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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2020

Summary of Significant Accounting Policies

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –

Basis of Presentation

These unaudited consolidated financial statements include the accounts of Comstock Resources, Inc. and its wholly-owned subsidiaries (collectively, "Comstock" or the "Company"). In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of Comstock as of September 30, 2020, and the related results of operations and cash flows for the periods being presented. Net income and comprehensive income are the same in all periods presented. All adjustments are of a normal recurring nature unless otherwise disclosed. Certain amounts in prior periods have been reclassified to conform with current period presentation.

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to those rules and regulations, although Comstock believes that the disclosures made are adequate to make the information presented not misleading. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in Comstock's Annual Report on Form 10-K for the year ended December 31, 2019.

The results of operations for the period through September 30, 2020 are not necessarily an indication of the results expected for the full year.

Covey Park Acquisition

On July 16, 2019, Comstock acquired Covey Park Energy LLC ("Covey Park") for total consideration of $700.0 million of cash, the issuance of Series A Convertible Preferred Stock with a redemption value of $210.0 million, and the issuance of 28,833,000 shares of common stock (the "Covey Park Acquisition"). In addition to the consideration paid, Comstock assumed $625.0 million of Covey Park's 7½% senior notes, repaid $380.0 million of Covey Park's then outstanding borrowings under its bank credit facility and redeemed all of Covey Park's preferred equity for $153.4 million. Based on the fair value of the preferred stock issued and the closing price of the Company's common stock of $5.82 per share on July 16, 2019, the transaction was valued at approximately $2.2 billion. Covey Park's operations were focused primarily in the Haynesville/Bossier shale in North Louisiana and East Texas. Funding for the Covey Park Acquisition was provided by the sale of 50.0 million newly issued shares of common stock for $300.0 million and 175,000 shares of newly issued Series B Convertible Preferred Stock for $175.0 million to the Company's majority stockholder and by borrowings under Comstock's bank credit facility and cash on hand. In connection with the Covey Park Acquisition, Comstock incurred $41.0 million of advisory and legal fees and other acquisition-related costs during the year ended December 31, 2019. These acquisition costs were included in transaction costs in the Company's consolidated statements of operations. The operations of Covey Park are included in the financial results for the three and nine months ended September 30, 2020. The following pro forma condensed combined financial information for the three and nine months ended September 30, 2019 gives effect to the Covey Park Acquisition as if the acquisition had occurred on January 1, 2019. The unaudited pro forma information reflects adjustments for the issuance of the Company's common stock and preferred stock, debt incurred in connection with the transaction, the impact of the fair value of properties acquired on depletion and other adjustments the Company believes are reasonable for the pro forma presentation. In addition, the pro forma earnings exclude acquisition-related costs. The unaudited pro forma results do not reflect any cost savings or other synergies that may arise in the future.


	Pro Forma
	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
	(In thousands, except per share amounts)
Revenues:	$	247,192	$	858,042
Net Income	$	36,755	$	201,338

Net income per share:
Basic	$	0.15	$	0.93
Diluted	$	0.13	$	0.72

The Covey Park Acquisition was accounted for as a business combination using the acquisition method. During the three months ended September 30, 2020, the Company completed the final purchase allocation of the assets acquired and liabilities assumed based on their fair value at the acquisition date. The following table summarizes the preliminary and final fair value allocations of the assets acquired and liabilities assumed in the Covey Park Acquisition:


