Fair Value Measurements | 3 Months Ended |
Mar. 31, 2015 |
Fair Value Disclosures [Abstract] | |
Fair Value Measurements | (5) Fair Value Measurements |
The Company’s financial assets and liabilities are measured at fair value on a recurring basis. The Company measures its non-financial assets and liabilities, such as asset retirement obligations and other property and equipment, at fair value on a non-recurring basis. |
As defined in the guidance of the FASB, fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). To estimate fair value, the Company utilizes market data and assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. |
The FASB’s guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows: |
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| • | | “Level 1” inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. | | | | | | | | | | | | | | | | | |
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| • | | “Level 2” inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. | | | | | | | | | | | | | | | | | |
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| • | | “Level 3” inputs are measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources. | | | | | | | | | | | | | | | | | |
As required, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities along with their placement within the fair value hierarchy levels. The Company determines the appropriate level for each financial asset and liability on a quarterly basis and recognizes any transfers at the end of the reporting period. |
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The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis for the respective period: |
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| | Fair value as of March 31, 2015 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Netting (1) | | | Total | |
| | (In thousands) | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Commodity derivative contracts | | $ | — | | | $ | — | | | $ | 272,726 | | | $ | (757 | ) | | $ | 271,969 | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Commodity derivative contracts | | | — | | | | — | | | | (757 | ) | | | 757 | | | | — | |
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Total fair value | | $ | — | | | $ | — | | | $ | 271,969 | | | $ | — | | | $ | 271,969 | |
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| | Fair value as of December 31, 2014 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Netting (1) | | | Total | |
| | (In thousands) | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Commodity derivative contracts | | $ | — | | | $ | — | | | $ | 289,878 | | | $ | (3,209 | ) | | $ | 286,669 | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Commodity derivative contracts | | | — | | | | — | | | | (3,209 | ) | | | 3,209 | | | | — | |
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Total fair value | | $ | — | | | $ | — | | | $ | 286,669 | | | $ | — | | | $ | 286,669 | |
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-1 | Represents the impact of netting commodity derivative assets and liabilities with counterparties where the Company has the contractual right and intends to net settle. No margin or collateral balances are deposited with counterparties and as such, gross amounts are offset to determine the net amounts presented in the Consolidated Balance Sheet. | | | | | | | | | | | | | | | | | | | |
The Company’s Level 3 instruments include commodity derivative contracts for which fair value is determined by a third-party provider. Although the Company compares the fair values derived from the third-party provider with its counterparties, the Company does not currently have sufficient corroborating market evidence to support classifying these contracts as Level 2 instruments and does not have access to the specific valuation models or certain inputs used by its third-party provider or counterparties. Therefore, these commodity derivative contracts are classified as Level 3 instruments. |
The following table presents a range of the unobservable inputs provided by the Company’s third-party provider utilized in the fair value measurements of the Company’s assets and liabilities classified as Level 3 instruments as of March 31, 2015 (in thousands): |
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| | | | | Valuation | | | | Range | | | Weighted | |
Level 3 Instrument | | Asset (Liability) | | | Technique | | Unobservable Input | | Minimum | | | Maximum | | | Average |
Oil swaps | | $ | 185,817 | | | Discounted cash flow | | Forward price curve-swaps | | $ | 48.18 | | | $ | 62.53 | | | $ | 55.99 | |
Oil costless collars | | | 8,489 | | | Option model | | Forward price curve-costless collar option value | | | (0.41 | ) | | | 5.16 | | | | 3.97 | |
NGL swaps | | | 26,889 | | | Discounted cash flow | | Forward price curve-swaps | | | 0.17 | | | | 1.17 | | | | 0.43 | |
Natural gas swaps | | | 29,460 | | | Discounted cash flow | | Forward price curve-swaps | | | (0.10 | ) | | | 3.36 | | | | 2.9 | |
Natural gas costless collars | | | 21,314 | | | Option model | | Forward price curve-costless collar option value | | | (0.07 | ) | | | 1.27 | | | | 0.75 | |
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Total | | $ | 271,969 | | | | | | | | | | | | | | | | | |
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The determination of derivative fair values by the third-party provider incorporates a credit adjustment for nonperformance risk, including the credit standing of the counterparties involved, and the impact of the Company’s nonperformance risk on its liabilities. The Company recorded a downward adjustment to the fair value of its derivative instruments in the amount of $0.6 million as of March 31, 2015 due to nonperformance risk. |
The significant unobservable inputs for Level 3 derivative contracts include forward price curves and option values. Significant increases (decreases) in the quoted forward prices for commodities and option values generally lead to corresponding decreases (increases) in the fair value measurement of the Company’s oil, NGL and natural gas derivative contracts. |
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The tables below present reconciliations of financial assets and liabilities classified as Level 3 in the fair value hierarchy during the indicated periods. |
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| | Derivative Asset | | | | | | | | | | | | | | | | | |
(Liability) | | | | | | | | | | | | | | | | |
| | (In thousands) | | | | | | | | | | | | | | | | | |
Balance at January 1, 2015 | | $ | 286,669 | | | | | | | | | | | | | | | | | |
Total Gains (Realized or Unrealized): | | | | | | | | | | | | | | | | | | | | |
Included in Earnings | | | 47,503 | | | | | | | | | | | | | | | | | |
Purchases, Issuances and Settlements: | | | | | | | | | | | | | | | | | | | | |
Settlements | | | (62,203 | ) | | | | | | | | | | | | | | | | |
Transfers in and out of Level 3 | | | — | | | | | | | | | | | | | | | | | |
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Balance at March 31, 2015 | | $ | 271,969 | | | | | | | | | | | | | | | | | |
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| | Derivative Asset | | | | | | | | | | | | | | | | | |
(Liability) | | | | | | | | | | | | | | | | |
| | (In thousands) | | | | | | | | | | | | | | | | | |
Balance at January 1, 2014 | | $ | 4,419 | | | | | | | | | | | | | | | | | |
Total Losses (Realized or Unrealized): | | | | | | | | | | | | | | | | | | | | |
Included in Earnings | | | (23,785 | ) | | | | | | | | | | | | | | | | |
Purchases, Issuances and Settlements: | | | | | | | | | | | | | | | | | | | | |
Settlements | | | 7,937 | | | | | | | | | | | | | | | | | |
Transfers in and out of Level 3 | | | — | | | | | | | | | | | | | | | | | |
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Balance at March 31, 2014 | | $ | (11,429 | ) | | | | | | | | | | | | | | | | |
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Fair Value of Other Financial Instruments |
All of the Company’s other financial instruments (excluding derivatives) are presented on the balance sheet at carrying value. As of March 31, 2015, the carrying value of cash and cash equivalents, other current assets and current liabilities reported in the Consolidated Balance Sheet approximate fair value because of their short-term nature, and all such financial instruments are considered Level 1 instruments. |
The Company’s debt consists of publicly traded Senior Notes (defined below) and borrowings under the Credit Facility (defined below). The fair values of the Company’s Senior Notes are based upon unadjusted quoted market prices and are considered Level 1 instruments. The Company’s borrowings under the Credit Facility approximate fair value as the interest rates are variable and reflective of current market rates, and are therefore considered a Level 1 instrument. As of March 31, 2015, the carrying amount of total debt was $1.84 billion and the estimated fair value of total debt was $1.74 billion. |