Fair Value Measurements

12 Months Ended

Dec. 31, 2015

FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Energen classifies the fair value of multiple derivative instruments executed under master netting arrangements as net derivative assets and liabilities. The following fair value hierarchy tables present information about Energen’s assets and liabilities measured at fair value on a recurring basis:



	December 31, 2015
(in thousands)	Level 2		Level 3			Total
Assets
Derivative instruments	$	69,864	$	(12,901	)	$	56,963
Liabilities
Derivative instruments	2,699		(3,158		)	(459		)
Net derivative asset (liability)	$	72,563	$	(16,059	)	$	56,504



	December 31, 2014
(in thousands)	Level 2		Level 3			Total
Assets
Derivative instruments	$	294,865	$	27,472		$	322,337
Liabilities
Derivative instruments	2,048		(3,036		)	(988		)
Net derivative asset	$	296,913	$	24,436		$	321,349

At December 31, 2015, Energen had interest rate swap agreements with a notional value of $66.7 million. The interest rate swaps exchange a variable interest rate for a fixed interest rate of 1.0425 percent. The fair value of our interest rate swap was a $0.2 million and a $0.8 million liability at December 31, 2015 and 2014, respectively, and are classified as Level 2 fair value liabilities. The fair value of our interest rate swaps are recognized on a gross basis in accounts payable on the consolidated balance sheet.

Energen prepared a sensitivity analysis to evaluate the hypothetical effect that changes in the prices used to estimate fair value would have on the fair value of its Level 3 instruments. We estimate that a 10 percent increase or decrease in commodity prices would result in an approximate $0.1 million change in the fair value of open Level 3 derivative contracts and to the results of operations.

The table below sets forth a summary of changes in the fair value of Energen’s Level 3 derivative commodity instruments as follows:



Years ended December 31, (in thousands)	2015			2014			2013
Balance at beginning of period	$	24,436		$	18,289		$	89,019
Realized gains	13,145			22,208			55,210
Unrealized gains (losses) relating to instruments held at the reporting date*	(40,495		)	2,981			(71,367		)
Settlements during period	(13,145		)	(19,042		)	(54,573		)
Balance at end of period	$	(16,059	)	$	24,436		$	18,289

*Includes $16.1 million in mark-to-market losses, $20.2 million in mark-to-market gains and $7.6 million in mark-to-market losses for the years ended December 31, 2015, 2014 and 2013, respectively.

The tables below set forth quantitative information about Energen’s Level 3 fair value measurements of derivative commodity instruments as follows:



(in thousands, except price data)	Fair Value as of December 31, 2015			Valuation Technique*	Unobservable Input*	Range
Oil Basis - WTI/WTI
2016	$	(13,181	)	Discounted Cash Flow	Forward Basis	($0.07 - $0.28) Bbl
Oil Basis - WTS/WTI
2016	$	(2,878	)	Discounted Cash Flow	Forward Basis	($0.19 - $0.31) Bbl

*Discounted cash flow represents an income approach in calculating fair value including the referenced unobservable input and a discount reflecting credit quality of the counterparty.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are reported at fair value on a nonrecurring basis in Energen’s consolidated balance sheets. The following methods and assumptions were used to estimate the fair values.

Asset retirement obligations: Energen’s asset retirement obligations (ARO) primarily relate to the future plugging, abandonment and reclamation of wells and facilities. We recognize a liability for the fair value of the ARO in the periods incurred. See Note 13, Asset Retirement Obligations, for further discussion related to these ARO’s. These assumptions are classified as Level 3 fair value.

Asset Impairments: We monitor our oil and natural gas properties as well as the market and business environments in which we operate and make assessments about events that could result in potential impairment issues. Such potential events may include, but are not limited to, commodity price declines, unanticipated increased operating costs, and lower than expected field production performance. If a material event occurs, Energen makes an estimate of undiscounted future cash flows to determine whether the asset is impaired. If the asset is impaired, we will record an impairment loss for the difference between the net book value of the properties and the fair value of the properties. The fair value of the properties typically is estimated using discounted cash flows. Cash flow and fair value estimates require Energen to make projections and assumptions for pricing, demand, competition, operating costs, legal and regulatory issues, discount rates and other factors for many years into the future.

These assumptions are classified as Level 3 fair value. See Note 14, Asset Impairment, for impairments recognized by Energen during the years ended December 31, 2015, 2014 and 2013.

Financial Instruments Not Carried at Fair Value

The stated value of cash and cash equivalents, short-term investments, accounts receivables (net of allowance), and short-term debt approximates fair value due to the short maturity of the instruments. Short-term investments purchased and sold during 2015 of $919 million are not considered readily convertible into cash and accordingly are not classified in cash and cash equivalents. In addition, the Company also invested in certain short-term investments that qualify and were classified as cash and cash equivalents. The fair value of Energen’s long-term debt, including the current portion and notes payable to banks, approximates $690.1 million and $993.7 million and has a carrying value of $776.5 million and $1,039.0 million at December 31, 2015 and 2014, respectively. The fair values are based on market prices of similar issues having the same remaining maturities, redemption terms and credit rating. Short-term debt is classified as Level 1 fair value and long-term debt is classified as Level 2 fair value.

Concentration of Credit Risk

Revenues and related accounts receivable from oil and natural gas operations primarily are generated from the sale of produced oil and natural gas to energy marketing companies. Such sales are typically made on an unsecured credit basis with payment due the month following delivery. This concentration of sales to the energy marketing industry has the potential to affect Energen’s overall exposure to credit risk, either positively or negatively, in that our oil and natural gas purchasers may be affected similarly by changes in economic, industry or other conditions. Energen considers the credit quality of its purchasers and, in certain instances, may require credit assurances such as a deposit, letter of credit or parent guarantee. The two largest purchasers of Energen’s oil and natural gas, Plains Marketing, LP (Plains) and Shell Trading (US) Company, accounted for approximately 47 percent and 21 percent, respectively, of Energen’s accounts receivable for commodity sales as of December 31, 2015. Energen’s other purchasers each accounted for less than 9 percent of these accounts receivable as of December 31, 2015. During the year ended December 31, 2015, Plains accounted for approximately 33 percent of total revenues, excluding the impact of non-cash mark-to-market open derivatives. All other oil and natural gas purchasers each accounted for less than 10 percent of total revenues for the year ended December 31, 2015.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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