Note 7 - 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, restricted 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 in the consolidated balance sheet. The carrying amount of floating-rate debt approximated fair value because the interest rates were variable and reflective of market rates.

 

The following table summarizes the respective carrying and fair values at:

 

 

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.

 

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis:

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

Acquisition. On October 8, 2014, the Company completed the Acquisition as discussed in Note 3. The Company determined the fair value of the assets acquired using the income approach based on expected future cash flows from estimated reserve quantities; costs to produce and develop reserves; and oil and gas forward prices. Asset retirement obligations assumed in connection with the Central Midland Basin Acquisition were determined in accordance with applicable accounting standards. The fair value measurements were based on level 2 and level 3 inputs. For more information on the Acquisition see Note 3.

 

During the second quarter of 2013, the Company completed an acquisition as discussed in Note 3. The Company determined the fair value of the assets acquired using the income approach based on expected future cash flows from estimated reserve quantities; costs to produce and develop reserves; and oil and gas forward prices. Asset retirement obligations assumed in connection with this acquisition were determined in accordance with applicable accounting standards. The fair value measurements were based on level 2 and level 3 inputs.

 

Other Property and Equipment.  As discussed in Note 14, the Company’s decision to abandon certain of its other property and equipment, that had been classified as held for sale, resulted in an impairment charge of $1,707 which is included in the Company’s Statement of Operations for the year ended December 31, 2013. The impairment charge was valued using level 3 inputs. See Note 14 for more information.