Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.20.2
Fair Value Measurements
6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements 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 June 30, 2020, the carrying values of all of these financial instruments approximated fair value.
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:
  As of June 30, 2020
  Fair Value Fair Value Measurement Classification
Description Measurement Level 1 Level 2 Level 3
Assets:        
Interest rate swap assets – current $ —    $ —    $ —    $ —   
Interest rate swap assets – noncurrent $ —    $ —    $ —    $ —   
Commodity derivative assets – current $ 117,369    $ —    $ 117,369    $ —   
Commodity derivative assets – noncurrent $ 4,053    $ —    $ 4,053    $ —   
Liabilities:        
Interest rate swap liabilities – current $ (2,949)   $ —    $ (2,949)   $ —   
Interest rate swap liabilities – noncurrent $ (4,242)   $ —    $ (4,242)   $ —   
Commodity derivative liabilities – current $ (71,634)   $ —    $ (71,634)   $ —   
Commodity derivative liabilities – noncurrent $ (4,658)   $ —    $ (4,658)   $ —   
  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)   $ —   
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 six months ended June 30, 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.