Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 10. Fair Value Measurements

The FASC Fair Value Measurements and Disclosures topic defines fair value as the price that would be received to sell an asset or would be 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.  Our 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.  At December 31, 2011, instruments in this category also included non-exchange-traded natural gas derivatives swaps that were based on regional pricing other than NYMEX (i.e., Houston Ship Channel).  Our basis swaps were estimated using discounted cash flow calculations based upon forward commodity price curves.

We adjust the valuations from the valuation model for nonperformance risk, using our estimate of the counterparty’s credit quality for asset positions and our credit quality for liability positions.  We use 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 December 31, 2012 and 2011:

	Fair Value Measurements Using:
	Quoted Prices in Active Markets		Significant Other Observable Inputs			Significant Unobservable Inputs
In thousands	(Level 1)		(Level 2)			(Level 3)		Total
December 31, 2012
Assets:
Oil derivative contracts	$	—	$	19,513		$	—	$	19,513
Liabilities:
Oil derivative contracts	—		(26,440		)	—		(26,440		)
Total	$	—	$	(6,927	)	$	—	$	(6,927	)
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

The following table summarizes the changes in the fair value of our Level 3 assets and liabilities for the years ended December 31, 2012 and 2011:

	Year Ended December 31,
In thousands	2012				2011
Fair value of Level 3 instruments, beginning of year	$	23,950			$	16,478
Unrealized gains on commodity derivative contracts included in earnings	3,921				13,384
Receipts on settlement of commodity derivative contracts	(27,871		)		(5,912		)
Fair value of Level 3 instruments, end of year	$	—		10	$	23,950
The amount of total gains for the period included in earnings attributable to the change in unrealized gains relating to assets still held at the reporting date	$	—			$	13,384

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 Consolidated Statements of Operations. Management's estimate of the fair market value of contingent consideration has not changed from the acquisition date to December 31, 2012; therefore, there has been no impact on the Consolidated Statements of Operations for the years ended December 31, 2012 and 2011.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During 2012, we recorded a $15.1 million impairment charge for an investment in the preferred stock of an entity that was created to develop a gasification plant (in which we would offtake its CO₂ to use in our tertiary oil operations) as a result of this project not moving forward. This charge is classified as “Impairment of assets” in the Consolidated Statement of Operations for the year ended December 31, 2012.

Other Fair Value Measurements

The carrying value of our revolving 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.  We use a market approach to determine fair value of our fixed-rate debt using observable market data. The fair values of our senior subordinated notes are based on quoted market prices.  The estimated fair value of our total long-term debt as of December 31, 2012 and 2011, excluding pipeline financing and capital lease obligations, is $2,956.9 million and $2,638.2 million, respectively.  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.