Fair Value Measurements and Disclosures

3 Months Ended

Mar. 31, 2021

Fair Value, Measurement Inputs, Disclosure

NOTE 4 - FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements

Derivative Financial Instruments. We measure the fair value of our commodity derivative instruments based upon 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, 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 exchange rates and the duration of each outstanding derivative position. We validate our fair value measurement by corroborating the original source of inputs, monitoring changes in valuation methods and assumptions and reviewing counterparty statements and other supporting documentation.

Our crude oil and natural gas fixed-price exchanges are included in Level 2. Our collars are included in Level 3. Our basis exchanges are included in Level 2 and 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 as of the dates indicated:


		March 31, 2021						December 31, 2020
	Condensed Consolidated Balance Sheet Line Item	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)
Derivative assets
Current	Fair value of derivatives	$	(390)	$	8,422	$	8,032	$	36,580	$	12,289	$	48,869
Non-current	Fair value of derivatives	4,611		10,976		15,587		315		9,250		9,565
Total		$	4,221	$	19,398	$	23,619	$	36,895	$	21,539	$	58,434

Derivative liabilities
Current	Fair value of derivatives	$	153,497	$	44,470	$	197,967	$	76,420	$	21,732	$	98,152
Non-current	Fair value of derivatives	41,173		11,162		52,335		28,125		8,234		36,359
Total		$	194,670	$	55,632	$	250,302	$	104,545	$	29,966	$	134,511

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


	Three Months Ended March 31,
		2021		2020
		(in thousands)
Fair value of Level 3 instruments, net asset (liability) beginning of period		$	(8,427)	$	8,414
Changes in fair value included in consolidated statements of operations line item:
Commodity price risk management gain (loss), net		(33,389)		67,530
Settlements included in condensed consolidated statement of operations line items:
Commodity price risk management loss, net		5,582		(8,704)
Fair value of Level 3 instruments, net asset (liability) end of period		$	(36,234)	$	67,240

Net change in fair value of Level 3 unsettled derivatives included in consolidated statements of operations line item:
Commodity price risk management gain (loss), net		$	(30,863)	$	59,417

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. There has been no change in the methodology we apply to measure the fair value of our Level 3 derivative contracts during the periods covered by the financial statements.

Nonrecurring Fair Value Measurement

Acquisitions and impairment of long-lived assets. We utilize fair value with inputs that are not observable in the market, and are therefore designated as Level 3 within the valuation hierarchy, on a nonrecurring basis for any acquired assets or businesses and to review our proved and unproved crude oil and natural gas properties for possible impairment.

Asset Retirement Obligations. We measure the fair value of asset retirement obligations as of the date a well begins drilling or when production equipment and facilities are installed using a discounted cash flow model based on inputs that are not observable in the market and therefore are designated as Level 3 within the valuation hierarchy.

Other Financial Instruments

The carrying value of the financial instruments included in current assets and current liabilities approximates fair value due to the short-term maturities of these instruments.

Long-term debt. The portion of our long-term debt related to our revolving credit facility approximates fair value, as the applicable interest rates are variable and reflective of market rates. We have not elected to account for the portion of our debt related to our senior notes under the fair value option; however, we have determined an estimate of the fair values based on measurements of trading activity and broker or dealer quotes, which are published market prices, and therefore are Level 2 inputs. The table below presents these estimates of the fair value of the portion of our long-term debt related to our senior notes and convertible notes as of the dates indicated:


	March 31, 2021				December 31, 2020
	Estimated Fair Value		Percent of Par		Estimated Fair Value		Percent of Par
	(in millions)				(in millions)
Senior Notes:
2021 Convertible Notes	$	198.2	99.1	%	$	196.2	98.1	%
2024 Senior Notes	410.4		102.6	%	410.8		102.7	%
2025 Senior Notes	102.8		100.5	%	102.8		100.5	%
2026 Senior Notes	777.8		103.7	%	775.5		103.4	%