	Original Allocation		Measurement Period Adjustments		Final Allocation
	(In thousands)
Consideration:
Cash Paid	$	700,000	$	—	$	700,000
Fair Value of Common Stock Issued	167,808		—		167,808
Fair Value of Series A Preferred Stock Issued	200,000		—		200,000
Total Consideration	1,067,808		—		1,067,808
Liabilities Assumed:
Accounts Payable and Accrued Liabilities	129,622		—		129,622
Derivative Financial Instruments	388		—		388
Other Current Liabilities	9,930		706		10,636
Long Term Debt	826,625		—		826,625
Covey Park Preferred Equity	153,390		—		153,390
Non-current Derivative Financial Instruments	186		—		186
Asset Retirement Obligations	5,374		—		5,374
Deferred Income Taxes	23,466		(1,780)		21,686
Other Non-current Liabilities	9,893		—		9,893
Liabilities Assumed	1,158,874		(1,074)		1,157,800
Total Consideration and Liabilities Assumed	$	2,226,682	$	(1,074)	$	2,225,608
Assets Acquired:
Cash and Cash Equivalents	$	6,131	$	—	$	6,131
Accounts Receivable	86,285		—		86,285
Current Derivative Financial Instruments	51,004		—		51,004
Other Current Assets	5,511		(554)		4,957
Proved Oil and Natural Gas Properties	1,818,413		(520)		1,817,893
Unproved Oil and Natural Gas Properties	237,210		—		237,210
Other Property, Plant and Equipment	2,262		—		2,262
Non-current Derivative Financial Instruments	19,866		—		19,866
Total Assets Acquired	$	2,226,682	$	(1,074)	$	2,225,608

Property and Equipment

The Company follows the successful efforts method of accounting for its oil and natural gas properties. Costs incurred to acquire oil and gas leasehold are capitalized.

The Company assesses the need for an impairment of the capitalized costs for its proved oil and gas properties on a property basis. No impairments were recognized to adjust the carrying value of the Company's proved oil and gas properties during any of the periods presented. Unproved oil and gas properties are also periodically assessed and any impairment in value is charged to expense. The costs related to unproved properties are transferred to proved oil and gas properties and amortized on an equivalent unit-of-production basis when they are reflected in proved oil and natural gas reserves. Exploratory drilling costs are initially capitalized as unproved property but charged to expense if and when the well is determined not to have found commercial quantities of proved oil and gas reserves. Exploratory drilling costs are evaluated within a one-year period after the completion of drilling.

The Company determines the fair values of its oil and gas properties using a discounted cash flow model and proved and risk-adjusted probable oil and natural gas reserves. Undrilled acreage can also be valued based on sales transactions in comparable areas. Significant Level 3 assumptions associated with the calculation of discounted future cash flows included in the cash flow model include management's outlook for oil and natural gas prices, production costs, capital expenditures, and future production as well as estimated proved oil and gas reserves and risk-adjusted probable oil and natural gas reserves. Management's oil and natural gas price outlook is developed based on third-party longer-term price forecasts as of each measurement date. The expected future net cash flows are discounted using an appropriate discount rate in determining a property's fair value.

It is reasonably possible that the Company's estimates of undiscounted future net cash flows attributable to its oil and gas properties may change in the future. The primary factors that may affect estimates of future cash flows include future adjustments, both positive and negative, to proved and appropriate risk-adjusted probable oil and gas reserves, results of future drilling activities, future prices for oil and natural gas, and increases or decreases in production and capital costs. As a result of these changes, there may be future impairments in the carrying values of these or other properties.

Goodwill

The Company had goodwill of $335.9 million as of September 30, 2020 that was recorded in 2018. Goodwill represents the excess of value of the Company over fair value of net tangible and identifiable intangible assets at the time of the change in control, which occurred on August 14, 2018. The Company is not required to amortize goodwill as a charge to earnings; however, the Company is required to conduct an annual review of goodwill for impairment. The Company performs annual assessment of goodwill on October 1st of each year to allow sufficient time to assess goodwill impairment and performs interim assessments if indicators of impairment are present. If the carrying value of goodwill exceeds the fair value, an impairment charge would be recorded for the difference between fair value and carrying value.

