Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

 v2.3.0.11
Fair Value Measurements
 6 Months Ended
Jun. 30, 2011
Fair Value Measurements [Abstract]  
Fair Value Measurements
Note 6 — Fair Value Measurements
          The fair value hierarchy outlined in the relevant accounting guidance gives the highest priority to Level 1 inputs, which consist of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 valuations are derived from inputs that are significant and unobservable, and these valuations have the lowest priority.
Fair Value of Financial Instruments
          Cash, Cash Equivalents, 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 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:
                                 
    June 30, 2011   December 31, 2010
    Carrying   Fair   Carrying   Fair
    Value   Value   Value   Value
13% Senior Notes due 2016 (1)
  $ 126,917     $ 112,844     $ 165,504     $ 140,030  
 
(1)   Fair value is calculated only in relation to the $106,961 and $137,961 principal outstanding of the 13% Senior Notes at the dates indicated above, respectively. The remaining $19,956 and $27,543, respectively, which the Company has recorded as a deferred credit, is excluded from the fair value calculation, and will be recognized in earnings as a reduction of interest expense over the remaining amortization period. 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 Sheets. The following methods and assumptions were used to estimate the fair values:
          Commodity Derivative Instruments. Callon’s derivative policy allows for commodity derivative instruments to consist of collars and natural gas and crude oil basis swaps. As disclosed in Note 5, the Company’s hedge portfolio includes only collar contracts. The fair value of these derivatives is calculated 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 these inputs primarily fall within Level 2 of the fair-value hierarchy based on the wide availability of quoted market prices for similar commodity derivative contracts. For additional information, see Note 5.
The following tables present the Company’s liabilities measured at fair value on a recurring basis for each hierarchy level:
                                     
As of June 30, 2011   Balance Sheet Presentation   Level 1     Level 2     Level 3     Total  
Assets                                    
Derivative financial instruments — current
  Fair market value of derivatives   $ —     $ 1,704     $ —     $ 1,704  
Derivative financial instruments — non-current
  Other assets, net     —       1,243       —       1,243  
Liabilities
                                   
Derivative financial instruments — current
  Fair market value of derivatives   $ —     $ 600     $ —     $ 600  
Derivative financial instruments — non-current
  Other long-term liabilities     —       —       —       —  
 
                           
Total
      $ —     $ 2,347     $ —     $ 2,347  
 
                           
 
                                   
As of December 31, 2010   Balance Sheet Presentation   Level 1     Level 2     Level 3     Total  
Assets
                                   
Derivative financial instruments — current
  Fair market value of derivatives   $ —     $ —     $ —     $ —  
Derivative financial instruments — non-current
  Other assets, net     —       —       —       —  
Liabilities
                                   
Derivative financial instruments — current
  Fair market value of derivatives   $ —     $ 937     $ —     $ 937  
Derivative financial instruments — non-current
  Other long-term liabilities     —       —       —       —  
 
                           
Total
      $ —     $ (937 )   $ —     $ (937 )
 
                           
          The derivative fair values above are based on analysis of each contract. Derivative liabilities with the same counterparty are presented here on a gross basis, even where the legal right of offset exists.
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:
          Asset Retirement Obligations Incurred in Current Period. Callon estimates the fair value of AROs based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors as (1) the existence of a legal obligation for an ARO, (2) amounts and timing of settlements, (3) the credit-adjusted risk-free rate to be used and (4) inflation rates. AROs incurred through June 30, 2011, including upward revisions of $219, were Level 3 fair value measurements. See Note 9, Asset Retirement Obligations, which provides a summary of changes in the ARO liability.
          Project wind-down assets acquired. See Note 10 for additional information regarding the Entrada project assets acquired through a wind-down agreement with Callon’s former joint interest partner on the project. During the second quarter of 2011, Callon acquired 100% of the rights to all remaining assets related to the Entrada project, which primarily consisted of surplus equipment not used during the Entrada project. As Callon is required to measure the assets acquired at fair value, Callon estimated each asset’s fair value based on several factors including (1) historical prices received for assets sold, (2) the similarity of unsold assets to those previously sold and the sales prices for those similar assets, (3) the number of market participants expected to have an interest in the assets, (4) the degree to which the asset has been customized and would require modification by a purchaser for use, and (5) the nature of the asset being held for sale (i.e. whether the asset is highly specialized, built-for-purpose, etc.). Values assigned to equipment sold prior to the June 30 reporting date and for which the exit price, as defined by (“US GAAP”), became readily determinable, represent Level 2 fair value measurements and represents $3,954 of the total $11,349 acquired through the agreement. The remaining $7,395 of Entrada assets represent Level 3 fair value measurements based on the limited ability of market pricing information for either identical or similar items. Certain assets were assigned $0 values in instances where the fair value was indeterminable due to the built-for-purpose or highly specialized nature of the assets. Also as a result of this Agreement, the Company assumed liabilities, which consisted of a deferred tax liability associated with the basis difference of the equipment, which was valued at $3,972, and represents a level 3 fair value measurement.