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Note 13 - Fair Value Measurements
12 Months Ended
Dec. 31, 2023
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

13. FAIR VALUE MEASUREMENTS

 

The Company’s fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the hierarchy level. The three levels of inputs that may be used to measure fair value are defined as:

 

Level 1 - Quoted prices for identical assets and liabilities traded in active markets.

 

Level 2 - Observable inputs other than Level 1 that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in active markets, or other observable inputs that can be corroborated by observable market data.

 

Level 3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following is a description of the valuation methodologies used for complex financial instruments measured at fair value:

 

Recurring Fair Value Measurements

 

Commodity Derivative Instruments

 

The Company measures the fair value of commodity derivative contracts using an income valuation technique based on the contract price of the underlying positions, crude oil and natural gas forward curves, discount rates, and Company or counterparty non-performance risk. The fixed-price swaps and collar derivative contracts are included in Level 2. The fair value of commodity derivative contracts and their presentation in our Consolidated Balance Sheets as of December 31, 2023 are presented below:

 

As of December 31, 2023

                      

Net Fair Value

 
  

Quoted Prices in

      

Significant

          

Presented in the

 
  

Active Markets for

  

Significant Other

  

Unobservable

         

Consolidated

 
  

Identical Assets

  

Observable Inputs

  

Inputs

  

Total

  

Effect of

  

Balance

 
  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Fair Value

  

Netting

  

Sheet

 
  

(in thousands)

 

Assets

                        

Current:

                        

Commodity derivatives

 $-  $1,844  $-  $1,844  $-  $1,844 
                         

Net derivative instruments

 $-  $1,844  $-  $1,844  $-  $1,844 

 

As of December 31, 2022

 
                      Net Fair Value 
  Quoted Prices in      Significant          Presented in the 
  Active Markets for  Significant Other  Unobservable          Consolidated 
  Identical Assets  Observable Inputs  Inputs  Total  Effect of  Balance 
  (Level 1)  (Level 2)  (Level 3)  Fair Value  Netting  Sheet 
  (in thousands) 

Assets

                        

Current:

                        

Commodity derivatives

 $-  $488  $-  $488  $(488) $- 
                         

Liabilities

                        

Current:

                        

Commodity derivatives

 $-  $(2,182) $-  $(2,182) $488  $(1,694)
                         

Net derivative instruments

 $-  $(1,694) $-  $(1,694) $-  $(1,694)

 

Marketable Equity Securities Valuation Methodologies

 

We measure the fair value of marketable equity securities based on quoted market prices obtained from independent pricing services.  The Company has an investment in the marketable equity securities of Anfield Energy (“Anfield”), which it acquired as consideration for sales of certain mining operations. Anfield is traded in an active market under the trading symbol AEC:TSXV and has been classified as Level 1.

 

  

December 31,

 
  

2023

  

2022

 
         

Number of shares owned

  2,421,180   2,421,180 

Quoted market price

 $0.06789  $0.04429 
         

Fair value

 $164,375  $107,234 

  

Credit Facility

 

The Company’s credit facility approximates fair value because the interest rate is variable and reflective of market rates.

 

Other Financial Instruments

 

The carrying value of financial instruments included in current assets and current liabilities approximate fair value due to the short-term nature of those instruments.

 

Nonrecurring Fair Value Measurements

 

Asset Retirement Obligations

 

The Company measures the fair value of asset retirement obligations as of the date a well is acquired, the date a well begins drilling, or the date the Company revises its ARO assumptions. The Company’s estimated asset retirement obligation is based on historical experience in plugging and abandoning wells, estimated economic lives, estimated plugging and abandonment costs and federal and state regulatory requirements, all unobservable inputs, and therefore, are designated as Level 3 within the valuation hierarchy. The liability is discounted using the credit-adjusted risk-free rate estimated at the time the liability is incurred or revised upward. The credit adjusted risk-free rate used to discount the Company’s plugging and abandonment liabilities range from 7.30% to 19.00%. See "Note 8. Asset Retirement Obligations."

 

Other Assets and Liabilities

 

The Company evaluates the fair value on a non-recurring basis for properties acquired in asset acquisitions using inputs that are not observable in the market and are therefore designated as Level 3 inputs within the fair value hierarchy. The Company evaluated the fair value of its January 2022 asset acquisition based on discounted future cash flows using estimated production at estimated prices based on NYMEX strip pricing adjusted for differentials, operating costs, production taxes and development costs, all discounted at 10%. This evaluation resulted in an estimate of fair value of $87.7 million. The Company has also valued asset acquisitions using a multiple of expected cash flows based on comparable transactions. For the asset acquisition of East Texas assets that was completed on July 27, 2022, the Company used a cash flow multiple of approximately 1.75 times estimated cash flows of $7.3 million.

 

The Company evaluates the fair value on a non-recurring basis of its Riverton, Wyoming real estate assets when circumstances indicate that the value has been impaired. At December 31, 2023 and 2022, the Company estimated the fair value of its real estate assets based on a market approach with comparison to recent comparable sales, all Level 3 inputs within the fair value hierarchy.