Leases

The Company has right-of-use lease assets of $3.6 million related to its corporate office lease, certain office equipment and leased vehicles used in oil and gas operations with corresponding short-term and long-term liabilities. The value of the lease assets and liabilities are determined based upon discounted future minimum cash flows contained within each of the respective contracts. The Company determines if contracts contain a lease at inception of the contract. To the extent that contract terms representing a lease are identified, leases are identified as being either an operating lease or a finance-type lease. Comstock currently has no finance-type leases. Right-of-use lease assets representing the Company's right to use an underlying asset for the lease term and the related lease liabilities represent our obligation to make lease payments under the terms of the contracts. Short-term leases that have an initial term of one year or less are not capitalized; however, amounts paid for those leases are included as part of its lease cost disclosures. Short-term lease costs exclude expenses related to leases with a lease term of one month or less. Leases for the right to explore for and develop oil and natural gas reserves and the related rights to use the land associated with those leases are reflected as oil and gas properties.

Comstock contracts for a variety of equipment used in its oil and natural gas exploration and development activities. Contract terms for this equipment vary broadly, including the contract duration, pricing, scope of services included along with the equipment, cancellation terms, and rights of substitution, among others. The Company's drilling operations routinely change due to changes in commodity prices, demand for oil and natural gas, and the overall operating and economic environment. Comstock accordingly manages the terms of its contracts for drilling rigs so as to allow for maximum flexibility in responding to these changing conditions. The Company's rig contracts are presently either for periods of less than one year, or they are on terms that provide for cancellation with 45 days advance notice without a specified expiration date. Accordingly,

the Company has elected not to recognize right-of-use lease assets for these rig contracts. The costs associated with drilling rig operations are accounted for under the successful efforts method, which generally require that these costs be capitalized as part of our proved oil and natural gas properties on our balance sheet unless they are incurred on exploration wells that are unsuccessful, in which case they are charged to exploration expense.

Lease costs recognized during the three months and nine months ended September 30, 2020 were as follows:


	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
	(In thousands)
Operating lease cost included in general and administrative expense	$	422	$	1,249
Operating lease cost included in lease operating expense	229		578
Short-term lease cost (drilling rig costs included in proved oil and gas properties)	7,324		26,605
	$	7,975	$	28,432

Cash payments for operating leases associated with right-of-use assets included in cash provided by operating activities were $0.7 million and $1.8 million for the three months and nine months ended September 30, 2020, respectively.

As of September 30, 2020, expected future payments related to contracts that contain operating leases were as follows:


	(In thousands)
October 1 to December 31, 2020	$	647
2021	2,329
2022	529
2023	182
Total lease payments	3,687
Imputed interest	(133)
Total lease liability	$	3,554

The weighted average term of these operating leases was 1.7 years and the weighted average interest rate used in lease computations was 4.4%. As of September 30, 2020, the Company also had expected future payments for contracted drilling services of $5.2 million.

Accrued Costs

Accrued costs at September 30, 2020 and December 31, 2019 consisted of the following:


	As of September 30, 2020		As of December 31, 2019
	(In thousands)
Accrued interest payable	$	38,910	$	39,501
Accrued transportation costs	25,465		26,907
Accrued capital expenditures	25,422		42,193
Accrued lease operating expenses	11,817		4,990
Accrued employee compensation	6,508		8,653
Other	3,485		4,092
Accrued transaction costs	1,088		10,830
	$	112,695	$	137,166

Reserve for Future Abandonment Costs

Comstock's asset retirement obligations relate to future plugging and abandonment expenses on its oil and gas properties and related facilities disposal. The following table summarizes the changes in Comstock's total estimated liability for such obligations during the periods presented:


	Nine Months Ended September 30,
	2020		2019
	(In thousands)
Reserve for future abandonment costs at beginning of period	$	18,151	$	5,136
New wells placed on production	451		256
Wells acquired	—		5,374
Liabilities settled and assets disposed of	(80)		(40)
Accretion expense	880		369
Reserve for future abandonment costs at end of period	$	19,402	$	11,095

