Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.19.3
Fair Value Measurements
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements

The fair value hierarchy 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, and restricted investments. The carrying amounts for these instruments approximated fair value due to the short-term nature or maturity of the instruments.

Debt. The carrying amount of the Company’s floating-rate debt approximated fair value, because the interest rates were variable and reflective of market rates.
 
 
September 30, 2019
 
December 31, 2018
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Credit Facility (a)
 
$
200,000

 
$
200,000

 
$
200,000

 
$
200,000

6.125% Senior Notes (b)
 
596,337

 
595,194

 
595,788

 
558,000

6.375% Senior Notes (b)
 
394,317

 
393,540

 
393,685

 
372,000

Total
 
$
1,190,654

 
$
1,188,734

 
$
1,189,473

 
$
1,130,000


(a)
Floating-rate debt.
(b)
The fair value was based upon Level 2 inputs. See Note 5 for additional information about the Company’s 6.125% and 6.375% Senior Notes.

Assets and liabilities measured at fair value on a recurring basis

Certain assets and liabilities are reported at fair value on a recurring basis in the consolidated balance sheet. The following methods and assumptions were used to estimate fair value:

Commodity derivative instruments. The fair value of commodity derivative instruments is derived using an income approach valuation model that utilizes market-corroborated inputs that are observable over the term of the derivative contract. 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 6 for additional information regarding the Company’s derivative instruments.

Contingent consideration arrangement - embedded derivative financial instrument. The embedded option within the contingent consideration arrangement is considered a financial instrument under ASC 815. The Company engages a third-party valuation specialist using an option pricing model approach to measure the fair value of the embedded option on a recurring basis. The valuation includes significant inputs such as forward oil price curves, time to expiration, and implied volatility. The model provides for the probability that the specified pricing thresholds would be met for each settlement period, estimates an undiscounted payout, and risk adjusts for the discount rates inclusive of adjustments for the counterparty’s credit quality. As these inputs are substantially observable for the full term of the contingent consideration arrangement, the inputs are considered Level 2 inputs within the fair value hierarchy. See Note 6 for additional information regarding the Company’s contingent consideration arrangement.

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis:
September 30, 2019
 
Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
 
Fair value of derivatives
 
$

 
$
36,241

 
$

 
$
36,241

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
 
Fair value of derivatives
 

 
(11,514
)
 

 
(11,514
)
Total net assets (liabilities)
 
 
 
$

 
$
24,727

 
$

 
$
24,727

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
 
Fair value of derivatives
 
$

 
$
65,114

 
$

 
$
65,114

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
 
Fair value of derivatives
 

 
(17,920
)
 

 
(17,920
)
Total net assets
 
 
 
$

 
$
47,194

 
$

 
$
47,194


Assets and liabilities measured at fair value on a nonrecurring basis

Acquisitions. The Company determines the fair value of the assets acquired and liabilities assumed using the income approach based on expected discounted future cash flows from estimated reserve quantities, costs to produce and develop reserves, and oil and natural gas forward prices. The future net revenues are discounted using a weighted average cost of capital. The discounted future net revenues of proved undeveloped and probable reserves are reduced by an additional reserve adjustment factor to compensate for the inherent risk of estimating the value of unevaluated properties. The fair value measurements were based on Level 1, Level 2 and Level 3 inputs.