Fair Value Measurements

12 Months Ended

Dec. 31, 2018

FAIR VALUE MEASUREMENTS

The estimated fair value of our available-for-sale securities, reflected on our Condensed Consolidated Balance Sheets as Non-current other assets, is based on market quotes. The following is a summary of available-for-sale securities:


	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In thousands)
Equity Securities:
December 31, 2018	$	830	$	—	$	636	$	194
December 31, 2017	$	830	$	102	$	—	$	932

During the second quarter of 2017, we received available-for-sale securities for early termination fees associated with a long-term drilling contract. We will evaluate the marketable equity securities to determine if any decline in fair value below cost is other-than-temporary. If a decline in fair value below cost is determined to be other-than-temporary, an impairment charge will be recorded and a new cost basis established. We will review several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, (i) the length of time a security is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near-term prospects of the issuer, and (iv) our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. These securities would be classified as Level 2.

Fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of 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 into three levels with the highest priority given to Level 1 and the lowest priority 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 that are either directly or indirectly observable as of the reporting date. Essentially, inputs (variables used in the pricing models) that are derived principally from or corroborated by observable market data.

•Level 3—generally unobservable inputs which are 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.

The following tables set forth our recurring fair value measurements:


	December 31, 2018
	Level 2		Level 3		Effect of Netting		Total
	(In thousands)
Financial assets (liabilities):
Commodity derivatives:
Assets	$	3,225	$	10,964	$	(1,319)	$	12,870
Liabilities	(1,278)		(334)		1,319		(293)
	$	1,947	$	10,630	$	—	$	12,577


	December 31, 2017
	Level 2		Level 3		Effect of Netting		Total
	(In thousands)
Financial assets (liabilities):
Commodity derivatives:
Assets	$	2,137	$	3,344	$	(4,760)	$	721
Liabilities	(8,973)		(3,550)		4,760		(7,763)
	$	(6,836)	$	(206)	$	—	$	(7,042)

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 any cash collateral with our counterparties and no collateral has been posted as of December 31, 2018.

The following methods and assumptions were used to estimate the fair values of the assets and liabilities in the table above. There were no transfers between Level 2 and Level 3 financial assets (liabilities).

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:


	Net Derivatives
	For the Year Ended,
	December 31, 2018		December 31, 2017
	(In thousands)
Beginning of period	$	(206)	$	(7,122)
Total gains or losses:
Included in earnings⁽¹⁾	4,159		7,791
Settlements	6,677		(875)
End of period	$	10,630	$	(206)
Total gains for the period included in earnings attributable to the change in unrealized loss relating to assets still held at end of period	$	10,836	$	6,916

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1.Commodity derivatives are reported in the Consolidated Statements of Operations in gain (loss) on derivatives.

The following table provides quantitative information about our Level 3 unobservable inputs at December 31, 2018:

Commodity ⁽¹⁾

Fair Value

Valuation Technique

Unobservable Input

Range

(In thousands)

Oil three-way collar

10,592

Discounted cash flow

Forward commodity price curve

$0.00 - $19.44

Natural gas collars

(334)

Discounted cash flow

Forward commodity price curve

$0.00 - $0.38

Natural gas three-way collar

372

Discounted cash flow

Forward commodity price curve

$0.00 - $0.43

_________________________

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

Based on our valuation at December 31, 2018, we determined that the non-performance risk with regard to our counterparties was immaterial.

Fair Value of Other Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with 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 the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

At December 31, 2018, the carrying values on the 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 agreements would approximate its fair value. This debt would be classified as Level 2. At December 31, 2018, we did not have any outstanding debt under our credit agreements.

The carrying amounts of long-term debt, net of unamortized discount and debt issuance costs, associated with the Notes reported in the Consolidated Balance Sheets at December 31, 2018 and December 31, 2017 were $644.5 million and $642.3 million, respectively. We estimate the fair value of these Notes using quoted marked prices at December 31, 2018 and December 31, 2017 were $600.5 million and $649.7 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 8 – Asset Retirement Obligations.Non-recurring fair value measurements are also applied, when applicable, to determine the fair value of our long-lived assets and goodwill. During 2016 and 2018, we recorded non-cash impairment charges discussed further in Note 2 – Summary of Significant Accounting Policies. The valuation of these assets requires the use of significant unobservable inputs classified as Level 3.