Fair value is defined as the amount that would be 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 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 2—significant observable pricing inputs other than quoted prices included within level 1 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 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:


	March 31, 2021
	Level 2		Level 3		Effect of Netting		Net Amounts Presented

Financial assets (liabilities):
Commodity derivatives:
Assets	$	1,899	$	—	$	(1,899)	$	—
Liabilities	(27,132)		—		1,899		(25,233)
Total commodity derivatives	$	(25,233)	$	—	$	—	$	(25,233)


	December 31, 2020
	Level 2		Level 3		Effect of Netting		Net Amounts Presented

Financial assets (liabilities):
Commodity derivatives:
Assets	$	3,436	$	—	$	(3,436)	$	—
Liabilities	(9,142)		—		3,436		(5,706)
Total commodity derivatives	$	(5,706)	—		—		(5,706)

All 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 and no collateral has been posted as of March 31, 2021.

We used the following methods and assumptions 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).

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.

Commodity Derivatives. The fair values of our natural gas and crude oil three-way 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.


	Net Derivatives
	Successor		Predecessor
	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
	(In thousands)
Beginning of period	$	—	$	1,204
Total gains or losses (realized and unrealized):
Included in earnings (1)	—		563
Settlements	—		(819)
End of period	$	—	$	948
Total losses for the period included in earnings attributable to the change in unrealized gain (loss) relating to assets still held at end of period	$	—	$	(256)

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

Warrants. Warrants are recorded at their fair value upon utilizing the Black-Scholes-Merton option model. The inputs to the model require judgement, including estimating the strike price, expected term and the associated volatility. At March 31, 2021, the Warrants have a fair value of $0.9 million and will continue to be adjusted to fair value at each reporting period until determined to be an equity instrument, at which time they will be reported as Shareholders' equity and no longer be subject to future fair value adjustment.

This 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 market information and certain valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Using different market assumptions or valuation methodologies may have a material effect on our estimated fair value amounts.

At March 31, 2021, the carrying values on the Unaudited Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable, other current assets, and current liabilities approximate their fair value because of their short-term nature.

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 our AROs is presented in Note 9 – Asset Retirement Obligations.