Derivative Financial Instruments and Hedging Activities

All of the Company's derivative financial instruments are used for risk management purposes and, by policy, none are held for trading or speculative purposes. Comstock minimizes credit risk to counterparties of its derivative financial instruments through formal credit policies, monitoring procedures, and diversification. The Company is not required to provide any credit support to its counterparties other than cross collateralization with the assets securing its bank credit facility. None of the Company's derivative financial instruments involve payment or receipt of premiums. The Company classifies the fair value amounts of derivative financial instruments as net current or noncurrent assets or liabilities, whichever the case may be, by commodity contract. All of Comstock's natural gas derivative financial instruments, except for certain basis swaps, are tied to the Henry Hub-NYMEX price index and all of its crude oil derivative financial instruments are tied to the WTI-NYMEX index price.

The Company had the following oil and natural gas price derivative financial instruments, excluding basis swaps which are discussed separately below, at September 30, 2020:


	Future Production Period
	Three Months Ending December 31, 2020			Year Ending December 31, 2021			Year Ending December 31, 2022			Total
Natural Gas Swap Contracts:
Volume (MMBtu)	47,658,438		(1)	142,633,140		(2)	10,950,000			201,241,578
Average Price per MMBtu	$	2.63	(1)	$	2.55	(2)	$	2.53		$	2.57
Natural Gas 2-Way Collar Contracts:
Volume (MMBtu)	8,720,000			109,550,000			3,600,000			121,870,000
Price per MMBtu:
Average Ceiling	$	2.95		$	2.93		$	3.36		$	2.94
Average Floor	$	2.43		$	2.45		$	2.50		$	2.45
Natural Gas 3-Way Collar Contracts:
Volume (MMBtu)	4,600,000			—			—			4,600,000
Price per MMBtu:
Average Ceiling	$	2.99		—			—			$	2.99
Average Floor	$	2.63		—			—			$	2.63
Average Put	$	2.32		—			—			$	2.32
Natural Gas Swaptions Call Contracts:
Volume (MMBtu)	—			71,250,000		(3)	49,200,000		(4)	120,450,000
Average Price per MMBtu	—			$	2.52	(3)	$	2.51	(4)	$	2.52
Crude Oil Collar Contracts:
Volume (Barrels)	259,500			182,500			—			442,000
Price per Barrel:
Average Ceiling	$	63.83		$	45.00		—			$	56.06
Average Floor	$	49.35		$	40.00		—			$	45.49

_____________________________

(1)For the three months ending December 31, 2020, natural gas price swap contracts include 19,320,000 MMBtu at an average price of $2.52 that are part of certain natural gas price swaption contracts which include a call to extend the price swap by the counterparty as described in (3) below.

(2)For the year ending December 31, 2021, natural gas price swap contracts include 23,650,000 MMBtu at an average price of $2.52 that are part of certain natural gas price swaption contracts which include a call to extend the price swap by the counterparty as described in (4) below.

(3)The counterparty has the right to exercise a call option to enter into a price swap with the Company on 71,250,000 MMBtu in 2021 at an average price of $2.52. The call option expires for 47,450,000 MMBtu at an average price of $2.53 in October 2020; for 7,300,000 MMBtu at an average price of $2.50 in November 2020 and for 16,500,000 MMBtu at an average price of $2.50 in March 2021.

(4)The counterparty has the right to exercise a call option to enter into a price swap with the Company on 49,200,000 MMBtu in 2022 at an average price $2.51. The call option expires for 5,400,000 MMBtu at an average price of $2.50 in March 2021; for 36,500,000 MMBtu at an average price of $2.52 in October 2021 and 7,300,000 MMBtu at an average price of $2.50 in November 2021.

In addition to the swaps, collars and swaptions above, at September 30, 2020, the Company has basis swap contracts that fix the differential between NYMEX Henry Hub and Houston Ship Channel indices. These contracts settle monthly through December 2022 on a total volume of 31,070,000 MMBtu. The fair value of these contracts was a net asset of $1.3 million at September 30, 2020.

