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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
 FORM 10-Q
________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to              
 Commission file number: 1-13283
  pvac2019logoa08.jpg
PENN VIRGINIA CORPORATION
(Exact name of registrant as specified in its charter)
__________________________________________________________
Virginia
 
23-1184320
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
16285 PARK TEN PLACE, SUITE 500
HOUSTON, TX 77084
(Address of principal executive offices) (Zip Code)
(713722-6500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.01 Par Value
 
PVAC
 
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes    No  
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
Accelerated Filer

Non-accelerated Filer
 
Smaller Reporting Company
 
 
 
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act subsequent to the distribution of securities under a plan confirmed by a court.    Yes   No  
 As of May 1, 2020, 15,157,919 shares of common stock of the registrant were outstanding.
 




PENN VIRGINIA CORPORATION
QUARTERLY REPORT ON FORM 10-Q
 For the Quarterly Period Ended March 31, 2020
 Table of Contents
Part I - Financial Information
Item
 
Page
1.
Financial Statements - unaudited.
 
 
Condensed Consolidated Statements of Operations
 
Condensed Consolidated Statements of Comprehensive Income
 
Condensed Consolidated Balance Sheets
 
Condensed Consolidated Statements of Cash Flows
 
Notes to Condensed Consolidated Financial Statements:
 
 
1. Nature of Operations
 
2. Basis of Presentation
 
3. Acquisitions and Divestitures
 
4. Accounts Receivable and Revenues from Contracts with Customers
 
5. Derivative Instruments
 
6. Property and Equipment
 
7. Long-Term Debt
 
8. Income Taxes
 
9. Leases
 
10. Supplemental Balance Sheet Detail
 
11. Fair Value Measurements
 
12. Commitments and Contingencies
 
13. Shareholders’ Equity
 
14. Share-Based Compensation and Other Benefit Plans
 
15. Interest Expense
 
16. Earnings per Share
Forward-Looking Statements
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
 
Overview and Executive Summary
 
Key Developments
 
Financial Condition
 
Results of Operations
 
Off Balance Sheet Arrangements
 
Critical Accounting Estimates
3.
Quantitative and Qualitative Disclosures About Market Risk.
4.
Controls and Procedures.
Part II - Other Information
1.
Legal Proceedings.
1A.
Risk Factors.
5.
Other Information
6.
Exhibits.
Signatures




Part I. FINANCIAL INFORMATION
Item 1.
Financial Statements.
PENN VIRGINIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS unaudited
(in thousands, except per share data) 
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Revenues
 
 
 
 
Crude oil
 
$
86,308

 
$
94,812

Natural gas liquids
 
1,893

 
5,548

Natural gas
 
2,690

 
4,277

Gain on sales of assets, net
 
6

 
25

Other revenues, net
 
482

 
566

Total revenues
 
91,379

 
105,228

Operating expenses
 
 
 
 
Lease operating
 
10,532

 
11,004

Gathering, processing and transportation
 
5,444

 
3,929

Production and ad valorem taxes
 
6,154

 
5,692

General and administrative
 
7,230

 
7,065

Depreciation, depletion and amortization
 
40,718

 
38,870

Total operating expenses
 
70,078

 
66,560

Operating income
 
21,301

 
38,668

Other income (expense)
 
 
 
 
Interest expense
 
(8,180
)
 
(9,478
)
Derivatives
 
151,119

 
(68,017
)
Other, net
 
(8
)
 
106

Income (loss) before income taxes
 
164,232

 
(38,721
)
Income tax (expense) benefit
 
(1,138
)
 
24

Net income (loss)
 
$
163,094

 
$
(38,697
)
Net income (loss) per share:
 
 
 
 
Basic
 
$
10.76

 
$
(2.56
)
Diluted
 
$
10.76

 
$
(2.56
)
 
 
 
 
 
Weighted average shares outstanding – basic
 
15,152

 
15,098

Weighted average shares outstanding – diluted
 
15,160

 
15,098


See accompanying notes to condensed consolidated financial statements.


3



PENN VIRGINIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME unaudited
(in thousands) 
 
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Net income (loss)
 
$
163,094

 
$
(38,697
)
Other comprehensive loss:
 
 
 
 
Change in pension and postretirement obligations, net of tax
 
(1
)
 
(1
)
 
 
(1
)
 
(1
)
Comprehensive income (loss)
 
$
163,093

 
$
(38,698
)


See accompanying notes to condensed consolidated financial statements.

4



PENN VIRGINIA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS unaudited
(in thousands, except share data)
 
March 31,
 
December 31,
 
2020
 
2019
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
55,331

 
$
7,798

Accounts receivable, net of allowance for credit losses
34,652

 
70,716

Derivative assets
233,442

 
4,131

Income taxes receivable
2,471

 
1,236

Other current assets
4,765

 
4,458

Total current assets
330,661

 
88,339

Property and equipment, net (full cost method)
1,160,559

 
1,120,425

Derivative assets
10,963

 
2,750

Other assets
6,764

 
6,724

Total assets
$
1,508,947

 
$
1,218,238

 
 
 
 
Liabilities and Shareholders’ Equity
 

 
 

Current liabilities
 

 
 

Accounts payable and accrued liabilities
$
105,863

 
$
105,824

Derivative liabilities
103,092

 
23,450

Total current liabilities
208,955

 
129,274

Other liabilities
8,616

 
8,382

Deferred income taxes
3,744

 
1,424

Derivative liabilities
10,689

 
3,385

Long-term debt, net
592,624

 
555,028

 
 
 
 
Commitments and contingencies (Note 12)


 


 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock of $0.01 par value – 5,000,000 shares authorized; none issued

 

Common stock of $0.01 par value – 45,000,000 shares authorized; 15,157,919 and 15,135,598 shares issued as of March 31, 2020 and December 31, 2019, respectively
152

 
151

Paid-in capital
201,222

 
200,666

Retained earnings
483,005

 
319,987

Accumulated other comprehensive loss
(60
)
 
(59
)
Total shareholders’ equity
684,319

 
520,745

Total liabilities and shareholders’ equity
$
1,508,947

 
$
1,218,238


See accompanying notes to condensed consolidated financial statements.

