Note 11 - Fair Value Measurements

The Company follows fair value measurement accounting guidance for all assets and liabilities measured at fair value. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The fair value hierarchy for grouping these assets and liabilities is based on the significance level of the following inputs:


•	Level 1 – quoted prices in active markets for identical assets or liabilities


•	Level 2 – quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable


•	Level 3 – significant inputs to the valuation model are unobservable

The following table summarizes the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they are classified within the fair value hierarchy as of June 30, 2017:



	Level 1		Level 2		Level 3
	(in thousands)
Assets:
Derivatives ⁽¹⁾	$	—	$	168,156	$	—
Liabilities:
Derivatives ⁽¹⁾	$	—	$	106,211	$	—

____________________________________________


⁽¹⁾	This represents a financial asset or liability that is measured at fair value on a recurring basis.

The following table summarizes the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they were classified within the fair value hierarchy as of December 31, 2016:



	Level 1		Level 2		Level 3
	(in thousands)
Assets:
Derivatives ⁽¹⁾	$	—	$	122,096	$	—
Total property and equipment, net ⁽²⁾	$	—	$	—	$	88,205
Liabilities:
Derivatives⁽¹⁾	$	—	$	213,804	$	—

____________________________________________


⁽¹⁾	This represents a financial asset or liability that is measured at fair value on a recurring basis.


⁽²⁾	This represents a non-financial asset that is measured at fair value on a nonrecurring basis.

Both financial and non-financial assets and liabilities are categorized within the above fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used by the Company as well as the general classification of such instruments pursuant to the above fair value hierarchy.

Derivatives

The Company uses Level 2 inputs to measure the fair value of oil, gas, and NGL commodity derivatives. Fair values are based upon interpolated data. The Company derives internal valuation estimates taking into consideration forward commodity price curves, counterparties’ credit ratings, the Company’s credit rating, and the time value of money. These valuations are then compared to the respective counterparties’ mark-to-market statements. The considered factors result in an estimated exit-price that management believes provides a reasonable and consistent methodology for valuing derivative instruments. The derivative instruments utilized by the Company are not considered by management to be complex, structured, or illiquid. The oil, gas, and NGL commodity derivative markets are highly active.

Generally, market quotes assume that all counterparties have near zero, or low, default rates and have equal credit quality. However, an adjustment may be necessary to reflect the credit quality of a specific counterparty to determine the fair value of the instrument. The Company monitors the credit ratings of its counterparties and may require counterparties to post collateral if their ratings deteriorate. In some instances, the Company will attempt to novate the trade to a more stable counterparty. All of the Company’s derivative counterparties are members of the Company’s credit facility lender group.

Valuation adjustments are necessary to reflect the effect of the Company’s credit quality on the fair value of any derivative liability position. This adjustment takes into account any credit enhancements, such as collateral margin that the Company may have posted with a counterparty, as well as any letters of credit between the parties. The methodology to determine this adjustment is consistent with how the Company evaluates counterparty credit risk, taking into account the Company’s credit rating, current credit facility margins, and any change in such margins since the last measurement date.

The methods described above may result in a fair value estimate that may not be indicative of net realizable value or may not be reflective of future fair values and cash flows. While the Company believes that the valuation methods utilized are appropriate and consistent with authoritative accounting guidance and with other marketplace participants, the Company recognizes that third parties may use different methodologies or assumptions to determine the fair value of certain financial instruments that could result in a different estimate of fair value at the reporting date.

Refer to Note 10 - Derivative Financial Instruments for more information regarding the Company’s derivative instruments.

Proved and Unproved Oil and Gas Properties and Other Property and Equipment

The Company did not have property and equipment measured at fair value within the accompanying balance sheets as of June 30, 2017. Property and equipment, net measured at fair value totaled $88.2 million as of December 31, 2016, and primarily consisted of the Company’s Powder River Basin assets, which were impaired at year-end as a result of downward performance reserve revisions.

