Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.21.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2021
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
Accounting guidelines for measuring fair value establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1 – Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Other inputs that are observable directly or indirectly such as 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 – Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities.
Fair value of financial instruments
Cash, cash equivalents, and restricted investments. The carrying amounts for these instruments approximate fair value due to the short-term nature or maturity of the instruments.
Debt. The carrying amount of borrowings outstanding under the Credit Facility approximates fair value as the borrowings bear interest at variable rates and are reflective of market rates. The following table presents the principal amounts of the Company’s Second Lien Notes and Senior Unsecured Notes with the fair values measured using quoted secondary market trading prices which are designated as Level 2 within the valuation hierarchy. See “Note 5 - Borrowings” for further discussion.
March 31, 2021 December 31, 2020
Principal Amount Fair Value Principal Amount Fair Value
(In thousands)
Second Lien Notes $516,659  $524,409  $516,659  $470,160 
6.25% Senior Notes
542,720  483,021  542,720  344,627 
6.125% Senior Notes
460,241  388,904  460,241  260,036 
8.25% Senior Notes
187,238  161,961  187,238  100,172 
6.375% Senior Notes
320,783  252,617  320,783  161,995 
Total $2,027,641  $1,810,912  $2,027,641  $1,336,990 
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 sheets. The following methods and assumptions were used to estimate fair value:
Commodity derivative instruments. The fair value of commodity derivative instruments is derived using a third-party income approach valuation model that utilizes market-corroborated inputs that are observable over the term of the commodity derivative contract. The Company’s fair value calculations also incorporate an estimate of the counterparties’ default risk for commodity derivative assets and an estimate of the Company’s default risk for commodity derivative liabilities. As the inputs in the model are substantially observable over the term of the commodity derivative contract and there is a wide availability of quoted market prices for similar commodity derivative contracts, the Company designates its commodity derivative instruments as Level 2 within the fair value hierarchy. See “Note 6 - Derivative Instruments and Hedging Activities” for further discussion.
Contingent consideration arrangements - embedded derivative financial instruments. The embedded options within the contingent consideration arrangements are considered financial instruments 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 options 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 undiscounted payouts, and risk adjusts for the discount rates inclusive of adjustments for each of the counterparty’s credit quality. As these inputs are substantially observable for the full term of the contingent consideration arrangements, the inputs are considered Level 2 inputs within the fair value hierarchy. See “Note 6 - Derivative Instruments and Hedging Activities” for further discussion.
The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020:
March 31, 2021
Level 1 Level 2 Level 3
(In thousands)
Assets      
Commodity derivative instruments $—  $560  $— 
Contingent consideration arrangements —  5,375  — 
Liabilities      
Commodity derivative instruments (1)
—  (207,933) — 
Contingent consideration arrangements —  (17,913) — 
Total net assets (liabilities) $—  ($219,911) $— 
     
December 31, 2020
Level 1 Level 2 Level 3
(In thousands)
Assets      
Commodity derivative instruments $—  $921  $— 
Contingent consideration arrangements —  1,816  — 
Liabilities      
Commodity derivative instruments (2)
—  (97,060) — 
Contingent consideration arrangements —  (8,618) — 
September 2020 Warrants —  —  (79,428)
Total net assets (liabilities) $—  ($102,941) ($79,428)

(1)    Includes approximately $15.0 million of deferred premiums which the Company will pay as the applicable contracts settle.
(2)    Includes approximately $11.2 million of deferred premiums which the Company will pay as the applicable contracts settle.
September 2020 Warrants. The fair value of the September 2020 Warrants was calculated using a Black Scholes-Merton option pricing model. As historical volatility is a significant input into the model, the September 2020 Warrants were designated as Level 3 within the valuation hierarchy.
In February 2021, holders of the September 2020 Warrants provided notice and exercised all of their outstanding warrants. The exercise of the September 2020 Warrants resulted in settlement of the associated derivative liability of $134.8 million. See “Note 6 - Derivative Instruments and Hedging Activities” for additional details.
The following table presents a reconciliation of the change in the fair value of the liability related to the September 2020 Warrants, which was designated as Level 3 within the valuation hierarchy, for the three months ended March 31, 2021.
Three Months Ended March 31, 2021
(In thousands)
Beginning of period $79,428 
(Gain) loss on changes in fair value (1)
55,390 
Transfers into (out of) Level 3 (134,818)
End of period $— 

(1)    Included in “(Gain) loss on derivative contracts” in the consolidated statements of operations.
Assets and liabilities measured at fair value on a nonrecurring basis
Asset retirement obligations. The Company measures the fair value of asset retirement obligations as of the date a well begins drilling or when production equipment and facilities are installed using a discounted cash flow model based on inputs that are not observable in the market and therefore are designated as Level 3 within the valuation hierarchy. Significant inputs to the fair value measurement of asset retirement obligations include estimates of the costs of plugging and abandoning oil and gas wells, removing production equipment and facilities and restoring the surface of the land as well as estimates of the economic lives of the oil and gas wells and future inflation rates.