The Company has interest rate swap agreements that fix LIBOR at 0.33% for $500.0 million of its floating rate long-term debt. These contracts settle monthly through April 2023. The fair value of these contracts was a net liability of $2.5 million at September 30, 2020.

None of the Company's derivative contracts were designated as cash flow hedges. The aggregate fair value of the Company's derivative instruments reported in the accompanying consolidated balance sheets by type, including the classification between assets and liabilities, consists of the following:


Type	Consolidated Balance Sheet Location	September 30, 2020		December 31, 2019
		(in thousands)
Asset Derivative Financial Instruments:
Natural gas price derivatives	Derivative Financial Instruments – current	$	6,405	$	75,123
Oil price derivatives	Derivative Financial Instruments – current	2,425		181
		$	8,830	$	75,304

Natural gas price derivatives	Derivative Financial Instruments – long-term	$	1,185	$	13,888

Liability Derivative Financial Instruments:
Natural gas price derivatives	Derivative Financial Instruments – current	$	62,652	$	—
Oil price derivatives	Derivative Financial Instruments – current	—		222
Interest rate derivatives	Derivative Financial Instruments – current	943		—
		$	63,595	$	222

Natural gas price derivatives	Derivative Financial Instruments – long-term	$	64,814	$	4,220
Oil price derivatives	Derivative Financial Instruments – long-term	20		—
Interest rate derivatives	Derivative Financial Instruments – long-term	1,539		—
		$	66,373	$	4,220

The Company recognized cash settlements and changes in the fair value of its derivative financial instruments as a single component of other income (expenses). Gains and losses related to cash settlements and changes in the fair value recognized on the Company's derivative contracts recognized in the consolidated statement of operations were as follows:


Gain (Loss) on Derivatives Recognized in Earnings	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(In thousands)
Natural gas price derivatives	$	(120,706)	$	22,664	$	(82,872)	$	37,722
Oil price derivatives	(989)		2,194		13,529		(5,777)
Interest rate derivatives	116		—		(2,635)		—
	$	(121,579)	$	24,858	$	(71,978)	$	31,945

Subsequent to September 30, 2020, the Company entered into additional natural gas 2-way collar contracts to hedge 20,000 MMBtu per day of natural gas production from March 2021 to February 2022 at an average ceiling price of $3.70 per MMBtu and an average floor price of $2.60 per MMBtu. In addition, counterparties to the Company's swaption contracts exercised their option to enter into additional natural gas swap contracts to hedge 47,450,000 MMBtu of the Company's 2021 natural gas production at an average price of $2.53.

Stock-Based Compensation

Comstock accounts for employee stock-based compensation under the fair value method. Compensation cost is measured at the grant date based on the fair value of the award and is recognized over the award vesting period and included in general and administrative expenses for awards of restricted stock and performance stock units ("PSUs") to the Company's employees and directors. The Company recognized $1.8 million and $1.1 million of stock-based compensation expense within general and administrative expenses related to awards of restricted stock and PSUs to its employees and directors during the three months ended September 30, 2020 and 2019, respectively, and $4.7 million and $2.4 million for the nine months ended September 30, 2020 and 2019, respectively.

In June 2020, the Company granted 514,258 shares of restricted stock to its directors and employees. The 2020 grants had a weighted average fair value of $5.38 per share on the grant date. As of September 30, 2020, Comstock had 1,044,673 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $5.80 per share. Total unrecognized compensation cost related to unvested restricted stock grants of $5.4 million as of September 30, 2020 is expected to be recognized over a period of 1.9 years.

As of September 30, 2020, Comstock had 1,136,488 PSUs outstanding at a weighted average grant date fair value of $9.33 per unit. The number of shares of common stock to be issued related to the PSUs is based on the Company's stock price performance as compared to its peers which could result in the issuance of anywhere from zero to 2,272,976 shares of common stock. Total unrecognized compensation cost related to these grants of $5.8 million as of September 30, 2020 is expected to be recognized over a period of 1.9 years.

