Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 18 – Fair Value Measurements

We measure the fair value of financial assets and liabilities on a recurring basis, defining 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. The fair value is based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. This includes not only the credit standing of counterparties involved and the impact of credit enhancements but also the impact of our own nonperformance risk on our liabilities. Fair value measurements are classified and disclosed in one of the following categories:

Level 1:       Fair value is based on actively-quoted market prices, if available.

Level 2:       In the absence of actively-quoted market prices, we seek price information from external sources, including broker quotes and industry publications. Substantially all of these inputs are observable in the marketplace during the entire term of the instrument, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.

Level 3:       If valuations require inputs that are both significant to the fair value measurement and less observable from objective sources, we must estimate prices based on available historical and near-term future price information and certain statistical methods that reflect our market assumptions.

We apply fair value measurements to certain assets and liabilities including commodity derivative instruments and embedded derivatives relating to conversion and change in control features in certain of our debt instruments. We seek to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The following table summarizes the valuation of our investments and financial instruments by pricing levels as of December 31, 2012:

		Quoted Market Prices			Significant Other			Significant
		in Active Markets -			Observable Inputs -			Unobservable Inputs -			Total
		Level 1			Level 2			Level 3			Fair Value
As of December 31, 2012:
Embedded derivatives			$	-		$	-		$	(7,402)		$	(7,402)
Total derivative liabilities			$	-		$	-		$	(7,402)		$	(7,402)
As of December 31, 2011:
Oil and gas derivative contracts:
	Oil and gas puts		$	-		$	1,038		$	209			1,247
Embedded derivatives				-			-			(16,067)			(16,067)
Total derivative liabilities			$	-		$	1,038		$	(15,858)		$	(14,820)

Our commodity derivative contracts have been measured using models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term. The inputs for the fair value models for our oil puts, which terminated as of December 31, 2012, were all observable market data and those instruments were classified as Level 2. Although we utilized the same option pricing models to assess the fair values of our gas puts, an active futures market did not exist for our U.K. gas derivatives, which also terminated as of December 31, 2012.We based the inputs to the option models for our U.K. gas derivatives on observable market data in other markets to verify the reasonableness of the counterparty quotes. These U.K. gas derivatives were classified as Level 3.

We use a derivative valuation model to derive the value of our embedded derivative features. Key inputs into this valuation model are our current stock price, risk-free interest rates, the stock volatility and our implied credit spread. The first three aforementioned inputs are based on observable market data and are considered Level 2 inputs while the last two aforementioned inputs are unobservable and thus require management's judgment and are considered Level 3 inputs. At December 31, 2012, a decrease or increase in the implied credit spread of 5% would increase or decrease, respectively, the liability by approximately $0.9 million. A similar 5% decrease or increase in the stock volatility has an inverse effect to the change in the liability and would result in an approximately $0.6 million decrease or increase, respectively.

The following is a reconciliation of changes in fair value of net derivative assets and liabilities classified as Level 3:

				Year Ended
				December 31,
				2012		2011
Balance at beginning of period			$	(15,858)	$	(26,703)
	Total gains or losses (realized/unrealized)
		Included in earnings		8,456		11,428
		Purchases		-		1,239
		Settlements		-		(1,822)
Balance at end of period			$	(7,402)	$	(15,858)
Changes in unrealized gains (losses) relating to derivatives assets and liabilities
	still held at the end of the period		$	8,665	$	11,428

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 our consolidated balance sheets. The following methods and assumptions were used to estimate the fair values:

Goodwill - Goodwill is tested annually at year end for impairment. The first step of that process is to compare the fair value of the reporting unit to which goodwill has been assigned to the carrying amount of the associated net assets and goodwill. Significant Level 3 inputs may be used in the determination of the fair value of the reporting unit, including present values of expected cash flows from operations.

When we are required to measure fair value, and there is not a market observable price for the asset or liability, or a market observable price for a similar asset or liability, we generally utilize an income valuation approach. This approach utilizes management's best assumptions regarding expectations of projected cash flows, and discounts the expected cash flows using a commensurate risk adjusted discount rate. Such evaluations involve a significant amount of judgment since the results are based on expected future events or conditions, such as sales prices; estimates of future oil and gas production; development and operating costs and the timing thereof; economic and regulatory climates and other factors. Our estimates of future net cash flows are inherently imprecise because they reflect management's expectation of future conditions that are often outside of management's control. However, assumptions used reflect a market participant's view of long-term prices, costs and other factors, and are consistent with assumptions used in our business plans and investment decisions.