Callon Petroleum Company Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

Fair Value Measurements

12 Months Ended

Dec. 31, 2013

Fair value is defined within the accounting rules 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. The rules established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:



Level 1	Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority.
Level 2	Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability.
Level 3	Valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority.

Fair Value of Financial Instruments

Cash, Cash Equivalents, and Short-Term Investments. The carrying amounts for these instruments approximate fair value due to the short-term nature or maturity of the instruments.

Debt. The Company’s debt is recorded at the carrying amount on its Consolidated Balance Sheet. The fair value of Callon’s fixed-rate debt, which is valued using Level 2 inputs, is based upon estimates provided by an independent investment banking firm. The carrying amount of floating-rate debt approximates fair value because the interest rates are variable and reflective of market rates.

The following table summarizes the respective carrying and fair values at:



	For the year ended December 31,
	2013				2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
Credit Facility	$	22,000	$	22,000	$	10,000	$	10,000
13% Senior Notes due 2016 (a)	53,748		50,299		110,668		100,112
Total	$	75,748	$	72,299	$	120,668	$	110,112


(a)	2013 and 2012 fair values are calculated only in relation to the $48,481 and $96,961 face value outstanding of the 13% Senior Notes, respectively. The remaining $5,267 and $13,707, respectively represents the Company’s deferred credits and have been excluded from the fair value calculation. See Note 4 for additional information.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Certain assets and liabilities are reported at fair value on a recurring basis (unless otherwise noted below) in Callon’s Consolidated Balance Sheet. The following methods and assumptions were used to estimate the fair values:

Commodity Derivative Instruments. The fair value of commodity derivative instruments is derived using a valuation model that utilizes market-corroborated inputs that are observable over the term of the derivative contract, and the values are corroborated by quotes obtained from counterparties to the agreements. The Company’s fair value calculations also incorporate an estimate of the counterparties’ default risk for derivative assets and an estimate of the Company’s default risk for derivative liabilities. The Company believes that the majority of the inputs used to calculate the commodity derivative instruments fall within Level 2 of the fair-value hierarchy based on the wide availability of quoted market prices for similar commodity derivative contracts. See Note 5 for additional information regarding the Company’s derivative instruments.

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis for each hierarchy level:



December 31, 2013	Balance Sheet Presentation	Level 1		Level 2			Level 3		Total
Assets
Derivative financial instruments - current Portion	Fair market value of derivatives	$	—	$	60		$	—	$	60
Derivative financial instruments - non-current	Other assets, net	—		—			—		—
Sub-total assets		$	—	$	60		$	—	$	60

Liabilities
Derivative financial instruments - current portion	Fair market value of derivatives	$	—	$	1,036		$	—	$	1,036
Derivative financial instruments - non-current	Other long-term liabilities	—		72			—		72
Sub-total liabilities		$	—	$	1,108		$	—	$	1,108

Total		$	—	$	(1,048	)	$	—	$	(1,048	)



December 31, 2012	Balance Sheet Presentation	Level 1		Level 2		Level 3		Total
Assets
Derivative financial instruments - current portion	Fair market value of derivatives	$	—	$	1,674	$	—	$	1,674
Derivative financial instruments - non-current	Other assets, net	—		250		—		250
Sub-total assets		$	—	$	1,924	$	—	$	1,924

Liabilities
Derivative financial instruments - current portion	Fair market value of derivatives	$	—	$	125	$	—	$	125
Derivative financial instruments - non-current	Other long-term liabilities	—		116		—		116
Sub-total liabilities		$	—	$	241	$	—	$	241

Total		$	—	$1,683		$	—	$1,683

The derivative fair values above are based on analysis of each contract. Derivative assets and liabilities with the same counterparty are presented here on a gross basis, even where the legal right of offset exists. See Note 5 for a discussion of net amounts recorded in the Consolidated Balance Sheet at December 31, 2013.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are reported at fair value on a nonrecurring basis in Callon’s Consolidated Balance Sheet. The following methods and assumptions were used to estimate the fair values:

Other Property and Equipment. As discussed in Note 13, the Company’s decision to abandon certain of its other property and equipment, that had been classified as held for sale, resulted in an impairment charge of $1,707 which is included in the Company’s Statement of Operations for the year ended December 31, 2013. The impairment charge was valued using level 3 inputs.

Acquisition. During the second quarter of 2013, the Company acquired approximately 2,468 gross (2,186 net) acres in Reagan and Upton Counties, Texas, which is located in the southern portion of the Midland Basin for a purchase price of $11,000. The acquisition also included seven gross vertical wells and 1,301 barrels of oil equivalent proved reserves. The Company valued the acquired assets in accordance with the method described below. In accordance with the acquisition method of accounting, the purchase price of the Company’s acquisition during the period has been allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. In valuing the acquired assets and liabilities assumed, fair values were based on expected future cash flows based on estimated reserve quantities; costs to produce and develop reserves; and oil and gas forward prices. The purchase price of the Company’s acquisition during the period was $11,000 with approximately $2,000 allocated to unevaluated oil and gas properties and approximately $9,000 allocated to evaluated oil and gas properties. Asset retirement obligations assumed in connection with the transaction were insignificant due to the nature of the properties acquired. The unaudited pro forma results of the properties acquired are immaterial to the Company’s financial statements. The fair value measurements were based on significant inputs not observable in the market and thus represent a level 3 measurement.

- 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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