5



PENN VIRGINIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS unaudited
(in thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Cash flows from operating activities
 

 
 

Net income (loss)
$
163,094

 
$
(38,697
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 

Depreciation, depletion and amortization
40,718

 
38,870

Derivative contracts:
 
 
 
Net (gains) losses
(151,119
)
 
68,017

Cash settlements, net
(269
)
 
4,394

Deferred income tax expense
2,320

 
1,212

Gain on sales of assets, net
(6
)
 
(25
)
Non-cash interest expense
823

 
921

Share-based compensation
856

 
1,038

Other, net
8

 
13

Changes in operating assets and liabilities, net
16,048

 
(6,484
)
Net cash provided by operating activities
72,473

 
69,259

 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures
(62,015
)
 
(86,486
)
Proceeds from sales of assets, net
75

 
18

Net cash used in investing activities
(61,940
)
 
(86,468
)
 
 
 
 
Cash flows from financing activities
 

 
 

Proceeds from credit facility borrowings
46,000

 
12,000

Repayment of credit facility borrowings
(9,000
)
 
(8,000
)
Net cash provided by financing activities
37,000

 
4,000

Net increase (decrease) in cash and cash equivalents
47,533

 
(13,209
)
Cash and cash equivalents – beginning of period
7,798

 
17,864

Cash and cash equivalents – end of period
$
55,331

 
$
4,655

 
 
 
 
Supplemental disclosures:
 

 
 

Cash paid for:
 

 
 

Interest, net of amounts capitalized
$
7,442

 
$
8,413

Reorganization items, net
$

 
$
79

Non-cash investing and financing activities:
 
 
 
Changes in accrued liabilities related to capital expenditures
$
18,660

 
$
13,569

 

See accompanying notes to condensed consolidated financial statements.

6



PENN VIRGINIA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS unaudited
For the Quarterly Period Ended March 31, 2020
(in thousands, except per share amounts or where otherwise indicated)

1. 
Nature of Operations
Penn Virginia Corporation (together with its consolidated subsidiaries, unless the context otherwise requires, “Penn Virginia,” the “Company,” “we,” “us” or “our”) is an independent oil and gas company engaged in the onshore exploration, development and production of oil, natural gas liquids (“NGLs”) and natural gas. Our current operations consist of drilling unconventional horizontal development wells and operating our producing wells in the Eagle Ford Shale (the “Eagle Ford”) in Gonzales, Lavaca, Fayette and DeWitt Counties in South Texas. We operate in and report our financial results and disclosures as one segment, which is the exploration, development and production of crude oil, NGLs and natural gas.
2.
Basis of Presentation
Our unaudited Condensed Consolidated Financial Statements include the accounts of Penn Virginia and all of our subsidiaries. Intercompany balances and transactions have been eliminated. Our Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Preparation of these statements involves the use of estimates and judgments where appropriate. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of our Condensed Consolidated Financial Statements, have been included. Our Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes included in our Annual Report on Form 10-K for the year ended December 31, 2019. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
Adoption of Recently Issued Accounting Pronouncements
Effective January 1, 2020, we adopted and began applying the relevant guidance provided in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2016–13, Measurement of Credit Losses on Financial Instruments (“ASU 2016–13”). We adopted ASU 2016–13 using the optional transition approach with a charge to the beginning balance of retained earnings as of January 1, 2020 (see Note 4 for the impact and disclosures associated with the adoption of ASU 2016–13). Comparative periods and related disclosures have not been restated for the application of ASU 2016–13.
Risks and Uncertainties
As an oil and gas exploration and development company, we are exposed to a number of risks and uncertainties that are inherent to our industry. In addition to such industry-specific risks, the global public health crisis associated with the novel coronavirus (“COVID-19”) has, and is anticipated to continue to have, an adverse effect on global economic activity for the immediate future and has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. The slowdown in global economic activity attributable to COVID-19 has resulted in a dramatic decline in the demand for energy, which directly impacts our industry and the Company. In addition, global crude oil prices experienced a collapse starting in early March 2020 as a direct result of failed negotiations between the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia. In response to the global economic slowdown, OPEC had recommended a decrease in production levels in order to accommodate reduced demand. Russia rejected the recommendation of OPEC as a concession to U.S. producers. After the failure to reach an agreement, Saudi Arabia, a dominant member of OPEC, and other Persian Gulf OPEC members announced intentions to increase production and offer price discounts to buyers in certain geographic regions.
As the breadth of the COVID-19 health crisis expanded throughout the month of March 2020 and governmental authorities implemented more restrictive measures to limit person-to-person contact, global economic activity continued to decline commensurately. The associated impact on the energy industry has been adverse and continued to be exacerbated by the unresolved conflict regarding production. In the second week of April, OPEC, Russia and certain other petroleum producing nations (“OPEC+”), reconvened to discuss the matter of production cuts in light of unprecedented disruption and supply and demand imbalances that expanded since the failed negotiations in early March 2020. Tentative agreements were reached to cut production by up to 10 million barrels of oil per day with allocations to be made among the OPEC+ participants. If effected, these production cuts, however, may not offset near-term demand loss attributable to the COVID-19 health crisis and related economic slowdown, and the tentative agreement has not resulted in increased commodity prices.
Despite a significant decline in drilling by U.S. producers starting in mid-March 2020, domestic supply is exceeding demand which has led to significant operational stress with respect to capacity limitations associated with storage, pipeline and refining infrastructure, particularly within the Gulf Coast region. The combined effect of the aforementioned factors is anticipated to have an adverse impact on the industry in general and our operations specifically.

