Fair Value Measurements

12 Months Ended

Dec. 31, 2021

Note 13 – Fair Value Measurements

We apply the authoritative accounting provisions included in GAAP for measuring fair value of both our financial and nonfinancial assets and liabilities. Fair value is an exit price representing the expected amount we would receive upon the sale of an asset or that we would expect to pay to transfer a liability in an orderly transaction with market participants at the measurement date.

We use a hierarchy that prioritizes the inputs we use to measure fair value into three distinct categories based upon whether such inputs are observable in active markets or unobservable. We classify assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value measurement. Our methodology for categorizing assets and liabilities that are measured at fair value pursuant to this hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest level to unobservable inputs as outlined below.

Fair value measurements are classified and disclosed in one of the following three categories:

•Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 1 inputs generally provide the most reliable evidence of fair value.

•Level 2: Quoted prices in markets that are not active or inputs, which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

•Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Our financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term maturities. As of December 31, 2021 and 2020, the carrying values of the borrowings outstanding under our credit facilities approximate fair value as the borrowings bear interest at variables rates tied to current market rates and the applicable margins represent market rates. The fair value of our fixed rate 9.25% Senior Notes due 2026 is estimated based on the published market prices for issuances of similar risk and tenor and is categorized as Level 2 within the fair value hierarchy. As of December 31, 2021, the carrying amount and estimated fair value of total debt (before amortization of issuance costs) was $619.0 million and $634.6 million, respectively. As of December 31, 2020, the estimated fair value of total debt (before amortization of issuance costs) approximated the carrying value of $514.4 million.

Recurring Fair Value Measurements

The fair values of our derivative instruments are measured at fair value on a recurring basis on our consolidated balance sheets. The following tables summarize the valuation of those financial assets and (liabilities) as of the dates presented:


	As of December 31, 2021
	Level 1		Level 2		Level 3		Total
Financial assets:


Commodity derivative assets – current	$	—	$	11,478	$	—	$	11,478
Commodity derivative assets – non-current	—		2,092		—		2,092
Total financial assets	$	—	$	13,570	$	—	$	13,570
Financial liabilities:
Interest rate swap liabilities – current	$	—	$	(1,480)	$	—	$	(1,480)

Commodity derivative liabilities – current	—		(48,892)		—		(48,892)
Commodity derivative liabilities – non-current	—		(23,815)		—		(23,815)
Total financial liabilities	$	—	$	(74,187)	$	—	$	(74,187)


	As of December 31, 2020
	Level 1		Level 2		Level 3		Total
Financial assets:
Commodity derivative assets – current	$	—	$	75,506	$	—	$	75,506
Commodity derivative assets – non-current	—		25,449		—		25,449
Total financial assets	$	—	$	100,955	$	—	$	100,955
Financial liabilities:
Interest rate swap liabilities – current	$	—	$	(3,655)	$	—	$	(3,655)
Interest rate swap liabilities – non-current	—		(1,645)		—		(1,645)
Commodity derivative liabilities – current	—		(81,451)		—		(81,451)
Commodity derivative liabilities – non-current	—		(26,789)		—		(26,789)
Total financial liabilities	$	—	$	(113,540)	$	—	$	(113,540)

We used the following methods and assumptions to estimate fair values for the financial assets and liabilities described below:

•Commodity derivatives: We determine the fair values of our commodity derivative instruments using industry-standard models that consider various assumptions including current market and contractual prices for the underlying instruments, implied volatilities, time value and non-performance risk. For the current market prices, we use third-party quoted forward prices, as applicable, for NYMEX WTI, MEH crude oil and NYMEX HH natural gas and OPIS Mt Belv Ethane natural gas liquids closing prices as of the end of the reporting periods. Each of these is a level 2 input.

•Interest rate swaps: We determine the fair values of our interest rate swaps using an income valuation approach valuation technique which discounts future cash flows back to a single present value. We estimate the fair value of the swaps based on published interest rate yield curves as of the date of the estimate. Each of these is a Level 2 input.

Non-performance risk is incorporated by utilizing discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position, and our own credit risk if the derivative is in a liability position. See Note 6 for additional details on our derivative instruments.

Non-Recurring Fair Value Measurements

In addition to the fair value measurements applied with respect to assets contributed in the Juniper Transactions and acquired with the Lonestar Acquisition, as described in Note 4, the most significant non-recurring fair value measurements utilized in the preparation of our consolidated financial statements are those attributable to the initial determination of AROs associated with the ongoing development of new oil and gas properties and certain share-based compensation awards. The determination of the fair value of AROs is based upon regional market and facility specific information. The amount of an ARO and the costs capitalized represent the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor after discounting the future cost back to the date that the abandonment obligation was incurred using a rate commensurate with the risk, which approximates our cost of funds. Because these significant fair value inputs are typically not observable, we have categorized the initial estimates as level 3 inputs.

- 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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