Fair Value Measurements

9 Months Ended

Sep. 30, 2020

Note 11. Fair Value Measurements

The FASC Fair Value Measurement topic defines fair value as 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 (often referred to as the “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 income 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 derivatives that are based on NYMEX and regional pricing other than NYMEX (e.g., Light Louisiana Sweet). Our costless collars and the sold put features of our three-way 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, 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. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. As of December 31, 2019, instruments in this category included non-exchange-traded three-way collars that were based on regional pricing other than NYMEX (e.g., Light Louisiana Sweet). The valuation models utilized for three-way collars were consistent with the methodologies described above; however, the implied volatilities utilized in the valuation of Level 3 instruments were developed using a benchmark, which was considered a significant unobservable input.

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 the periods indicated:



	Fair Value Measurements Using:
In thousands	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total
September 30, 2020 (Successor)
Assets
Oil derivative contracts – current	$	—	$	26,778		$	—		$	26,778
Oil derivative contracts – long-term	—		1,147			—			1,147
Total Assets	$	—	$	27,925		$	—		$	27,925

Liabilities
Oil derivative contracts – current	$	—	$	(5,739	)	$	—		$	(5,739	)
Oil derivative contracts – long-term	—		(584		)	—			(584		)
Total Liabilities	$	—	$	(6,323	)	$	—		$	(6,323	)


December 31, 2019 (Predecessor)
Assets
Oil derivative contracts – current	$	—	$	8,503		$	3,433		$	11,936
Total Assets	$	—	$	8,503		$	3,433		$	11,936

Liabilities
Oil derivative contracts – current	$	—	$	(6,522	)	$	(1,824	)	$	(8,346	)
Total Liabilities	$	—	$	(6,522	)	$	(1,824	)	$	(8,346	)

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

Level 3 Fair Value Measurements

The following tables summarize the changes in the fair value of our Level 3 assets and liabilities:



	Successor		Predecessor
	Period from Sept. 19, 2020 through		Period from July 1, 2020 through		Three Months Ended
In thousands	Sept. 30, 2020		Sept. 18, 2020		Sept. 30, 2019
Fair value of Level 3 instruments, beginning of period	$	—	$	—	$	6,073
Transfers out of Level 3	—		—		—
Fair value gains on commodity derivatives	—		—		6,450
Receipts on settlements of commodity derivatives	—		—		(1,323		)
Fair value of Level 3 instruments, end of period	$	—	$	—	$	11,200

The amount of total gains for the period included in earnings attributable to the change in unrealized gains relating to assets or liabilities still held at the reporting date	$	—	$	—	$	6,234



	Successor		Predecessor
	Period from Sept. 19, 2020 through		Period from Jan. 1, 2020 through			Nine Months Ended
In thousands	Sept. 30, 2020		Sept. 18, 2020			Sept. 30, 2019
Fair value of Level 3 instruments, beginning of period	$	—	$	1,609		$	13,624
Transfers out of Level 3	—		(1,609		)	—
Fair value gains on commodity derivatives	—		—			90
Receipts on settlements of commodity derivatives	—		—			(2,514		)
Fair value of Level 3 instruments, end of period	$	—	$	—		$	11,200

The amount of total gains for the period included in earnings attributable to the change in unrealized gains relating to assets or liabilities still held at the reporting date	$	—	$	—		$	6,540

Instruments previously categorized as Level 3 included non-exchange-traded three-way collars that were based on regional pricing other than NYMEX, whereby the implied volatilities utilized were developed using a benchmark, which was considered a significant unobservable input. The transfers between Level 3 and Level 2 during the period generally relate to changes in the significant relevant observable and unobservable inputs that are available for the fair value measurements of such financial instruments.

Other Fair Value Measurements

The carrying value of our loans under our Successor Bank Credit Agreement approximate fair value, as they are subject to short-term floating interest rates that approximate the rates available to us for those periods. We use a market approach to determine the fair value of our fixed-rate long-term debt using observable market data. The fair values of the Predecessor’s senior secured second lien notes, convertible senior notes, and senior subordinated notes were based on quoted market prices, which are considered Level 1 measurements under the fair value hierarchy. The estimated fair value of the principal amount of our debt as of September 30, 2020 and December 31, 2019, excluding pipeline financing obligations, was $85.0 million and $1,833.1 million, respectively, which decrease is primarily the result of the cancellation of $2.1 billion principal amount of debt as part of the Chapter 11 Restructuring. See Note 1, Basis of Presentation – Emergence from Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code, for additional information. We have other financial instruments consisting primarily of cash, cash equivalents, U.S. Treasury

notes, short-term receivables and payables that approximate fair value due to the nature of the instrument and the relatively short maturities.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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