7



During March and April 2020, we initiated several actions to mitigate the anticipated adverse economic conditions for the immediate future and to support our financial position and liquidity. The more significant actions that we took in March/April 2020 included: (i) suspending our drilling and completion program, (ii) substantially expanding the scope and range of our commodity derivatives portfolio, (iii) initiating actions to pursue certain liquidity-related provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and related regulations. These actions are discussed further in Notes 5, 8 and 12 that follow.
Going Concern Presumption
Our unaudited Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business.
Subsequent Events
Management has evaluated all of our activities through the issuance date of our Condensed Consolidated Financial Statements and has concluded that, with the exception of the re-determination of the borrowing base and related amendments to our credit agreement (“Credit Facility”), as disclosed in Note 7, no subsequent events have occurred that would require recognition in our Condensed Consolidated Financial Statements or disclosure in the Notes thereto.
3.
Acquisitions
Eagle Ford Working Interests
In 2019, we acquired working interests in certain properties for which we are the operator from our joint venture partners therein for cash consideration of approximately $6.5 million. Funding for this acquisition was provided by borrowings under the Credit Facility.
4.       Accounts Receivable and Revenues from Contracts with Customers
Accounts Receivable and Major Customers
The following table summarizes our accounts receivable by type as of the dates presented:
 
March 31,
 
December 31,
 
2020
 
2019
Customers
$
27,004

 
$
63,165

Joint interest partners
7,872

 
6,929

Other

 
674

 
34,876

 
70,768

Less: Allowance for credit losses
(224
)
 
(52
)
 
$
34,652

 
$
70,716



For the three months ended March 31, 2020, four customers accounted for $66.5 million, or approximately 73%, of our consolidated product revenues. The revenues generated from these customers during the three months ended March 31, 2020, were $22.6 million, $15.7 million, $15.7 million and $12.5 million, or 25%, 17%, 17% and 14% of the consolidated total, respectively. As of March 31, 2020 and December 31, 2019, $22.0 million and $52.7 million, or approximately 82% and 83%, respectively, of our consolidated accounts receivable from customers was related to these customers. For the three months ended March 31, 2019, three customers accounted for $69.0 million, or approximately 66%, of our consolidated product revenues. No significant uncertainties exist related to the collectability of amounts owed to us by any of these customers. As of March 31, 2020 and December 31, 2019, the allowance for credit losses is entirely attributable to receivables from joint interest partners.
Credit Losses and Allowance for Credit Losses
Adoption of ASU 2016–13
Effective January 1, 2020, we adopted ASU 2016–13 and have applied the guidance therein to our portfolio of accounts receivable including those from our customers and our joint interest partners. We have adopted ASU 2016–13 using the modified retrospective method resulting in an adjustment of less than $0.1 million to the beginning balance of retained earnings and a corresponding increase to the allowance for credit losses as of January 1, 2020.
Accounting Policies for Credit Losses
We monitor and assess our portfolio of accounts receivable, including those from our customers, our joint interest partners and others, when applicable, for credit losses on a monthly basis as we originate the underlying financial assets. Our review process and related internal controls take into appropriate consideration (i) past events and historical experience with the identified portfolio segments, (ii) current economic and related conditions within the broad energy industry as well as those

8



factors with broader applicability and (iii) reasonable supportable forecasts consistent with other estimates that are inherent in our financial statements. In order to facilitate our processes for the review and assessment of credit losses, we have identified the following portfolio segments which are described below: (i) customers for our commodity production and (ii) joint interest partners which are further stratified into the following sub-segments: (a) mutual operators which includes joint interest partners with whom we are a non-operating joint interest partner in properties for which they are the operator, (b) large partners consisting of those legal entities that maintain a working interest of at least 10 percent in properties for which we are the operator and (c) all others which includes legal entities that maintain working interests of less than 10 percent in properties for which we are the operator as well as legal entities with whom we no longer have an active joint interest relationship, but continue to have transactions, including joint venture audit settlements, that from time-to-time give rise to the origination of new accounts receivable.
Customers. We sell our commodity products to approximately 20 customers. A substantial majority of these customers are large, internationally recognized refiners and marketers in the case of our crude oil sales and large domestic processors and interstate pipelines with respect to our NGL and natural gas sales. As noted in our disclosures regarding major customers above, a significant portion of our outstanding customer accounts receivable are concentrated within a group of up to five customers at any given time. Due primarily to the historical market efficiencies and generally timely settlements associated with commodity sale transactions for crude oil, NGLs and natural gas, we have assessed this portfolio segment at zero risk for credit loss upon the adoption of ASU 2016–13 and for each of the three-months included in the period ended March 31, 2020. Historically, we have never experienced a credit loss with such customers including the periods during the 2008-2009 financial crisis and the more recent periods of significant commodity price declines. While we believe that the receivables that originated in March 2020 will be fully collected despite the ongoing uncertainty associated with the COVID-19 health crisis and the related global energy market disruptions, future originations of customer receivables will be assessed with a greater emphasis on current economic conditions and reasonable supportable forecasts.
Mutual Operators. As of March 31, 2020, we had mutual joint interest partner relationships with two upstream producers that also operate properties within the Eagle Ford for which we have non-operated working interests. Historically we have had full and timely collection experiences with these entities and we ourselves are timely with respect to our payments to them of joint venture costs. Upon adoption of ASU 2016–13, we had assessed this portfolio segment at zero risk for credit loss; however, in light of the potential for liquidity concerns due to current economic conditions in the near-term, we have assessed receivables originating in March 2020 with a de minimus one percent risk.
Large Partners. As of March 31, 2020, four legal entities had working interests of 10 percent or greater in properties that we operate. These entities are primarily passive investors. Historically we have had full and timely collection experiences with these entities. Upon adoption of ASU 2016–13, we had assessed this portfolio segment at a de minimus risk of one percent for credit loss; however, in light of the potential for liquidity concerns due to current economic conditions in the near-term, we have increased the assessed receivables originating in March 2020 to a two percent risk.
All Others. As of March 31, 2020, approximately thirty legal entities had working interests of less than 10 percent in properties that we operate. Historically, this is the only portfolio segment with whom we have experienced credit losses. Generally, this group includes passive investors and smaller producers that may not have the wherewithal or alternative sources of liquidity to settle their obligations to us in the event of individual challenges unique to smaller entities as well as adverse economic conditions in general. Upon adoption of ASU 2016–13, we had assessed this portfolio segment at a risk of five percent for credit loss; however, in light of the potential for liquidity concerns due to current economic conditions in the near-term, we have increased the assessed receivables originated in March 2020 to a 10 percent risk. As of March 31, 2020, approximately $0.1 million of accounts receivables attributable to this portfolio segment was past due, or over 60 days.
Supplemental Disclosures
The following table summarizes the activity in our allowance for credit losses, by portfolio segment, for the three months ended March 31, 2020:
 