Proved oil and gas properties. Proved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication the carrying costs may not be recoverable. The Company uses Level 3 inputs and the income valuation technique, which converts future amounts to a single present value amount, to measure the fair value of proved properties through an application of discount rates and price forecasts representative of the current operating environment, as selected by the Company’s management. The calculation of the discount rates are based on the best information available and the rates used ranged from 10 percent to 15 percent based on the reservoir specific weightings of future estimated proved and unproved cash flows as of June 30, 2017, and December 31, 2016. The Company believes the discount rates are representative of current market conditions and consider estimates of future cash payments, reserve categories, expectations of possible variations in the amount and/or timing of cash flows, the risk premium, and nonperformance risk. The prices for oil and gas are forecast based on NYMEX strip pricing, adjusted for basis differentials, for the first five years, after which a flat terminal price is used for each commodity stream. The prices for NGLs are forecast using OPIS Mont Belvieu pricing, for as long as the market is actively trading, after which a flat terminal price is used. Future operating costs are also adjusted as deemed appropriate for these estimates.

The Company did not recognize any material impairment of proved properties expenses for the three or six months ended June 30, 2017, or for the three months ended June 30, 2016. The Company recorded impairment of proved properties expense of $269.8 million for the six months ended June 30, 2016, primarily related to the Company’s outside-operated Eagle Ford shale assets and the decline in expected cash flows driven by commodity price declines during the first quarter of 2016.

Unproved oil and gas properties. Unproved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs may not be recoverable. To measure the fair value of unproved properties, the Company uses a market approach, which takes into account the following significant assumptions: remaining lease terms, future development plans, risk weighted potential resource recovery, estimated reserve values, and estimated acreage value based on price(s) received for similar, recent acreage transactions by the Company or other market participants.

There were no material abandonments or impairments of unproved properties expenses for the three or six months ended June 30, 2017, or 2016.

Oil and gas properties held for sale. Proved and unproved properties and other property and equipment classified as held for sale, including the corresponding asset retirement obligation liability, are valued using a market approach based on an estimated net selling price, as evidenced by the most current bid prices received from third parties, if available, or by recent, comparable market transactions. If an estimated selling price is not available, the Company utilizes the various income valuation techniques discussed above. When assets no longer meet the criteria of assets held for sale, they are measured at the lower of the carrying value of the assets before being classified as held for sale, adjusted for any depletion, depreciation, and amortization expense that would have been recognized, or the fair value at the date they are reclassified to assets held for use.

There were no assets held for sale that were recorded at fair value as of June 30, 2017. However, for the six months ended June 30, 2017, the Company recorded a $526.5 million write-down on its Divide County assets previously held for sale, of which $359.6 million was recorded in the first quarter of 2017 based on an estimated fair value less selling costs and $166.9 million was recorded in the second quarter of 2017 based on market conditions that existed on the date the Company decided to retain the assets. Certain assets held for sale as of June 30, 2016, were written down by $68.3 million during the first quarter of 2016 and subsequently written up by $49.5 million in the second quarter of 2016 due to an increase in estimated selling prices, as evidenced by bid prices received from third parties. Certain of these assets were subsequently sold in the third quarter of 2016 for a small net gain due to successful marketing efforts. Please refer to Note 3 - Divestitures, Assets Held for Sale, and Acquisitions for additional discussion.

Long-Term Debt

The following table reflects the fair value of the Senior Notes and Senior Convertible Notes measured using Level 1 inputs based on quoted secondary market trading prices. These notes were not presented at fair value on the accompanying balance sheets as of June 30, 2017, or December 31, 2016, as they were recorded at carrying value, net of any unamortized discounts and deferred financing costs. Please refer to Note 5 - Long-Term Debt for additional discussion.



	As of June 30, 2017				As of December 31, 2016
	Principal Amount		Fair Value		Principal Amount		Fair Value
	(in thousands)
6.50% Senior Notes due 2021	$	344,611	$	338,794	$	346,955	$	354,546
6.125% Senior Notes due 2022	$	561,796	$	536,347	$	561,796	$	570,925
6.50% Senior Notes due 2023	$	394,985	$	377,211	$	394,985	$	403,134
5.0% Senior Notes due 2024	$	500,000	$	445,465	$	500,000	$	475,975
5.625% Senior Notes due 2025	$	500,000	$	449,335	$	500,000	$	485,000
6.75% Senior Notes due 2026	$	500,000	$	479,840	$	500,000	$	516,565
1.50% Senior Convertible Notes due 2021	$	172,500	$	154,612	$	172,500	$	202,189