Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Abstract]

Fair Value Measurements

Note 6. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. We are able to classify fair value balances based on the observability of those inputs. The FASC establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

•Level 1 – Quoted prices in active markets for identical assets or liabilities as of the reporting date.

•Level 2 –Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. Instruments in this category include non-exchange-traded oil and natural gas derivatives that are based on NYMEX pricing. The Company's costless-collars are valued using the Black-Scholes model, an industry standard option valuation model, that takes into account inputs such as contractual prices for the underlying instruments, including maturity, quoted forward prices for commodities, interest rates, volatility factors and credit worthiness, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

•Level 3 –Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value. Instruments in this category include non-exchange-traded natural gas derivatives swaps that are based on regional pricing other than NYMEX (i.e., HoustonShip Channel). The Company's basis swaps are estimated using discounted cash flow calculations based upon forward commodity price curves.Significant increases or decreases in forward commodity price curves would result in a significantly higher or lower fair value measurement.

We adjust the valuations from the valuation model for nonperformance risk, using our estimate of the counterparty's credit quality for asset positions and Denbury's credit quality for liability positions. Denbury uses multiple sources of third-party credit data in determining counterparty nonperformance risk, including credit default swaps.

The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of the periods indicated:

			Fair Value Measurements Using:
					Significant
			Quoted Prices		Other		Significant
			in Active		Observable		Unobservable
			Markets		Inputs		Inputs
In thousands			(Level 1)		(Level 2)		(Level 3)		Total
September 30, 2012
Assets
	Oil and natural gas derivative contracts		$	—	$	23,600	$	6,040	$	29,640
Liabilities
	Oil and natural gas derivative contracts			—		(3,679)		—		(3,679)
		Total	$	—	$	19,921	$	6,040	$	25,961
December 31, 2011
Assets
	Short-term investments		$	86,682	$	—	$	—	$	86,682
	Oil and natural gas derivative contracts			—		23,481		23,950		47,431
Liabilities
	Oil and natural gas derivative contracts			—		(41,312)		—		(41,312)
		Total	$	86,682	$	(17,831)	$	23,950	$	92,801

Since we do not use hedge accounting for our commodity derivative contracts, any gains and losses on our assets and liabilities are included in “Derivatives expense (income)” in the accompanying Unaudited Condensed Consolidated Statements of Operations.

Level 3 Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes the changes in the fair value of ourLevel 3 assets for the three and nine months endedSeptember 30, 2012 and 2011:

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
In thousands		2012		2011		2012		2011
Balance, beginning of period		$	13,214	$	6,638	$	23,950	$	16,478
	Unrealized gains (losses) on commodity derivative contracts included in earnings		(264)		1,717		4,031		(5,359)
	Receipts on settlement of commodity derivative contracts		(6,910)		(1,378)		(21,941)		(4,142)
Balance, end of period		$	6,040	$	6,977	$	6,040	$	6,977

We utilize an income approach to value our natural gas swap arrangements, generally the industry standard valuation technique for a commodity swap contract. We obtain and ensure the appropriateness of the natural gas forward pricing curve, the most significant input to the calculation, and the fair value estimate is prepared and reviewed on a quarterly basis.

The following table details fair value inputs related to our Level 3 natural gas financial measurements:

In thousands		Fair Value at 9/30/2012		Valuation Technique	Unobservable Input	Range
Natural gas derivative contracts		$	6,040	Discounted Cash Flow	Forward commodity price curve	(a)
(a)	The derivative instruments detailed in this category include non-exchange-traded natural gas derivatives swaps that are valued based on regional pricing other than NYMEX. The regional pricing sources utilized for these instruments include the following (forward pricing ranges represent the high and low price expected to be received within the settlement period):
	Pricing Index		Settlement Period		Forward Pricing Range
	TETCO M1		10/1/2012 – 12/31/2012		$2.92/MMBtu – $3.55/MMBtu
	Houston Ship Channel		10/1/2012 – 12/31/2012		$2.98/MMBtu – $3.56/MMBtu
	Natural Gas – Midcontinent		10/1/2012 – 12/31/2012		$2.77/MMBtu – $3.53/MMBtu

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

As of December 31, 2011, we had invested a total of $13.8 million in the preferred stock of Faustina Hydrogen Products LLC, a company created to develop a proposed gasification plant from which CO2 would be produced as a byproduct and used by Denbury in its tertiary oil operations. The investment was recorded at cost, together with a $1.3 million receivable for accrued dividends receivable. The developer of the proposed plant was soliciting other potential investors for the project, and as of December 31, 2011, a third-party was actively engaged in due diligence.  During 2012, a key investor and participant in the project announced its intent to abandon its investment in the proposed plant. As a result, due diligence by the potential third party investor ceased. Absent the key investor, we believe it is unlikely the plant will be constructed, and therefore, it is also unlikely our investment will generate future cash flows. Accordingly, we recorded a $15.1 million impairment charge for this investment during the first quarter of 2012, which is classified as “Impairment of assets” in the Unaudited Condensed Consolidated Statement of Operations for the nine months ended September 30, 2012. The inputs used to determine fair value of the investment included the projected future cash flows of the plant and risk-adjusted rate of return that we estimated would be used by a market participant in valuing the asset. These inputs are unobservable within the marketplace and therefore considered Level 3 within the fair value hierarchy. However, as there are currently no expected future cash flows associated with the plant, the preferred stock was determined to have no value.

Other Fair Value Measurements

The carrying value of our Bank Credit Facility approximates fair value, as it is subject to short-term floating interest rates that approximate the rates available to us for those periods. The fair values of our senior subordinated notes are based on quoted market prices. The estimated fair value of our senior subordinated notes as of September 30, 2012 and December 31, 2011 is $2,260.0 million and $2,253.2 million, respectively. The fair value hierarchy for long-term debt is primarily Level 1 (quoted prices for identical assets in active markets). We have other financial instruments consisting primarily of cash, cash equivalents, short-term receivables and payables that approximate fair value due to the nature of the instrument and the relatively short maturities.