 
 
Joint Interest Partners
 
 
 
Customers
 
Mutual Operators
 
Large Partners
 
All Others
 
Total
Balance at beginning of period
$

 
$

 
$

 
$
52

 
$
52

Adjustment upon adoption

 

 
60

 
16

 
76

Provision for expected credit losses

 
24

 
53

 
19

 
96

Write-offs and recoveries

 

 

 

 

Balance at end of period
$

 
$
24

 
$
113

 
$
87

 
$
224



9



5.
Derivative Instruments
We utilize derivative instruments, typically swaps, put options and call options which are placed with financial institutions that we believe are acceptable credit risks, to mitigate our financial exposure to commodity price volatility associated with anticipated sales of our future production and volatility in interest rates attributable to our variable rate debt instruments. Our derivative instruments are not formally designated as hedges in the context of GAAP. While the use of derivative instruments limits the risk of adverse commodity price and interest rate movements, such use may also limit the beneficial impact of future product revenues and interest expense from favorable commodity price and interest rate movements. From time to time, we may enter into incremental derivative contracts in order to increase the notional volume of production we are hedging, restructure existing derivative contracts or enter into other derivative contracts resulting in modification to the terms of existing contracts. In accordance with our internal policies, we do not utilize derivative instruments for speculative purposes.
Commodity Derivatives
The following is a general description of the commodity derivative instruments we have employed:
Swaps. A swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, or the swap price, with the payments calculated by reference to specified commodities or indexes. The counterparty to a swap contract is required to make a payment to us based on the amount of the swap price in excess of the settlement price multiplied by the notional volume if the settlement price for any settlement period is below the swap price for such contract. We are required to make a payment to the counterparty based on the amount of the settlement price in excess of the swap price multiplied by the notional volume if the settlement price for any settlement period is above the swap price for such contract.
Put Options. A put option has a defined strike, or floor price. We have entered into put option contracts in the roles of buyer and seller depending upon our particular hedging objective. The buyer of the put option pays the seller a premium to enter into the contract. When the settlement price is below the floor price, the seller pays the buyer an amount equal to the difference between the settlement price and the strike price multiplied by the notional volume. When the settlement price is above the floor price, the put option expires worthless. Certain of our purchased put options have deferred premiums. For the deferred premium puts, we agree to pay a premium to the counterparty at the time of settlement.
Call Options. A call option has a defined strike, or ceiling price. We have entered into call option contracts in the roles of buyer and seller depending upon our particular hedging objective. The buyer of the call option pays the seller a premium to enter into the call option. When the settlement price is above the ceiling price, the seller pays the buyer an amount equal to the difference between the settlement price and the strike price multiplied by the notional volume. When the settlement price is below the ceiling price, the call option expires worthless.
We typically combine swaps, purchased put options, purchased call options, sold put options and sold call options in order to achieve various hedging objectives. Certain of these objectives result in combinations that operate as collars which include purchased put options and sold call options, three-way collars which include purchased put options, sold put options and sold call options, and enhanced swaps, which include either sold put options or sold call options with the associated premiums rolled into an enhanced fixed price swap, among others.
We determine the fair values of our commodity derivative instruments using industry-standard models that consider various assumptions, including current market value and contractual prices for the underlying instruments, implied volatilities, time value and nonperformance risk. For the current market prices, we use third-party quoted forward prices, as applicable, for NYMEX West Texas Intermediate (“NYMEX WTI”), Magellan East Houston (“MEH”) crude oil and NYMEX Henry Hub (“NYMEX HH”) natural gas closing prices as of the end of the reporting period. Nonperformance risk is incorporated by utilizing discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position, and our own credit risk if the derivative is in a liability position.

10



The following table sets forth our commodity derivative positions, presented on a net basis by period of maturity, as of March 31, 2020:


2Q2020

3Q2020

4Q2020

1Q2021

2Q2021
NYMEX WTI Crude Swaps










Average Volume Per Day (barrels)

13,209


8,630


9,804


5,000


4,945

Weighted Average Swap Price ($/barrel)

$
52.06


$
55.20


$
55.18


$
51.60


$
51.60

















NYMEX WTI Purchased Puts/Sold Calls















Average Volume Per Day (barrels)

5,297


6,891


2,000


4,167


4,121

Weighted Average Purchased Put Price ($/barrel)

$
52.36


$
52.97


$
48.00


$
43.60


$
43.60

Weighted Average Sold Call ($/barrel)

$
57.60


$
58.03


$
57.10


$
46.84


$
46.84

















NYMEX WTI Purchased Puts















Average Volume Per Day (barrels)

3,297













Weighted Average Purchased Put ($/barrel)

$
23.00













Weighted Average Purchased Put Deferred Premium ($/barrel)

$
2.11





























NYMEX WTI Purchased Puts















Average Volume Per Day (barrels)

8,242













Weighted Average Purchased Put ($/barrel)

$
30.00













Weighted Average Purchased Put Deferred Premium ($/barrel)

$
3.19





























NYMEX WTI Put Spread















Average Volume Per Day (barrels)




5,435










Weighted Average Put Spread Purchased Put ($/barrel)




$
30.00










Weighted Average Put Spread Sold Put ($/barrel)




$
20.00










Weighted Average Put Spread Deferred Premium ($/barrel)




$
1.84


























NYMEX WTI Cap Offset















Average Volume Per Day (barrels)

3,297













Weighted Average Cap Offset Purchased Call ($/barrel)

$
57.90













Weighted Average Cap Offset Deferred Premium ($/barrel)