Revenue Recognition

Comstock produces oil and natural gas and reports revenues separately for each of these two primary products in its statements of operations. Revenues are recognized upon the transfer of produced volumes to the Company's customers, who take control of the volumes and receive all the benefits of ownership upon delivery at designated sales points. Payment is reasonably assured upon delivery of production. All sales are subject to contracts that have commercial substance, contain specific pricing terms, and define the enforceable rights and obligations of both parties. These contracts typically provide for cash settlement within 25 days following each production month and are cancellable upon 30 days' notice by either party for oil and vary for natural gas based upon the terms set out in the confirmations between both parties. Prices for sales of oil and natural gas are generally based upon terms that are common in the oil and gas industry, including index or spot prices, location and quality differentials, as well as market supply and demand conditions. As a result, prices for oil and natural gas routinely fluctuate based on changes in these factors. Each unit of production (barrel of crude oil and thousand cubic feet of natural gas) represents a separate performance obligation under the Company's contracts since each unit has economic benefit on its own and each is priced separately according to the terms of the contracts.

Comstock has elected to exclude all taxes from the measurement of transaction prices, and its revenues are reported net of royalties and exclude revenue interests owned by others because the Company acts as an agent when selling crude oil and natural gas, on behalf of royalty owners and working interest owners. Revenue is recorded in the month of production based on an estimate of the Company's share of volumes produced and prices realized. The Company recognizes any differences between estimates and actual amounts received in the month when payment is received. Historically, differences between estimated revenues and actual revenue received have not been significant. The amount of oil or natural gas sold may differ from the amount to which the Company is entitled based on its revenue interests in the properties. The Company did not have any significant imbalance positions at September 30, 2020. Sales of oil and natural gas generally occur at or near the wellhead. When sales of oil and gas occur at locations other than the wellhead, the Company accounts for costs incurred to transport the production to the delivery point as gathering and transportation expenses. The Company recognized accounts receivable of $88.0 million as of September 30, 2020 from customers for contracts where performance obligations have been satisfied and an unconditional right to consideration exists.

Credit Losses

On January 1, 2020, the Company adopted Financial Accounting Standards Board Accounting Standards Codification 326, Credit Losses ("ASC 326"). In adopting ASC 326, the Company determined Topic 326 is limited to the trade accounts receivables relating to purchaser receivables and joint interest receivables of the Company. The Company performs quarterly impairment analysis using the Current Expected Credit Losses ("CECL") impairment model. The Company concluded there is no cumulative-effect adjustment required as of January 1, 2020 and credit impairment at September 30, 2020 was immaterial.

Income Taxes

Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates.

In recording deferred income tax assets, the Company considers whether it is more likely than not that its deferred income tax assets will be realized in the future. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible. The Company believes that after considering all the available objective evidence, historical and prospective, with greater weight given to historical evidence, management is not able to determine that it is more likely than not that all of its deferred tax assets will be realized. As a result, the Company established valuation allowances for its deferred tax assets and U.S. federal and state

net operating loss carryforwards that are not expected to be utilized due to the uncertainty of generating taxable income prior to the expiration of the carryforward periods. The Company will continue to assess the valuation allowances against deferred tax assets considering all available information obtained in future periods.

The following is an analysis of the consolidated income tax provision:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(In thousands)
Current - Federal	$	—	$	—	$	—	$	—
Current - State	67		72		216		(22)
Deferred - Federal	(35,645)		3,184		(37,662)		13,959
Deferred - State	(10,545)		591		(8,731)		1,246
	$	(46,123)	$	3,847	$	(46,177)	$	15,183

The difference between the federal statutory rate of 21% and the effective tax rate is due to the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Tax at statutory rate	21.0	%	21.0	%	21.0	%	21.0	%
Tax effect of:
Valuation allowance on deferred tax assets	1.5		4.5		1.0		2.3
State income taxes, net of federal benefit	5.2		(1.8)		4.3		—
Nondeductible stock-based compensation	(1.0)		1.2		(0.8)		1.5
Transaction costs	—		8.6		—		1.9
Other	—		2.7		0.1		—
Effective tax rate	26.7	%	36.2	%	25.6	%	26.7	%

The Company's federal income tax returns for the years subsequent to December 31, 2015 remain subject to examination. The Company's income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2012. The Company currently believes that all other significant filing positions are highly certain and that all of its other significant income tax positions and deductions would be sustained under audit or the final resolution would not have a material effect on the consolidated financial statements. Therefore, the Company has not established any significant reserves for uncertain tax positions.

