Fair Value Measurements | 6 Months Ended |
Jun. 30, 2014 |
Fair Value Disclosures [Abstract] | ' |
Fair Value Measurements | ' |
Fair Value Measurements |
The Company follows a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows: |
| | | | | | | | | | | | | | | | |
• | Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
• | Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
• | Level 3: Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value. | | | | | | | | | | | | | | | |
A financial instrument’s categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Level 1 inputs are given the highest priority in the fair value hierarchy while Level 3 inputs are given the lowest priority. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the hierarchy. As Level 1 inputs generally provide the most reliable evidence of fair value, the Company uses Level 1 inputs when available. The Company’s policy is to recognize transfers between the hierarchy levels as of the beginning of the reporting period in which the event or change in circumstances caused the transfer. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis |
The Company's derivative instruments are reported at fair value on a recurring basis. In determining the fair values of fixed price swaps, a discounted cash flow method is used due to the unavailability of relevant comparable market data for the Company’s exact contracts. The discounted cash flow method estimates future cash flows based on quoted market prices for forward commodity prices and a risk-adjusted discount rate. The fair values of fixed price swaps are calculated mainly using significant observable inputs (Level 2). Calculation of the fair values of collar contracts requires the use of an industry-standard option pricing model that considers various inputs including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. These assumptions are observable in the marketplace or can be corroborated by active markets or broker quotes and are therefore designated as Level 2 within the valuation hierarchy. The Company’s calculation of fair value for each of its derivative positions is compared to the counterparty valuation for reasonableness. |
The following tables summarize the valuation of financial instruments by pricing levels that were accounted for at fair value on a recurring basis as of June 30, 2014 and December 31, 2013. |
|
| | | | | | | | | | | | | | | | |
| | Fair value measurements at June 30, 2014 using: | | |
In thousands | | Level 1 | | Level 2 | | Level 3 | | Total |
Derivative assets (liabilities): | | | | | | | | |
Fixed price swaps | | $ | — | | | $ | (290,591 | ) | | $ | — | | | $ | (290,591 | ) |
|
Collars | | — | | | (8,948 | ) | | — | | | (8,948 | ) |
|
Total | | $ | — | | | $ | (299,539 | ) | | $ | — | | | $ | (299,539 | ) |
|
| | | | | | | | |
| | Fair value measurements at December 31, 2013 using: | | |
In thousands | | Level 1 | | Level 2 | | Level 3 | | Total |
Derivative assets (liabilities): | | | | | | | | |
Fixed price swaps | | $ | — | | | $ | (84,893 | ) | | $ | — | | | $ | (84,893 | ) |
|
Collars | | — | | | (9,855 | ) | | — | | | (9,855 | ) |
|
Total | | $ | — | | | $ | (94,748 | ) | | $ | — | | | $ | (94,748 | ) |
|
Assets Measured at Fair Value on a Nonrecurring Basis |
Certain assets are reported at fair value on a nonrecurring basis in the condensed consolidated financial statements. The following methods and assumptions were used to estimate the fair values for those assets. |
Asset Impairments – Proved crude oil and natural gas properties are reviewed for impairment on a field-by-field basis each quarter, or when events and circumstances indicate a possible decline in the recoverability of the carrying value of such field. The estimated future cash flows expected in connection with the field are compared to the carrying amount of the field to determine if the carrying amount is recoverable. If the carrying amount of the field exceeds its estimated undiscounted future cash flows, the carrying amount of the field is reduced to its estimated fair value. Due to the unavailability of relevant comparable market data, a discounted cash flow method is used to determine the fair value of proved properties. The discounted cash flow method estimates future cash flows based on management’s estimates of future crude oil and natural gas production, commodity prices based on commodity futures price strips, operating and development costs, and a risk-adjusted discount rate. The fair value of proved crude oil and natural gas properties is calculated using significant unobservable inputs (Level 3). The following table sets forth quantitative information about the significant unobservable inputs used by the Company to calculate the fair value of proved crude oil and natural gas properties using a discounted cash flow method. |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Unobservable Input | | Assumption | | | | | | | | | | | | | | |
Future production | | Future production estimates for each property | | | | | | | | | | | | | | |
Forward commodity prices | | Forward NYMEX swap prices through 2018 (adjusted for differentials), escalating 3% per year thereafter | | | | | | | | | | | | | | |
