Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

v3.19.3.a.u2
Fair Value Measurements
 12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements
13.
Fair Value Measurements
We apply the authoritative accounting provisions for measuring 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.
We use a hierarchy that prioritizes the inputs we use to measure fair value into three distinct categories based upon whether such inputs are observable in active markets or unobservable. We classify assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value measurement. Our methodology for categorizing assets and liabilities that are measured at fair value pursuant to this hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest level to unobservable inputs as outlined below.
Fair value measurements are classified and disclosed in one of the following three categories:
•
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 1 inputs generally provide the most reliable evidence of fair value.
•
Level 2: Quoted prices in markets that are not active or inputs, which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
•
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
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. Due to the short-term nature of their maturities, the carrying value of our cash and cash equivalents, accounts receivable and accounts payable approximate their fair value. Our derivatives are marked-to-market and presented at their values. The carrying value of our long-term debt, which includes the Credit Facility and the Second Lien Facility, approximated their fair values as they represent variable-rate debt and their interest rates are reflective of market rates.
Recurring Fair Value Measurements
Certain financial assets and liabilities are measured at fair value on a recurring basis on our Consolidated Balance Sheets. The following tables summarize the valuation of those assets and (liabilities) as of the dates presented:
 
 
As of 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
)
 
—

 
 
As of December 31, 2018
 
 
Fair Value
 
Fair Value Measurement Classification
Description
 
Measurement
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Commodity derivative assets – current
 
$
34,932

 
$
—

 
$
34,932

 
$
—

Commodity derivative assets – noncurrent
 
10,100

 
—

 
10,100

 
—

Liabilities:
 
 

 
 

 
 

 
 

Commodity derivative liabilities – current
 
$
(991
)
 
$
—

 
$
(991
)
 
$
—

Commodity derivative liabilities – noncurrent
 
—

 
—

 
—

 
—


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 any period in the years ended December 31, 2019, 2018 and 2017.
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 based on discounted cash flows derived from third-party quoted forward prices for WTI, LLS and MEH crude oil closing prices as of the end of the reporting periods. We generally use the income approach, using valuation techniques that convert future cash flows to a single discounted value. Each of these is a level 2 input.
Non-Recurring Fair Value Measurements
In addition to the fair value measurements applied with respect to the Hunt and Devon Acquisitions, as described in Note 4, the most significant non-recurring fair value measurements utilized in the preparation of our 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.