FAIR VALUE MEASUREMENTS

Fair value is defined as the amount received from the sale of an asset or paid for transferring a liability in an orderly transaction between market participants (in either case, an exit price). To estimate an exit price, a three-level hierarchy is used prioritizing the valuation techniques used to measure fair value. The highest priority is given to Level 1 and the lowest priority is given to Level 3. The levels are summarized as follows:


•	Level 1 - unadjusted quoted prices in active markets for identical assets and liabilities.


•	Level 2 - significant observable pricing inputs other than quoted prices included within level 1 either directly or indirectly observable as of the reporting date. Inputs (variables used in the pricing models) that are derived principally from or corroborated by observable market data.


•	Level 3 - unobservable inputs developed based on the best information available and may include our own internal data.

The inputs available to us determine the valuation technique we use to measure the fair values of our financial instruments. We corroborate these inputs based on recent transactions and broker quotes and compare the fair value with actual settlements.

The following tables set forth our recurring fair value measurements:



	March 31, 2015
	Level 2		Level 3			Gross Amounts			Effect of Netting			Net Amounts Presented
	(In thousands)
Financial assets (liabilities):
Commodity derivatives:
Assets	$	25,856	$	902		$	26,758		$	(45	)	$	26,713
Liabilities	—		(45		)	(45		)	45			—
	$	25,856	$	857		$	26,713		$	—		$	26,713



	December 31, 2014
	Level 2		Level 3		Gross Amounts		Effect of Netting		Net Amounts Presented
	(In thousands)
Financial assets (liabilities):
Commodity derivatives:
Assets	$	27,784	$	3,355	$	31,139	$	—	$	31,139
Liabilities	—		—		—		—		—
	$	27,784	$	3,355	$	31,139	$	—	$	31,139

All of our counterparties are subject to master netting arrangements. If a legal right of set-off exists, we net the value of the derivative transactions we have with the same counterparty. We are not required to post cash collateral with our counterparties.

The following methods and assumptions were used to estimate the fair values of the assets and liabilities in the table above.

Level 2 Fair Value Measurements

Commodity Derivatives. We measure the fair values of our crude oil and natural gas swaps using estimated internal discounted cash flow calculations based on the NYMEX futures index.

Level 3 Fair Value Measurements

Commodity Derivatives. The fair values of our natural gas and crude oil collars are estimated using internal discounted cash flow calculations based on forward price curves, quotes obtained from brokers for contracts with similar terms, or quotes obtained from counterparties to the agreements.

The following tables are reconciliations of our level 3 fair value measurements:



	Commodity Collars
	Three Months Ended
	March 31,
	2015			2014
	(In thousands)
Beginning of period	$	3,355		$	(2,595	)
Total gains or losses (realized and unrealized):
Included in earnings ⁽¹⁾	777			(3,428		)
Settlements	(3,275		)	1,559
End of period	$	857		$	(4,464	)
Total losses for the period included in earnings attributable to the change in unrealized loss relating to assets still held at end of period	$	(2,498	)	$	(1,869	)

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(1)	Commodity collars are reported in the Unaudited Condensed Consolidated Statements of Operations in gain (loss) on derivatives not designated as hedges.

The following table provides quantitative information about our Level 3 unobservable inputs at March 31, 2015:



Commodity ⁽¹⁾	Fair Value		Valuation Technique	Unobservable Input	Range
	(In thousands)
Natural gas collar	$	857	Discounted cash flow	Forward commodity price curve	$0.00 - $0.38

_______________________


(1)	The commodity contracts detailed in this category include non-exchange-traded natural gas collars that are valued based on NYMEX. The forward pricing range represents the low and high price expected to be paid or received within the settlement period.

Based on our valuation at March 31, 2015, we determined that risk of non-performance by our counterparties was immaterial.

Fair Value of Other Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made under accounting guidance for financial instruments. We have determined the estimated fair values by using available market information and valuation methodologies. Considerable judgment is required in interpreting market data to develop these estimates. Using different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

At March 31, 2015, the carrying values on the Unaudited Condensed Consolidated Balance Sheets for cash and cash equivalents (classified as Level 1), accounts receivable, accounts payable, other current assets, and current liabilities approximate their fair value because of their short term nature.

Based on the borrowing rates currently available to us for credit agreement debt with similar terms and maturities and also considering the risk of our non-performance, long-term debt under our credit agreement has historically approximated its fair value and at March 31, 2015 was $237.3 million. This debt would be classified as Level 2.

The carrying amounts of long-term debt, net of unamortized discount, associated with the Notes reported in the Unaudited Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 were $646.3 million and $646.2 million, respectively. We estimated the fair value of these Notes using quoted marked prices at March 31, 2015 and December 31, 2014 which were $617.7 million and $605.5 million, respectively. These Notes would be classified as Level 2.

Fair Value of Non-Financial Instruments

The initial measurement of AROs at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with property, plant, and equipment. Significant Level 3 inputs used in the calculation of AROs include plugging costs and remaining reserve lives. A reconciliation of the Company’s AROs is presented in Note 7 – Asset Retirement Obligations.