$
0.10





























NYMEX WTI Sold Puts















Average Volume Per Day (barrels)

912





5,087


9,167


9,066

Weighted Average Sold Put Price ($/barrel)

$
44.00





$
43.50


$
37.36


$
37.36












MEH Crude Swaps










Average Volume Per Day (barrels)

2,000


2,000


2,000







Weighted Average Swap Price ($/barrel)

$
61.03


$
61.03


$
61.03








 














HH Purchased Puts/Sold Calls
 














Average Volume Per Day (MMBtus)
 
12,901


12,804


12,804







Weighted Average Floor ($/MMBtu)
 
$
2.00


$
2.00


$
2.00







Weighted Average Cap ($/MMBtu)
 
$
2.21


$
2.21


$
2.21








As of March 31, 2020, we were unhedged with respect to NGL production.
Interest Rate Derivatives
We have entered into a series of interest rate swap contracts (the “Interest Rate Swaps”) to establish fixed interest rates on a portion of our variable interest rate indebtedness under the Credit Facility and Second Lien Credit Agreement dated as of September 29, 2017 (the “Second Lien Facility”). The notional amount of the Interest Rate Swaps totals $300 million, with us paying a weighted average fixed rate of 1.36% on the notional amount, and the counterparties paying a variable rate equal to a customary London interbank offered rate (“LIBOR”) through May 2022.

11



Financial Statement Impact of Derivatives
The impact of our derivative activities on income is included in the “Derivatives” caption on our Condensed Consolidated Statements of Operations. The effects of derivative gains and (losses) and cash settlements are reported as adjustments to reconcile net income to net cash provided by operating activities. These items are recorded in the “Derivative contracts” section of our Condensed Consolidated Statements of Cash Flows under “Net (gains) losses” and “Cash settlements, net.”
The following table summarizes the effects of our derivative activities for the periods presented:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Interest rate swap gains (losses) recognized in the Consolidated Statements of Operations
 
$
(6,683
)
 
$

Commodity gains (losses) recognized in the Consolidated Statements of Operations
 
157,802

 
(68,017
)
 
 
$
151,119

 
$
(68,017
)
 
 
 
 
 
Interest rate cash settlements recognized in the Consolidated Statements of Cash Flows
 
$
68

 
$

Commodity cash settlements recognized in the Consolidated Statements of Cash Flows
 
(337
)
 
4,394

 
 
$
(269
)
 
$
4,394


The following table summarizes the fair values of our derivative instruments presented on a gross basis, as well as the locations of these instruments on our Condensed Consolidated Balance Sheets as of the dates presented:
 
 
 
 
March 31, 2020
 
December 31, 2019
 
 
 
 
Derivative
 
Derivative
 
Derivative
 
Derivative
Type
 
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Interest rate contracts
 
Derivative assets/liabilities - current
 
$
40

 
$
2,890

 
$

 
$

Commodity contracts
 
Derivative assets/liabilities – current
 
233,402

 
100,202

 
4,131

 
23,450

Interest rate contracts
 
Derivative assets/liabilities - noncurrent
 

 
3,900

 

 

Commodity contracts
 
Derivative assets/liabilities – noncurrent
 
10,963

 
6,789

 
2,750

 
3,385

 
 
 
 
$
244,405

 
$
113,781

 
$
6,881

 
$
26,835


As of March 31, 2020, we reported net commodity derivative assets of $137.4 million and net Interest Rate Swap liabilities of $6.8 million. The contracts associated with these positions are with nine counterparties for commodity derivatives and four counterparties for Interest Rate Swaps, all of which are investment grade financial institutions and are participants in the Credit Facility. This concentration may impact our overall credit risk in that these counterparties may be similarly affected by changes in economic or other conditions.
The agreements underlying our derivative instruments include provisions for the netting of settlements with the counterparties for contracts of similar type. We have neither paid to, nor received from, our counterparties any cash collateral in connection with our derivative positions. Furthermore, our derivative contracts are not subject to margin calls or similar accelerations. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.

12



6.
Property and Equipment
The following table summarizes our property and equipment as of the dates presented: 
 
March 31,
 
December 31,
 
2020
 
2019
Oil and gas properties:
 

 
 

Proved
$
1,487,868

 
$
1,409,219

Unproved
53,878

 
53,200

Total oil and gas properties
1,541,746

 
1,462,419

Other property and equipment
27,355

 
25,915

Total properties and equipment
1,569,101

 
1,488,334

Accumulated depreciation, depletion and amortization
(408,542
)
 
(367,909
)
 
$
1,160,559

 
$
1,120,425


Unproved property costs of $53.9 million and $53.2 million have been excluded from amortization as of March 31, 2020 and December 31, 2019, respectively. We transferred $1.4 million and less than $0.1 million of undeveloped leasehold costs associated with acreage unlikely to be drilled or associated with proved undeveloped reserves, including capitalized interest, from unproved properties to the full cost pool during the three months ended March 31, 2020 and 2019, respectively. We capitalized internal costs of $0.8 million and $1.0 million and interest of $0.7 million and $1.2 million during the three months ended March 31, 2020 and 2019, respectively, in accordance with our accounting policies. Average depreciation, depletion and amortization per barrel of oil equivalent of proved oil and gas properties was $16.73 and $17.49 for the three months ended March 31, 2020 and 2019, respectively.
At the end of each quarterly reporting period, the unamortized cost of our oil and gas properties, net of deferred income taxes, is limited to the sum of the estimated discounted future net revenues from proved properties adjusted for costs excluded from amortization and related income taxes (the “Ceiling Test”). As of March 31, 2020, the carrying value of our proved oil and gas properties was below the limit determined by the Ceiling Test by approximately $350 million. Because the Ceiling Test utilizes commodity prices based on a trailing twelve month average, it does not, as of March 31, 2020, fully reflect the substantial decline in commodity prices due to the economic impact of the COVID-19 health crisis and the ongoing disruption in global energy markets. If current commodity prices continue at depressed levels or decline further, it is likely that we will experience a Ceiling Test write-down in the carrying value of our oil and gas properties at some point during the year ended December 31, 2020.
7.
Long-Term Debt
The following table summarizes our debt obligations as of the dates presented:
 
