FAIR VALUE MEASUREMENT

3 Months Ended

Mar. 31, 2020

NOTE 7 — FAIR VALUE MEASUREMENT

The Company follows FASB ASC Topic 820 – Fair Value Measurement and Disclosure which establishes 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: Quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Inputs other than quoted prices included within Level 1 that are either 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 inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived from observable market data by correlation or other means.

Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The Level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement. The financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets are grouped into the fair value hierarchy as follows (in thousands):


	March 31, 2020
	Level 1		Level 2		Level 3		Total
Assets measured at fair value
Derivative commodity contracts	$	—	$	89,002	$	—	$	89,002
Liabilities measured at fair value
Derivative commodity contracts		—		(34)		—		(34)
Derivative interest rate swaps		—		(8,065)		—		(8,065)
Total liabilities measured at fair value		—		(8,099)		—		(8,099)
Net fair value	$	—	$	80,903	$	—	$	80,903

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets measured at fair value
Derivative commodity contracts	$	—	$	2,093	$	—	$	2,093
Liabilities measured at fair value
Derivative commodity contracts		—		(2,300)		—		(2,300)
Derivative interest rate swaps		—		(5,763)		—		(5,763)
Total liabilities measured at fair value		—		(8,063)		—		(8,063)
Net fair value	$	—	$	(5,970)	$	—	$	(5,970)

During the three months ended March 31, 2020, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfer into or out of Level 3 fair value measurements.

Measurement of Fair Value

Derivatives

The Company’s derivative instruments consist of commodity contracts (primarily swaps and collars) and interest rate swaps. The Company utilizes present value techniques and option-pricing models for valuing its derivatives. Inputs to these valuation techniques include published forward prices, volatilities, and credit risk considerations, including the incorporation of published interest rates and credit spreads. All of the significant inputs are observable, either directly or indirectly; therefore, the Company’s derivative instruments are included within the Level 2 fair value hierarchy.

b) Credit Facilities

As of March 31, 2020 and December 31, 2019, the Company had $250 million and $115 million of principal debt outstanding on its Term Loan and Revolving Facility, respectively. The Company estimated that the fair value of its Term Loan at March 31, 2020 was $214 million. The fair value of the Term Loan was determined by using a discounted cash flow model using a discount rate that reflects the Company’s assumed borrowing rate at the end of the reporting period. The market for new debt was not active for oil and gas companies at quarter end due the sharp decline in oil and gas prices and the economic downturn resulting from COVID-19. The Company’s assumed borrowing rate (15%) was an estimate based on movements in the oil and gas bond markets, which were uniquely volatile at March 31, 2020. The carrying value of the Company’s Revolving Facility approximates its fair value as its variable interest rate is tied to current market rates and the applicable margins of 2.25%‑3.25% approximate market rates.

c) Other Financial Instruments

The carrying amounts of cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short-term nature.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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