Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.6
Fair Value Measurements
3 Months Ended
Mar. 31, 2012
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: 
 
 
March 31, 2012
 
December 31, 2011
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
13% Senior Notes due 2016 (1)
 
$
124,534

 
$
114,983

 
$
125,345

 
$
110,571


(1) Fair value is calculated only in relation to the $106,961 principal outstanding of the 13% Senior Notes at the dates indicated above, respectively.  The remaining $17,573 and $18,384, 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 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 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 March 31, 2012
 
Balance Sheet Presentation
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments - current
 
Fair market value of derivatives
 
$

 
$
467

 
$

 
$
467

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

 
152

 

 
152

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

 
$
82

 
$

 
$
82

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

 

 

 

Total
 
 
 
$

 
$
537

 
$

 
$
537

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2011
 
Balance Sheet Presentation
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 

 
 

 
 

 
 

Derivative financial instruments - current
 
Fair market value of derivatives
 
$

 
$
2,499

 
$

 
$
2,499

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

 

 

 

Total
 
 
 
$

 
$
2,499

 
$

 
$
2,499


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. Derivative contracts designated as accounting hedges are reflected above as current assets of $467. Derivative contracts not designated as accounting hedges are reflected in the table above as non-current assets of $152 and current liabilities of $82.

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 three-month period ended March 31, 2012, including upward revisions of $0, were Level 3 fair value measurements. See Note 8, Asset Retirement Obligations, which provides a summary of changes in the ARO liability.