FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, we use various valuation approaches and classify all assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect our own considerations about the assumptions other market participants would use in pricing the asset or liability based on the best information available in the circumstances. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and its placement within the fair value hierarchy. The hierarchy is broken down into three levels based on the observability of inputs as follows:


Level 1 -	Unadjusted quoted prices in active markets for identical assets or liabilities;


Level 2 -	Pricing inputs other than quoted prices in active markets included within Level 1, which are either directly or indirectly observable through correlation with market data as of the reporting date; and


Level 3 -	Pricing that requires inputs that are both significant and unobservable to the calculation of the fair value measure. The fair value measure represents estimates of the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints.

No transfers between fair value hierarchy levels occurred during the three months and nine months ended September 30, 2018.

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:



	September 30, 2018
(in thousands)	Level 2			Level 3			Total
Assets:
Derivative instruments	$	(4,645	)	$	8,871		$	4,226
Total assets	(4,645		)	8,871			4,226
Liabilities:
Derivative instruments	167,065			5,707			172,772
Noncurrent derivative instruments	30,787			26,670			57,457
Total liabilities	197,852			32,377			230,229
Net derivative liability	$	(202,497	)	$	(23,506	)	$	(226,003	)



	December 31, 2017
(in thousands)	Level 2			Level 3			Total
Liabilities:
Derivative instruments	$	43,241		$	28,138		$	71,379
Noncurrent derivative instruments	7,736			1,150			8,886
Total liabilities	50,977			29,288			80,265
Net derivative liability	$	(50,977	)	$	(29,288	)	$	(80,265	)

Derivative Instruments: The fair value of Energen’s derivative commodity instruments is determined using market transactions and other market evidence whenever possible, including market-based inputs to models and broker or dealer quotations. Our OTC derivative contracts trade in less liquid markets with limited pricing information as compared to markets with actively traded, unadjusted quoted prices; accordingly, the determination of fair value is inherently more difficult. OTC derivatives for which we are able to substantiate fair value through direct or indirect observable market prices are classified within Level 2 of the fair value hierarchy. These Level 2 fair values consist of swaps and options priced in reference to NYMEX oil and natural gas prices. OTC derivatives valued using unobservable market prices have been classified within Level 3 of the fair value hierarchy. These Level 3 fair values include oil basis and natural gas liquids swaps. We consider the frequency of pricing and variability in pricing between sources in determining whether a market is considered active. While Energen does not have access to the specific assumptions used in its counterparties’ valuation models, Energen maintains communications with its counterparties and discusses pricing practices. Further, we corroborate the fair value of our transactions by comparison of market-based price sources.

Level 3 Fair Value Instruments: 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 $0.3 million change in the fair value of open Level 3 derivative contracts and to our 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:



	Three months ended
	September 30,
(in thousands)	2018			2017
Balance at beginning of period	$	90,303		$	7,645
Realized gains (losses)	22,603			(1,548		)
Unrealized losses relating to instruments held at the reporting date*	(109,528		)	(24,112		)
Settlements during period	(26,884		)	398
Balance at end of period	$	(23,506	)	$	(17,617	)



	Nine months ended
	September 30,
(in thousands)	2018			2017
Balance at beginning of period	$	(29,288	)	$	(8,852	)
Realized gains (losses)	21,618			(4,588		)
Unrealized gains (losses) relating to instruments held at the reporting date*	10,064			(7,616		)
Settlements during period	(25,900		)	3,439
Balance at end of period	$	(23,506	)	$	(17,617	)

*Includes $88.8 million and $13.0 million in losses related to open contracts held at the reporting date for the three months and nine months ended September 30, 2018, respectively. Includes $23.0 million and $14.2 million in losses related to open contracts held at the reporting date for the three months and nine months ended September 30, 2017, respectively.

The table below sets 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 September 30, 2018			Valuation Technique*	Unobservable Input*	Range
Oil Basis - WTI/WTI
2018	$	24,790		Discounted Cash Flow	Forward Basis	($9.50) - ($9.23) Bbl
2019	$	7,417		Discounted Cash Flow	Forward Basis	($6.76) - ($5.83) Bbl
2020	$	(11,350	)	Discounted Cash Flow	Forward Basis	($0.53) - ($0.26) Bbl
Natural Gas Liquids
2018	$	(17,870	)	Discounted Cash Flow	Forward Basis	$1.00 - $1.01 Gal
2019	$	(26,493	)	Discounted Cash Flow	Forward Basis	$0.89 Gal

*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 of these assets and liabilities.

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 10, Asset Retirement Obligations, for further discussion related to these AROs. These assumptions are classified as Level 3 fair value measurements.

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. 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 and values derived from purchase and sale agreements and similar support as applicable. 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 measurements. Impairments recognized by Energen during the three months and nine months ended September 30, 2018 and 2017 were immaterial.

Financial Instruments not Carried at Fair Value

The stated value of cash and cash equivalents, short-term investments, accounts receivable (net of allowance for doubtful accounts), and short-term debt approximates fair value due to the short maturity of the instruments. The Company invested in certain short-term investments that qualify and were classified as cash and cash equivalents. Energen had an allowance for doubtful accounts of $0.6 million at both September 30, 2018 and December 31, 2017, respectively. The fair value of Energen’s long-term debt, including the current portion, was approximately $972.8 million and $798.9 million and had a carrying value of $955.0 million and $785.0 million at September 30, 2018 and December 31, 2017, respectively. The fair values are based on market prices of similar debt issues having the same remaining maturities, redemption terms and credit rating. Short-term debt is classified as a Level 1 fair value measurement and long-term debt is classified as a Level 2 fair value measurement.