Fair Value Measurements

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 4. Fair Value Measurements

FASB ASC Topic 820, Fair Value Measurements and Disclosure (“ASC Topic 820”), defines fair value as the price 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. ASC Topic 820 provides a framework for measuring fair value, establishes a three level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.

The three-level fair value hierarchy for disclosure of fair value measurements defined by ASC Topic 820 is as follows:

Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 – Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the nine months ended September 30, 2016.

Fair Value on a Recurring Basis

Derivative financial instruments are carried at fair value and measured on a recurring basis. The derivative financial instruments consist of swaps for crude oil and natural gas. The Company’s swaps are valued based on a discounted future cash flow model. The primary input for the model is published forward commodity price curves. The swaps are also designated as Level 2 within the valuation hierarchy.

The fair values of commodity derivative instruments in an asset position include a measure of counterparty nonperformance risk, and the fair values of commodity derivative instruments in a liability position include a measure of the Company’s nonperformance risk. These measurements were not material to the Condensed Consolidated Financial Statements.

The following table summarizes the fair value of the Company’s financial assets and liabilities, by level within the fair-value hierarchy (in thousands):

September 30, 2016	Level 1		Level 2			Level 3		Total
Financial assets
Current derivative assets	$	—	$	185		$	—	$	185
Total financial assets	$	—	$	185		$	—	$	185
Financial liabilities
Current derivative liabilities	$	—	$	(1,237	)	$	—	$	(1,237	)
Noncurrent derivative liabilities		—		(1,101	)		—		(1,101	)
Total financial liabilities	$	—	$	(2,338	)	$	—	$	(2,338	)
December 31, 2015
Financial assets
Current derivative assets	$	—	$	3,694		$	—	$	3,694
Total financial assets	$	—	$	3,694		$	—	$	3,694

The carrying amounts of the Company’s other financial instruments, which include cash, accounts receivable, accounts payable, advances and revenues and royalties payable, approximate their respective fair values due to the relatively short-term nature of these instruments.  The Company has long-term debt obligations, which consist of a credit facility with a floating interest rate structure, and an unsecured promissory note, with interest rates that are currently available to the Company for debt with similar terms.  Both obligations carrying amounts approximate fair value.

Fair Value on a Nonrecurring Basis

The Company applies the provisions of the fair value measurement standard on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties and goodwill.  These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Fair value measurements of certain assets acquired and certain liabilities assumed in business combinations are based on inputs that are not observable in the market and thus represent Level 3 inputs.  The fair value of acquired properties is based on market and cost approaches.  Asset retirement obligation estimates are derived from historical costs as well as management’s expectations of future cost environments.  As there is no corroborating market activity to support the assumptions, the Company has designated these liabilities as Level 3 as well.

The Company did not recognize any impairment write-downs with respect to its oil and natural gas properties or goodwill during the three and nine months ended September 30, 2016.