Fair Value Measurements and Disclosures

9 Months Ended

Sep. 30, 2022

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 use our counterparties’ valuations to assess reasonableness of our fair value measurement.

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


		September 30, 2022						December 31, 2021
	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	$	35,577	$	26,669	$	62,246	$	—	$	17,909	$	17,909
Non-current	Fair value of derivatives	72,161		18,914		91,075		605		14,572		15,177
Total		$	107,738	$	45,583	$	153,321	$	605	$	32,481	$	33,086

Derivative liabilities
Current	Fair value of derivatives	$	(291,427)	$	(97,807)	$	(389,234)	$	(230,695)	$	(74,175)	$	(304,870)
Non-current	Fair value of derivatives	(80,596)		(20,264)		(100,860)		(74,715)		(20,846)		(95,561)
Total		$	(372,023)	$	(118,071)	$	(490,094)	$	(305,410)	$	(95,021)	$	(400,431)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(in thousands)
Fair value of Level 3 instruments, net asset (liability) beginning of period	$	(205,520)	$	(117,985)	$	(62,540)	$	(8,427)
Changes in fair value included on condensed consolidated statements of operations line item:
Commodity price risk management gain (loss), net	61,565		(87,036)		(211,363)		(214,556)
Settlements included on condensed consolidated statement of operations line items:
Commodity price risk management gain (loss), net	71,467		46,368		201,415		64,330
Fair value of Level 3 instruments, net asset (liability) end of period	$	(72,488)	$	(158,653)	$	(72,488)	$	(158,653)

Net change in fair value of Level 3 unsettled derivatives included on condensed consolidated statements of operations line item:
Commodity price risk management gain (loss), net	$	67,566	$	(78,786)	$	(54,500)	$	(210,430)

The significant unobservable input used in the fair value measurement of our derivative contracts is the implied volatility curve. 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 Measurements

Acquisitions and Impairment of Long-lived Assets. We measure fair value using 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 elected not 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 as of the dates indicated:


			September 30, 2022				December 31, 2021
	Nominal Interest		Estimated Fair Value		Percent of Par		Estimated Fair Value		Percent of Par
			(in millions)				(in millions)
Senior Notes:
2024 Senior Notes	6.125	%	$	198.6	99.3	%	$	202.8	101.4	%
2026 Senior Notes	5.75	%	694.5		92.6	%	775.5		103.4	%