Fair Value Measurements

The Company holds or has held certain financial assets and liabilities that are required to be measured at fair value. These include cash and cash equivalents held in bank accounts and derivative financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level hierarchy is followed for disclosure to show the extent and level of judgment used to estimate fair value measurements:

Level 1 — Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date.

Level 2 — Inputs used to measure fair value, other than quoted prices included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

Level 3 — Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions.

The Company's natural gas price swap agreements, basis swap agreements, interest rate swap agreements and its crude oil and natural gas price collars were not traded on a public exchange, and their value is determined utilizing a discounted cash flow model based on inputs that are readily available in public markets and, accordingly, the valuation of these derivative financial instruments, is categorized as a Level 2 measurement. The Company's natural gas swaption agreements are measured at fair value using a third-party pricing service, categorized as a Level 3 measurement.

The Company had no derivative instruments classified as Level 3 as of September 30, 2019. The following is a reconciliation of the beginning and ending balances for derivative instrument assets (liabilities) classified as Level 3 in the fair value hierarchy:


	Nine Months Ended September 30, 2020
	(In thousands)
Balance at beginning of year	$	4,351
Total loss included in earnings	(27,450)
Settlements, net	(33,143)
Balance at end of period	$	(56,242)

Fair Values – Reported

The following presents the carrying amounts and the fair values of the Company's financial instruments as of September 30, 2020 and December 31, 2019:


	September 30, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:	(In thousands)
Derivative financial instruments (1)	$	10,015	$	10,015	$	89,192	$	89,192
Liabilities:
Derivative financial instruments (1)	$	129,968	$	129,968	$	4,442	$	4,442
Bank credit facility (2)	$	500,000	$	500,000	$	1,250,000	$	1,250,000
7½% senior notes due 2025 (3)	$	467,917	$	586,882	$	455,768	$	534,375
9¾% senior notes due 2026 (3)	$	1,575,554	$	1,687,125	$	820,057	$	765,000

______________

(1)The Company's natural gas price swaps and basis swap agreements, its interest rate swap agreements and its crude oil and natural gas price collars are classified as Level 2 and measured at fair value using a market approach using third party pricing services and other active markets or broker quotes that are readily available in the public markets. The Company's natural gas swaption contracts provide the counterparty the right, but not the obligation, to extend terms of an existing swap on predetermined dates. Due to subjectivity of the inputs used to value the counterparty rights in the contracts, these contracts are classified as Level 3 in the fair value hierarchy.

(2)The carrying value of our floating rate debt outstanding approximates fair value.

(3)The fair value of the Company's fixed rate debt was based on quoted prices as of September 30, 2020 and December 31, 2019, respectively, a Level 1 measurement.

Earnings Per Share

Unvested share-based payment awards containing non-forfeitable rights to dividends are considered to be participating securities and included in the computation of basic and diluted earnings per share pursuant to the two-class method. PSUs represent the right to receive a number of shares of the Company's common stock that may range from zero to up to two times the number of PSUs granted on the award date based on the achievement of certain performance measures during a performance period. The number of potentially dilutive shares related to PSUs is based on the number of shares, if any, which would be issuable at the end of the respective period, assuming that date was the end of the contingency period. The treasury stock method is used to measure the dilutive effect of PSUs.