March 31, 2020
 
December 31, 2019
 
Principal
 
Unamortized Discount and Deferred Issuance Costs 1, 2
 
Principal
 
Unamortized Discount and Deferred Issuance Costs 1, 2
Credit facility
$
399,400

 
 
 
$
362,400

 
 
Second lien term loan
200,000

 
$
6,776

 
200,000

 
$
7,372

Totals
599,400

 
$
6,776

 
562,400

 
$
7,372

Less: Unamortized discount 2
(2,219
)
 
 
 
(2,415
)
 
 
Less: Unamortized deferred issuance costs 1, 2
(4,557
)
 
 
 
(4,957
)
 
 
Long-term debt, net
$
592,624

 
 
 
$
555,028

 
 

_______________________
1
Excludes issuance costs of the Credit Facility, which represent costs attributable to the access to credit over its contractual term, that have been presented as a component of Other assets (see Note 10) and are being amortized over the term of the Credit Facility using the straight-line method.
2 Discount and issuance costs of the Second Lien Facility are being amortized over the term of the underlying loan using the effective-interest method.

13



Credit Facility
In April 2020, we entered into the Borrowing Base Redetermination Agreement and Amendment No. 7 to Credit Agreement (the “Seventh Amendment”). The Seventh Amendment, which became effective on April 30, 2020, provides a $1.0 billion revolving commitment and a $400 million borrowing base, reduced from $500 million, including a $25 million sublimit for the issuance of letters of credit. Furthermore, the Seventh Amendment provides for an additional decrease in the borrowing base to $375 million effective July 1, 2020 and, effective October 1, 2020, limits availability under the Credit Facility to a maximum of $350 million until the redetermination of the borrowing base in Fall 2021. Availability under the Credit Facility may not exceed the lesser of the aggregate commitments or the borrowing base, provided that effective October 1, 2020, availability under the Credit Facility is limited to a maximum of $350 million until the redetermination of the borrowing base in Fall 2021. The borrowing base under the Credit Facility is redetermined semi-annually, generally in April and October of each year. Additionally, the Credit Facility lenders may, at their discretion, initiate a redetermination at any time during the six-month period between scheduled redeterminations. The Credit Facility is available to us for general corporate purposes, including working capital. We had $0.4 million in letters of credit outstanding as of March 31, 2020 and December 31, 2019.
The Credit Facility is scheduled to mature in May 2024; provided that on June 30, 2022, unless we have either extended the maturity date of the Second Lien Facility described below to a date that is at least 91 days after May 7, 2024 or have repaid our Second Lien Facility in full, the maturity date of the Credit Facility will mean June 30, 2022.
The outstanding borrowings under the Credit Facility bear interest at a rate equal to, at our option, either (a) a customary reference rate plus an applicable margin ranging from 1.50% to 2.50% (0.50% to 1.50% prior to the Seventh Amendment), determined based on the utilization level under the Credit Facility or (b) a Eurodollar rate, including LIBOR through 2021, plus an applicable margin ranging from 2.50% to 3.50% (1.50% to 2.50% prior to the Seventh Amendment), determined based on the utilization level under the Credit Facility. Interest on reference rate borrowings is payable quarterly in arrears and is computed on the basis of a year of 365/366 days, and interest on Eurodollar borrowings is payable every one, three or six months, at the election of the borrower, and is computed on the basis of a year of 360 days. As of March 31, 2020, the actual weighted-average interest rate on the outstanding borrowings under the Credit Facility was 3.20%. Unused commitment fees are charged at a rate of 0.50% (0.375% to 0.50% prior to the Seventh Amendment).
The Credit Facility is guaranteed by us and all of our subsidiaries (the “Guarantor Subsidiaries”). The guarantees under the Credit Facility are full and unconditional and joint and several. Substantially all of our consolidated assets are held by the Guarantor Subsidiaries. There are no significant restrictions on our ability or any of the Guarantor Subsidiaries to obtain funds through dividends, advances or loans. The obligations under the Credit Facility are secured by a first priority lien on substantially all of our assets.
The Credit Facility requires us to maintain (1) a minimum current ratio (as defined in the Credit Facility, which considers the unused portion of the total commitment as a current asset), measured as of the last day of each fiscal quarter of 1.00 to 1.00 and (2) a maximum leverage ratio (consolidated indebtedness to adjusted earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses, both as defined in the Credit Facility), measured as of the last day of each fiscal quarter of 3.50 to 1.00 (4.00 to 1.00 prior to the Seventh Amendment).
The Credit Facility also contains customary affirmative and negative covenants, including as to compliance with laws (including environmental laws, ERISA and anti-corruption laws), maintenance of required insurance, delivery of quarterly and annual financial statements, oil and gas engineering reports and budgets, weekly cash balance reports, maintenance and operation of property (including oil and gas properties), restrictions on the incurrence of liens and indebtedness, merger, consolidation or sale of assets, payment of dividends, and transactions with affiliates and other customary covenants. In addition, the Credit Facility contains certain anti-cash hoarding provisions, including the requirement to repay outstanding loans and cash collateralize outstanding letters of credit on a weekly basis in the amount of any cash on the balance sheet (subject to certain exceptions) in excess of $25 million.
The Credit Facility contains customary events of default and remedies for credit facilities of this nature. If we do not comply with the financial and other covenants in the Credit Facility, the lenders may, subject to customary cure rights, require immediate payment of all amounts outstanding under the Credit Facility.
As of March 31, 2020, and through the date upon which the Condensed Consolidated Financial Statements were issued, we were in compliance with all of the covenants under the Credit Facility.
Second Lien Facility
On September 29, 2017, we entered into the Second Lien Facility. We received net proceeds of $187.8 million from the Second Lien Facility net of an original issue discount (“OID”) of $4.0 million and issue costs of $8.2 million. The proceeds from the Second Lien Facility were used to fund a significant acquisition and related fees and expenses. The maturity date under the Second Lien Facility is September 29, 2022.