Operating and development costs | | Estimated costs for the current year, escalating 3% per year thereafter | | | | | | | | | | | | | | |
Productive life of field | | Ranging from 0 to 50 years | | | | | | | | | | | | | | |
Discount rate | | 10% | | | | | | | | | | | | | | |
Unobservable inputs to the fair value assessment are reviewed quarterly and are revised as warranted based on a number of factors, including reservoir performance, new drilling, crude oil and natural gas prices, changes in costs, technological advances, new geological or geophysical data, or other economic factors. Fair value measurements of proved properties are reviewed and approved by certain members of the Company’s management. |
During the periods ended June 30, 2014 and June 30, 2013, the Company determined the carrying amounts of certain proved properties were not recoverable from future cash flows and, therefore, were impaired. Impairments of proved properties amounted to $27.5 million and $31.3 million for the three and six months ended June 30, 2014, respectively, which primarily reflect fair value adjustments made for certain properties in non-core areas of the South region. The impaired properties were written down to their estimated fair value totaling approximately $10.2 million. Impairment provisions for proved properties totaled $39.6 million for the three and six months ended June 30, 2013, primarily reflecting uneconomic results for certain wells drilled in the Niobrara play in Colorado and Wyoming. Those impaired properties were written down to their estimated fair value totaling approximately $22.2 million as of June 30, 2013. |
Certain unproved crude oil and natural gas properties were impaired during the three and six months ended June 30, 2014 and 2013, reflecting recurring amortization of undeveloped leasehold costs on properties that management expects will not be transferred to proved properties over the lives of the leases based on experience of successful drilling and the average holding period. |
The following table sets forth the non-cash impairments of both proved and unproved properties for the indicated periods. Proved and unproved property impairments are recorded under the caption “Property impairments” in the unaudited condensed consolidated statements of income. |
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
In thousands | | 2014 | | 2013 | | 2014 | | 2013 |
Proved property impairments | | $ | 27,529 | | | $ | 39,635 | | | $ | 31,291 | | | $ | 39,635 | |
|
Unproved property impairments | | 51,787 | | | 40,077 | | | 106,233 | | | 80,158 | |
|
Total | | $ | 79,316 | | | $ | 79,712 | | | $ | 137,524 | | | $ | 119,793 | |
|
Financial Instruments Not Recorded at Fair Value |
The following table sets forth the fair values of financial instruments that are not recorded at fair value in the condensed consolidated financial statements. |
|
| | | | | | | | | | | | | | | | |
| | June 30, 2014 | | December 31, 2013 |
In thousands | | Carrying | | Fair Value | | Carrying | | Fair Value |
Amount | Amount |
Debt: | | |
Credit facility | | $ | — | | | $ | — | | | $ | 275,000 | | | $ | 275,000 | |
|
Note payable | | 17,471 | | | 15,764 | | | 18,470 | | | 16,500 | |
|
8.25% Senior Notes due 2019 | | 298,422 | | | 316,950 | | | 298,305 | | | 327,800 | |
|
7.375% Senior Notes due 2020 | | 198,770 | | | 223,100 | | | 198,695 | | | 223,700 | |
|
7.125% Senior Notes due 2021 | | 400,000 | | | 453,600 | | | 400,000 | | | 450,300 | |
|
5% Senior Notes due 2022 | | 2,024,180 | | | 2,172,600 | | | 2,025,362 | | | 2,063,300 | |
|
4.5% Senior Notes due 2023 | | 1,500,000 | | | 1,595,250 | | | 1,500,000 | | | 1,519,400 | |
|
3.8% Senior Notes due 2024 | | 996,474 | | | 1,009,000 | | | — | | | — | |
|
4.9% Senior Notes due 2044 | | 698,022 | | | 720,930 | | | — | | | — | |
|
Total debt | | $ | 6,133,339 | | | $ | 6,507,194 | | | $ | 4,715,832 | | | $ | 4,876,000 | |
|
The fair value of credit facility borrowings approximates carrying value based on borrowing rates available to the Company for bank loans with similar terms and maturities and is classified as Level 2 in the fair value hierarchy. |
The fair value of the note payable is determined using a discounted cash flow approach based on the interest rate and payment terms of the note payable and an assumed discount rate. The fair value of the note payable is significantly influenced by the discount rate assumption, which is derived by the Company and is unobservable. Accordingly, the fair value of the note payable is classified as Level 3 in the fair value hierarchy. |
The fair values of the 8.25% Senior Notes due 2019 (“2019 Notes”), the 7.375% Senior Notes due 2020 (“2020 Notes”), the 7.125% Senior Notes due 2021 (“2021 Notes”), the 5% Senior Notes due 2022 (“2022 Notes”), the 4.5% Senior Notes due 2023 ("2023 Notes"), the 3.8% Senior Notes due 2024 ("2024 Notes"), and the 4.9% Senior Notes due 2044 ("2044 Notes") are based on quoted market prices and, accordingly, are classified as Level 1 in the fair value hierarchy. |
The carrying values of all classes of cash and cash equivalents, trade receivables, and trade payables are considered to be representative of their respective fair values due to the short term maturities of those instruments. |