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Fair Value Measurements and Disclosures
 9 Months Ended
Sep. 30, 2013
Fair Value Disclosures [Abstract]  
Fair Value, Measurement Inputs, Disclosure
FAIR VALUE OF FINANCIAL INSTRUMENTS

Derivative Financial Instruments

Determination of fair value. Our fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. In these cases, the lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The three levels of inputs that may be used to measure fair value are defined as:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived from observable market data by correlation or other means.

Level 3 – Unobservable inputs for the asset or liability, including situations where there is little, if any, market activity.

We measure the fair value of our derivative instruments based on a pricing model that utilizes market-based inputs, including, but not limited to, the contractual price of the underlying position, current market prices, crude oil and natural gas forward curves, discount rates such as the LIBOR curve for a similar duration of each outstanding position, volatility factors and nonperformance risk. Nonperformance risk considers the effect of our credit standing on the fair value of derivative liabilities and the effect of our counterparties' credit standings on the fair value of derivative assets. Both inputs to the model are based on published credit default swap rates and the duration of each outstanding derivative position.

We validate our fair value measurement through the review of counterparty statements and other supporting documentation, the determination that the source of the inputs is valid, the corroboration of the original source of inputs through access to multiple quotes, if available, or other information and monitoring changes in valuation methods and assumptions. While we use common industry practices to develop our valuation techniques and believe our valuation method is appropriate and consistent with those used by other market participants, changes in our pricing methodologies or the underlying assumptions could result in significantly different fair values.

Our fixed-price swaps, basis swaps and physical purchases are included in Level 2 and our crude oil and natural gas collars, natural gas calls and physical sales are included in Level 3. The following table presents, for each applicable level within the fair value hierarchy, our derivative assets and liabilities, including both current and non-current portions, measured at fair value on a recurring basis:

 
September 30, 2013
 
December 31, 2012
 
Significant Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
 
Significant Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Commodity-based derivative contracts
$
12,328

 
$
3,060

 
$
15,388

 
$
42,788

   
$
15,734

   
$
58,522

Basis protection derivative contracts
182

 
12

 
194

 
387

 
16

 
403

Total assets
12,510

 
3,072

 
15,582

 
43,175

 
15,750

 
58,925

Liabilities:
 
 
 
 
 
 
 
   
 
   
 
Commodity-based derivative contracts
17,293

 
2,340

 
19,633

 
9,839

 
2,081

   
11,920

Basis protection derivative contracts
1,563

 
—

 
1,563

 
16,656

 
—

   
16,656

Total liabilities
18,856

 
2,340

 
21,196

 
26,495

 
2,081

 
28,576

Net asset (liability)
$
(6,346
)
 
$
732

 
$
(5,614
)
 
$
16,680

 
$
13,669

 
$
30,349

 
 
 
 
 
 
 
 
 
 
 
 

The following table presents a reconciliation of our Level 3 assets measured at fair value:

 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Fair value, net asset, beginning of period
 
$
3,904

 
$
28,600

 
$
13,669

 
$
22,107

Changes in fair value included in statement of operations line item:
 
 
 
 
 
 
 
 
Commodity price risk management gain (loss), net
 
(3,111
)
 
(9,055
)
 
(3,008
)
 
6,098

Sales from natural gas marketing
 
11

 
(4
)
 
16

 
35

Changes in fair value included in balance sheet line item:
 
 
 
 
 
 
 
 
Accounts payable affiliates (1)
 
—

 
(93
)
 
—

 
(240
)
Settlements included in statement of operations line items:
 
 
 
 
 
 
 
 
Commodity price risk management gain (loss), net
 
(66
)
 
(3,900
)
 
(5,545
)
 
(12,357
)
Sales from natural gas marketing
 
(6
)
 
(10
)
 
(34
)
 
(105
)
Income (loss) from discontinued operations, net of tax
 
—

 
—

 
(4,366
)
 
—

Fair value, net asset end of period
 
$
732

 
$
15,538

 
$
732

 
$
15,538

 
 
 
 
 
 
 
 
 
Changes in unrealized gains (losses) relating to assets (liabilities) still held
 
 
 
 
 
 
 
 
as of period-end, included in statement of operations line item:
 
 
 
 
 
 
 
 
Commodity price risk management gain (loss), net
 
$
(3,333
)
 
$
(8,169
)
 
$
(5,362
)
 
$
2,577

Sales from natural gas marketing
 
(5
)
 
(13
)
 
4

 
(1
)
Total
 
$
(3,338
)
 
$
(8,182
)
 
$
(5,358
)
 
$
2,576

 
 
 
 
 
 
 
 
 
__________
(1)
Represents the change in fair value related to derivative instruments entered into by us and designated to our affiliated partnerships.

The significant unobservable input used in the fair value measurement of our derivative contracts is the implied volatility curve, which is provided by a third-party vendor. A significant increase or decrease in the implied volatility, in isolation, would have a directionally similar effect resulting in a significantly higher or lower fair value measurement of our Level 3 derivative contracts.
    
Non-Derivative Financial Assets and Liabilities

The carrying values of the financial instruments included in current assets and current liabilities approximate fair value due to the short-term maturities of these instruments.
 
The portion of our debt related to our revolving credit facility, as well as our proportionate share of PDCM's credit facility and second lien term loan, approximates fair value due to the variable nature of related interest rates. We have not elected to account for the portion of our debt related to our senior notes under the fair value option; however, as of September 30, 2013, we estimate the fair value of our 3.25% convertible senior notes due 2016 to be $176.4 million, or 153.4% of par value, and our 7.75% senior notes due 2022 to be $528.8 million, or 105.7% of par value. We determined these valuations based upon measurements of trading activity and broker and/or dealer quotes which are published market prices, and therefore are Level 2 inputs.

Concentration of Risk

Derivative Counterparties. Our derivative arrangements expose us to credit risk of nonperformance by our counterparties. We primarily use financial institutions who are also lenders under our revolving credit facility as counterparties to our derivative contracts. To date, we have had no counterparty default losses relating to our derivative arrangements. We have evaluated the credit risk of our derivative assets from our counterparties using relevant credit market default rates, giving consideration to amounts outstanding for each counterparty and the duration of each outstanding derivative position. Based on our evaluation, we have determined that the potential impact of nonperformance of our counterparties on the fair value of our derivative instruments was not significant at September 30, 2013, taking into account the estimated likelihood of nonperformance.
The following table presents the counterparties that expose us to credit risk as of September 30, 2013 with regard to our derivative assets:

Counterparty Name
 
Fair Value of
Derivative Assets
As of September 30, 2013
 
 
(in thousands)
 
 
 
JPMorgan Chase Bank, N.A. (1)
 
$
4,163

Wells Fargo Bank, N.A. (1)
 
3,830

Natixis (1)
 
1,637

Bank of Montreal (1)
 
1,885

BNP Paribas (1)
 
1,285

Other lenders in our revolving credit facility
 
2,624

Various (2)
 
158

Total
 
$
15,582

 
 
 
__________
(1)Major lender in our revolving credit facility. See Note 7, Long-Term Debt.
(2)Represents a total of 20 counterparties.