Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements

Fair Value Measurements

Note 15 – Fair Value Measurements

Fair Value Measurements

Certain of our financial assets and liabilities are measured and reported at fair value on a recurring basis as required under applicable accounting requirements. These requirements establish a hierarchy for inputs used in measuring fair value. The fair value is to be calculated based on assumptions that market participants would use in pricing assets and liabilities and not on assumptions specific to the entity. The statement requires that each asset and liability carried at fair value be classified into one of the following categories:

• Level 1.  Observable inputs such as quoted prices in active markets;

• Level 2.  Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

• Level 3.  Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of three valuation techniques as follows:

(a)   Market Approach.  Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

(b)   Cost Approach.   Amount that would be required to replace the service capacity of an asset (replacement cost).

(c)   Income Approach. Techniques to convert expected future cash flows to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models).

The following table provides additional information related to assets and liabilities measured at fair value on a recurring basis at September 30, 2011 (in thousands):

	Level 1		Level 2 (1)		Level 3		Total		Valuation Technique
Assets:
Oil and gas swaps and collars	$	–	$	42,284	$	–	$	42,284	(c)
Foreign currency forwards		–		109		–		109	(c)
Interest rate swaps		–		238		–		238	(c)
Liabilities:
Fair value of long term debt(2)		1,063,501		124,212		–		1,187,713	(a), (b)
Foreign currency forwards		–		264		–		264	(c)
Interest rate swaps		–		692		–		692	(c)
Total net liability	$	1,063,501	$	82,537	$	–	$	1,146,038

(1)   Unless otherwise indicated, the fair value of our Level 2 derivative instruments reflects our best estimate and is based upon exchange or over-the-counter quotations whenever they are available. Quoted valuations may not be available due to location differences or terms that extend beyond the period for which quotations are available. Where quotes are not available, we utilize other valuation techniques or models to estimate market values. These modeling techniques require us to make estimations of future prices, price correlation and market volatility and liquidity. Our actual results may differ from our estimates, and these differences can be positive or negative.

(2)   We have elected not to record our debt at fair value in the accompanying condensed consolidated balance sheets. See Note 7 for additional information regarding our long term debt.   The fair value of our long term debt at September 30, 2011 is as follows:

	Fair Value		Carrying Value
Term Loan (matures July 2015)	$	289,545	$	298,500
Revolving Credit Facility (matures July 2015)		—		—
Convertible Senior Notes (matures March 2025)		289,497		300,000	(a)
Senior Unsecured Notes (matures January 2016)		484,459		474,960
MARAD Debt (matures February 2027) (b)		124,212		110,166
Total	$	1,187,713	$	1,183,626

(a)   Amount excludes the $11.8 million of unamortized discount remaining on the Convertible Senior Notes at September 30, 2011.

(b)   The estimated fair value of all debt, other than MARAD Debt, was determined using Level 1 inputs using the market approach.  The fair value of the MARAD debt was determined using a third party evaluation of the remaining average life and outstanding principal balance of the MARAD indebtedness as compared to other governmental obligations in the market place with similar terms.   The fair value of the MARAD debt was estimated using Level 2 fair value inputs using the cost approach.

We review long lived assets for impairment whenever events occur or changes in circumstances indicate that the carrying amount of assets may not be recoverable.  In such evaluation, the estimated future undiscounted cash flows to be generated by the asset are compared with the carrying value of the asset to determine if impairment may be required.  For our oil and gas properties, the estimated future undiscounted cash flows are based on estimated crude oil and natural gas proved and probable reserves and published future market commodity prices, estimated operating costs and estimates of future capital expenditures.   If the estimated undiscounted cash flows for a particular asset are not sufficient to cover the carrying value of the asset, the asset is impaired and its carrying value is reduced to the current fair value.  The fair value of these assets is determined using an income approach by calculating present value of future cash flows attributable to the asset based on market information (such as forward commodity prices), estimates of future costs and estimated proved and probable reserve quantities.  These fair value measurements fall within Level 3 of the fair value hierarchy.

In the third quarter of 2011, we recorded $2.4 million of impairment charges for two Gulf of Mexico oil and gas properties that are in the process of being abandoned.  In the second quarter of 2011, we recorded impairment charges on seven of our oil and gas properties.  These impairment charges reduced these oil and gas properties to their estimated fair value, which, for six of the properties, including our only United Kingdom oil and gas property, was zero and for the remaining property was $2.9 million at June 30, 2011.  At June 30, 2010 we impaired 15 of our Gulf of Mexico properties as a result of reductions in estimates of proved reserves.   The total amounts of these impairment charges were $159.9 million, which reduced the carrying value of these properties to their aggregate fair value of $62.5 million.   In the first quarter of 2010, we impaired three of our natural gas producing properties following a significant drop in natural gas prices during the period.  The total amounts of the impairment charges were $7.0 million, which reduced these properties to their aggregate fair value of $28.2 million. See Note 4 for additional information regarding our oil and gas property impairment charges.