None of the Company's participating securities participate in losses and as such are excluded from the computation of basic earnings per share during periods of net losses. The Company redeemed all of the shares of Series A Convertible Preferred Stock on May 19, 2020. The Series B Convertible Preferred Stock became convertible into an aggregate

of 43,750,000 shares of common stock on July 16, 2020 at a conversion price of $4.00 per share. The dilutive effect of preferred stock is computed using the if-converted method as if conversion of the preferred shares had occurred at the earlier of the date of issuance or the beginning of the period.

At September 30, 2020 and December 31, 2019, 1,044,673 and 1,092,309 shares of restricted stock, respectively, are included in common stock outstanding as such shares have a non-forfeitable right to participate in any dividends that might be declared and have the right to vote on matters submitted to the Company's stockholders.

Weighted average shares of unvested restricted stock outstanding were as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
	(in thousands)
Unvested restricted stock	1,285	758	1,185	539

Weighted average unearned PSUs outstanding were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(In thousands, except per unit amounts)
Weighted average PSUs	1,136		862		1,014		513
Weighted average grant date fair value per unit	$	9.33	$	9.60	$	9.33	$	9.60

The convertible preferred stock, unvested restricted shares and the PSUs were anti-dilutive in the three months and nine months ended September 30, 2020 and 2019.

Basic and diluted income (loss) per share were determined as follows:


	Three Months Ended September 30,
	2020					2019
	Loss		Shares	Per Share		Income		Shares	Per Share
	(In thousands, except per share amounts)
Net income (loss) attributable to common stock	$	(130,890)				$	(1,337)
Income allocable to unvested restricted shares	—					—
Basic income (loss) attributable to common stock	(130,890)		231,223	$	(0.57)	(1,337)		171,487	$	(0.01)

Diluted income (loss) attributable to common stock	$	(130,890)	231,223	$	(0.57)	$	(1,337)	171,487	$	(0.01)


	Nine Months Ended September 30,
	2020					2019
	Loss		Shares	Per Share		Income		Shares	Per Share
	(In thousands, except per share amounts)
Net income (loss) attributable to common stock	$	(160,936)				$	33,645
Income allocable to unvested restricted shares	—					(141)
Basic income (loss) attributable to common stock	(160,936)		209,760	$	(0.77)	33,504		127,709	$	0.26

Diluted income (loss) attributable to common stock	$	(160,936)	209,760	$	(0.77)	$	33,504	127,709	$	0.26

Basic and diluted per share amounts are the same for the three and nine months ended September 30, 2020 and the three months ended September 30, 2019 due to the net loss in those periods. Basic and diluted shares for the nine months ended September 30, 2019 are the same as there was no impact from the unvested restricted shares.

Supplementary Information with Respect to the Consolidated Statements of Cash Flows

Cash payments made for interest and income taxes and other non-cash investing and financing activities for the nine months ended September 30, 2020 and 2019, respectively, were as follows:


	Nine Months Ended September 30,
	2020		2019
	(In thousands)
Cash payments for:
Interest payments	$	143,942	$	110,820
Income tax payments	$	—	$	2
Non-cash investing activities include:
Decrease in accrued capital expenditures	$	16,771	$	46,918
Non-cash investing activities related to the Covey Park Acquisition include:
Issuance of common stock	$	—	$	167,808
Issuance of Series A Convertible Preferred Stock	$	—	$	200,000
Assumed 7½% Senior Notes due 2025	$	—	$	446,625
Acquired working capital	$	520	$	41,624
Non-cash financing activities include:
Retirement of debt in exchange for common stock	$	(4,151)	$	—
Issuance of common stock in exchange for debt	$	5,012	$	—

Recent Accounting Pronouncements

In January 2017, the FASB issued Accounting Standards Update No. 2017-4 (ASU 2017-4) "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." ASU 2017-4 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. ASU 2017-4 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019 and early adoption is permitted. We did not early adopt ASU 2017-4 and will implement ASU 2017-4 when we perform our annual impairment assessments following adoption of this standard in 2020. We do not expect the adoption to have a significant effect on our results of operations, liquidity or financial position.