Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.8
Fair Value Measurements
6 Months Ended
Jun. 30, 2013
Fair Value Disclosures [Abstract]  
Fair Value Measurements
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, 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: 
 
 
June 30, 2013
 
December 31, 2012
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Credit Facility
 
$

 
$

 
$
10,000

 
$
10,000

13% Senior Notes due 2016 (1)
 
109,053

 
101,615

 
110,668

 
100,112

     Total
 
$
109,053

 
$
101,615

 
$
120,668

 
$
110,112


(1) Fair value is calculated only in relation to the $96,961 principal outstanding of the Senior Notes at each of the dates indicated above, respectively. The remaining $12,092 and $13,707, 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 the Company’s Consolidated Balance Sheet. 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 natural gas and crude oil collars, basis swaps, puts, calls and similar commodity instrument structures. The fair value of these derivatives 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, based on analysis of each contract, 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:
As of June 30, 2013
 
Balance Sheet Presentation
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments - current
 
Fair market value of derivatives
 
$

 
$
1,647

 
$

 
$
1,647

Derivative financial instruments - non-current
 
Other long-term assets
 

 
428

 

 
428

     Sub-total assets
 
 
 

 
2,075

 

 
2,075

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments - current
 
Fair market value of derivatives
 
$

 
$
106

 
$

 
$
106

Derivative financial instruments - non-current
 
Other long-term liabilities
 

 
38

 

 
38

     Sub-total liabilities
 
Other long-term liabilities
 

 
144

 

 
144

 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
$

 
$
1,931

 
$

 
$
1,931

 
 
 
 
 
 
 
 
 
 
 
As of 12/31/2012
 
Balance Sheet Presentation
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments - current
 
Fair market value of derivatives
 
$

 
$
1,674

 
$

 
$
1,674

Derivative financial instruments - non-current
 
Other long-term assets
 

 
250

 

 
250

     Sub-total assets
 
 
 

 
1,924

 

 
1,924

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments - current
 
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



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 during the six months ended June 30, 2013, including upward revisions of $360, were Level 3 fair value measurements. See Note 8, Asset Retirement Obligations, which provides a summary of changes in the ARO liability.

Acquisition. In accordance with the acquisition method of accounting, the purchase price from 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 fair value measurements were based on significant inputs not observable in the market and thus represent a level 3 measurement.