Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.3.0.15
Fair Value Measurements
 9 Months Ended
Sep. 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:
                                 
    September 30, 2011     December 31, 2010  
    Carrying     Fair     Carrying     Fair  
    Value     Value     Value     Value  
13% Senior Notes due 2016 (1)
  $ 126,139     $ 110,170     $ 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 $19,178 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 September 30, 2011   Balance Sheet Presentation   Level 1     Level 2     Level 3     Total  
Assets
                                   
Derivative financial instruments — current
  Fair market value of derivatives   $ —     $ 8,338     $ —     $ 8,338  
Derivative financial instruments — non-current
  Other assets, net     —       2,500       —       2,500  
 
                                   
Liabilities
                                   
Derivative financial instruments — current
  Fair market value of derivatives   $ —     $ —     $ —     $ —  
Derivative financial instruments — non-current
  Other long-term liabilities     —       —       —       —  
 
                           
Total
      $ —     $ 10,838     $ —     $ 10,838  
 
                           
                                     
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 (“AROs”) 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 during the three and nine-month periods ended September 30, 2011, including upward revisions of $186 and $405, respectively, were Level 3 fair value measurements. See Note 9, “Asset Retirement Obligations,” which provides a summary of changes in the ARO liability.
     Other Property and Equipment. During the quarter ended September 30, 2011, the Company determined that certain unsold surplus Entrada equipment with carrying values of $690 had become impaired due to the limited market for these assets and based on discussions with potential buyers. Consequently the Company reduced these assets’ carrying value to $348, which represents a level 3 fair value measurement. See Note 10 for additional information regarding this equipment.