14



The outstanding borrowings under the Second Lien Facility bear interest at a rate equal to, at our option, either (a) a customary reference rate based on the prime rate plus an applicable margin of 6.00% or (b) a customary LIBOR rate plus an applicable margin of 7.00%. As of March 31, 2020, the actual interest rate of outstanding borrowings under the Second Lien Facility was 8.00%. Amounts under the Second Lien Facility were borrowed at a price of 98% with an initial interest rate of 8.34%, resulting in an effective interest rate of 9.89%. Interest on reference rate borrowings is payable quarterly in arrears and is computed on the basis of a year of 365/366 days, and interest on eurocurrency borrowings is payable every one or three months (including in three-month intervals if we select a six-month interest period), at our election and is computed on the basis of a 360-day year. We have the right, to the extent permitted under the Credit Facility and an intercreditor agreement between the lenders under the Credit Facility and the lenders under the Second Lien Facility, to prepay loans under the Second Lien Facility at any time, subject to the following prepayment premiums (in addition to customary “breakage” costs with respect to eurocurrency loans): 101% of the amount being prepaid through September 2020; and thereafter, no premium. The Second Lien Facility also provides for a 101% prepayment premiums in the event of a change in control that results in an offer of prepayment that is accepted by the lenders under the Second Lien Facility through September 2020, but no prepayment premium thereafter.
The Second Lien Facility is collateralized by substantially all of the Company’s and its subsidiaries’ assets with lien priority subordinated to the liens securing the Credit Facility. The obligations under the Second Lien Facility are guaranteed by us and the Guarantor Subsidiaries.
The Second Lien Facility has no financial covenants, but contains customary affirmative and negative covenants, including as to compliance with laws (including environmental laws, ERISA and anti-corruption laws), maintenance of required insurance, delivery of quarterly and annual financial statements, oil and gas engineering reports and budgets, maintenance and operation of property (including oil and gas properties), restrictions on the incurrence of liens and indebtedness, merger, consolidation or sale of assets, payment of dividends and transactions with affiliates and other customary covenants.
As illustrated in the table above, the OID and issue costs of the Second Lien Facility are presented as reductions to the outstanding term loans. These costs are subject to amortization using the interest method over the five-year term of the Second Lien Facility.
As of March 31, 2020, and through the date upon which the Consolidated Financial Statements were issued, we were in compliance with all of the covenants under the Second Lien Facility.
8.
Income Taxes
We recognized a federal and state income tax expense for the three months ended March 31, 2020 at the blended rate of 21.7%. The federal and state tax expense was offset by an adjustment to the valuation allowance against our net deferred tax assets resulting in an effective tax rate of 0.7%, which is fully attributable to the State of Texas. The provision also reflects a reclassification of $1.2 million from deferred tax assets to the current income tax receivable for our remaining refundable alternative minimum tax (“AMT”) credit carryforwards that were accelerated due to certain income tax provisions provided in the CARES Act. As of March 31, 2020, we have a receivable of $2.5 million for the aforementioned AMT credit carryforwards for which we have applied for an immediate refund in April 2020. Our net deferred income tax liability balance of $3.7 million as of March 31, 2020 is fully attributable to the State of Texas and primarily related to property and equipment.
We recognized a federal and state income tax benefit for the three months ended March 31, 2019 at the blended rate of 21.6%; however, the federal and state tax expense was offset by an adjustment to the valuation allowance against our net deferred tax assets resulting in an effective tax rate of less than 0.1%.
We had no liability for unrecognized tax benefits as of March 31, 2020. There were no interest and penalty charges recognized during the periods ended March 31, 2020 and 2019. Tax years from 2015 forward remain open to examination by the major taxing jurisdictions to which the Company is subject; however, net operating losses originating in prior years are subject to examination when utilized.

15



9.
Leases
Lease Arrangements and Supplemental Disclosures
We generally have lease arrangements for office facilities and certain office equipment, certain field equipment including compressors, drilling rigs, land easements and similar arrangements for rights-of-way, and certain gas gathering and gas lift assets. Our short-term leases included in the disclosures below are primarily comprised of our contractual arrangements with certain vendors for operated drilling rigs and our field compressors. During April 2020, we released our drilling rigs. Our primary variable lease was represented by our field gas gathering and gas lift agreement with a midstream service provider and the lease payments are charged on a volumetric basis at a contractual fixed rate.
The following table summarizes the components of our total lease cost for the periods presented:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Operating lease cost
 
$
210

 
$
163

Short-term lease cost
 
11,296

 
11,571

Variable lease cost
 
5,657

 
5,095

Less: Amounts charged as drilling costs 1
 
(10,621
)
 
(10,851
)
Total lease cost recognized in the Condensed Consolidated Statement of Operations 2
 
$
6,542

 
$
5,978

___________________
1 
Represents the combined gross amounts paid and (i) capitalized as drilling costs for our working interest share and (ii) billed to joint interest partners for their working interest share for short-term leases of operated drilling rigs.
2 
Includes $2.8 million and $2.1 million recognized in Gathering, processing and transportation, $3.5 million and $3.7 million recognized in Lease operating and $0.2 million and $0.2 million recognized in G&A for the three months ended March 31, 2020 and 2019, respectively.
The following table summarizes supplemental cash flow information related to leases for the periods presented:
 
Three Months Ended March 31,
 
2020
 
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
218

 
$
39

ROU assets obtained in exchange for lease obligations:
 
 
 
Operating leases 1
$
306

 
$
2,572


___________________
1    Includes $2.5 million recognized upon the adoption of Accounting Standards Codification Topic 842 (“ASC842”) in 2019.
The following table summarizes supplemental balance sheet information related to leases as of the dates presented:
 
March 31,
 
December 31,
 
2020
 
2019
ROU assets - operating leases
$
2,928

 
$
2,740

Current operating lease obligations
$
927

 
$
847

Noncurrent operating lease obligations
2,335

 
2,232

Total operating lease obligations
$
3,262

 
$
3,079

Weighted-average remaining lease term
 
 
 
Operating leases
3.8 Years

 
4.1 Years

Weighted-average discount rate
 
 
 
Operating leases
3.26
%
 
5.97
%
Remaining maturities of operating lease obligations as of March 31, 2020:
 
 
 
2020
$
689

 
 
2021
894

 
 
2022
874

 
 
2023
873

 
 
2024 and thereafter
144

 
 
Total undiscounted lease payments
3,474

 
 
Less: imputed interest
(212
)
 
 
Total operating lease obligations
$
3,262

 
 


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10.
Supplemental Balance Sheet Detail
The following table summarizes components of selected balance sheet accounts as of the dates presented:
 
March 31,
 
December 31,
 
2020
 
2019
Other current assets:
 

 
 

Tubular inventory and well materials
$
2,959

 
$
2,989

Prepaid expenses
1,806

 
1,469

 
$
4,765

 
$
4,458

Other assets:
 

 
 

Deferred issuance costs of the Credit Facility, net of amortization
$
3,725

 
$
3,952

Right-of-use assets – operating leases
2,928

 
2,740

Other
111

 
32

 
$
6,764

 
$
6,724

Accounts payable and accrued liabilities:
 

 
 

Trade accounts payable
$
44,482

 
$
30,098

Drilling costs
23,260

 
18,832

Royalties
29,317

 
44,537

Production, ad valorem and other taxes
3,444

 
3,244

Compensation
2,246

 
5,272

Interest
644

 
730

Current operating lease obligations
927

 
847

Other
1,543

 
2,264

 
$
105,863

 
$
105,824

Other liabilities:
 

 
 

Asset retirement obligations
$
5,082

 
$
4,934

Noncurrent operating lease obligations
2,335

 
2,232

Defined benefit pension obligations
843

 
873

Postretirement health care benefit obligations
356

 
343

 
$
8,616

 
$
8,382


11.
Fair Value Measurements
We apply the authoritative accounting provisions included in GAAP for measuring the fair value of both our financial and nonfinancial assets and liabilities. Fair value is an exit price representing the expected amount we would receive upon the sale of an asset or that we would expect to pay to transfer a liability in an orderly transaction with market participants at the measurement date.
Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives and our Credit Facility and Second Lien Facility borrowings. As of March 31, 2020, the carrying values of all of these financial instruments approximated fair value.

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Recurring Fair Value Measurements
Certain financial assets and liabilities are measured at fair value on a recurring basis on our Condensed Consolidated Balance Sheets. The following tables summarize the valuation of those assets and (liabilities) as of the dates presented:
 
 
March 31, 2020
 
 
Fair Value
 
Fair Value Measurement Classification
Description
 
Measurement
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Interest rate swap assets – current
 
$
40

 
$

 
$
40

 
$

Interest rate swap assets – noncurrent
 
$

 
$

 
$

 
$

Commodity derivative assets – current
 
$
233,402

 
$

 
$
233,402

 
$

Commodity derivative assets – noncurrent
 
$
10,963

 
$

 
$
10,963

 
$

Liabilities:
 
 

 
 

 
 

 
 

Interest rate swap liabilities – current
 
$
(2,890
)
 

 
$
(2,890
)
 

Interest rate swap liabilities – noncurrent
 
$
(3,900
)
 

 
$
(3,900
)
 

Commodity derivative liabilities – current
 
$
(100,202
)
 
$

 
$
(100,202
)
 
$

Commodity derivative liabilities – noncurrent
 
$
(6,789
)
 
$

 
$
(6,789
)
 
$


 
 
December 31, 2019
 
 
Fair Value
 
Fair Value Measurement Classification
Description
 
Measurement
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Commodity derivative assets – current
 
$
4,131

 
$

 
$
4,131

 
$

Commodity derivative assets - noncurrent
 
$
2,750

 
$

 
$
2,750

 
$

Liabilities:
 
 

 
 

 
 

 
 

Commodity derivative liabilities – current
 
$
(23,450
)
 
$

 
$
(23,450
)
 
$

Commodity derivative liabilities – noncurrent
 
$
(3,385
)
 
$

 
$
(3,385
)
 
$


Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one level of the fair value hierarchy to another level. In such instances, the transfer is deemed to have occurred at the beginning of the quarterly period in which the event or change in circumstances that caused the transfer occurred. There were no transfers during the three months ended March 31, 2020 and 2019.
We used the following methods and assumptions to estimate fair values for the financial assets and liabilities described below:
Commodity derivatives: We determine the fair values of our commodity derivative instruments using industry-standard models that consider various assumptions including current market and contractual prices for the underlying instruments, implied volatilities, time value and non-performance risk. For the current market prices, we use third-party quoted forward prices, as applicable, for NYMEX WTI, MEH crude oil and NYMEX HH natural gas closing prices as of the end of the reporting periods. Each of these is a Level 2 input.
Interest rate swaps: We determine the fair values of our interest rate swaps using an income approach valuation technique that connects future cash flows to a single discounted value. We estimate the fair value of the swaps based on published interest rate yield curves as of the date of the estimate. Each of these is a Level 2 input.
Non-Recurring Fair Value Measurements
The most significant non-recurring fair value measurements utilized in the preparation of our Condensed Consolidated Financial Statements are those attributable to the initial determination of AROs associated with the ongoing development of new oil and gas properties. The determination of the fair value of AROs is based upon regional market and facility specific information. The amount of an ARO and the costs capitalized represent the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor after discounting the future cost back to the date that the abandonment obligation was incurred using a rate commensurate with the risk, which approximates our cost of funds. Because these significant fair value inputs are typically not observable, we have categorized the initial estimates as Level 3 inputs.

18



12.
Commitments and Contingencies
Drilling and Completion Commitments
In March 2020, we provided termination notices releasing our contracted drilling rigs in connection with the suspension of our drilling and completion program. There were no material charges associated with the rig releases. In April 2020, we rescinded one of the termination notices and entered into a new agreement to maintain one rig in place for a minimal daily rate pr