Fair value measurements

Recurring fair value measurements

Our financial instruments recorded at fair value on a recurring basis consist of commodity derivative contracts (see “Note 9: Derivative instruments”). We had no Level 1 assets or liabilities as of December 31, 2019 or December 31, 2018. Our derivative contracts classified as Level 2 as of December 31, 2019 and 2018 consisted of commodity price swaps, including our oil roll contracts, which are valued using an income approach. Future cash flows from these derivatives are estimated based on the difference between the fixed contract price and the underlying published forward market price, and are discounted at a rate that captures our own nonperformance risk for derivative liabilities or that of our counterparties for derivative assets.

As of December 31, 2019 and 2018 our derivative contracts classified as Level 3 consisted of collars and gas basis swaps. The fair value of these contracts is developed by a third-party pricing service using a proprietary valuation model, which we believe incorporates the assumptions that market participants would have made at the end of each period. Observable inputs include contractual terms, published forward pricing curves, and yield curves. Significant unobservable inputs are implied volatilities. Significant increases (decreases) in implied volatilities in isolation would result in a significantly higher (lower) fair value measurement. We review these valuations and the changes in the fair value measurements for reasonableness. All derivative instruments are recorded at fair value and include a measure of our own nonperformance risk for derivative liabilities or our counterparty credit risk for derivative assets.

The fair value hierarchy for our financial assets and liabilities is shown by the following table:



	As of December 31, 2019									As of December 31, 2018
	Derivative assets			Derivative liabilities			Net assets (liabilities)			Derivative assets			Derivative liabilities			Net assets (liabilities)
Significant other observable inputs (Level 2)	$	6,576		$	(22,895	)	$	(16,319	)	$	29,370		$	(4,718	)	$	24,652
Significant unobservable inputs (Level 3)	235			(1		)	234			252			(222		)	30
Netting adjustments (1)	(5,864		)	5,864			—			(3,398		)	3,398			—
	$	947		$	(17,032	)	$	(16,085	)	$	26,224		$	(1,542	)	$	24,682

____________________________________________________________


(1)	Amounts represent the impact of master netting agreements that allow us to net settle positive and negative positions with the same counterparty. Positive and negative positions with counterparties are netted on the balance sheet only to the extent that they relate to the same current versus noncurrent classification.

Changes in the fair value of our derivative instruments classified as Level 3 in the fair value hierarchy were as follows for the periods presented:



	For the Year Ended December 31,
Net derivative assets (liabilities)	2019			2018
Beginning balance	$	30		$	(295	)
Realized and unrealized gains (losses) included in derivative (losses) gains	1,009			(1,101		)
Settlements (received) paid	(805		)	1,426
Ending balance	$	234		$	30
Gains relating to instruments still held at the reporting date included in derivative (losses) gains for the period	$	234		$	30

Nonrecurring fair value measurements

Asset retirement obligations. Additions to the asset and liability associated with our asset retirement obligations are measured at fair value on a nonrecurring basis. Our asset retirement obligations consist of the estimated present value of future costs to plug and abandon or otherwise dispose of our oil and natural gas properties and related facilities. Significant inputs used in determining such obligations include estimates of plugging and abandonment costs, inflation rates, discount rates, and well life, all of which are Level 3 inputs according to the fair value hierarchy. See “Note 11: Asset retirement obligations” for additional information regarding our asset retirement obligations. The table below discloses the inflation and discount rate assumptions for the periods presented:



	Year ended December 31,
	2019				2018
	Low		High		Low		High
Inflation rate (1)	2.25	%	2.25	%	2.26	%	2.26	%
Credit adjusted risk-free discount rate	12.35	%	21.79	%	6.92	%	11.94	%

__________________________________________

(1) The inflation rate is measured as a single rate on an annual basis.

Our significant financial instruments, other than derivatives, consist primarily of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. We believe the carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate fair values due to the short-term maturities of these instruments.

The carrying value and estimated fair value of our debt at December 31, 2019 and 2018 were as follows:



	December 31, 2019				December 31, 2018
Level 2	Carrying value (1)		Estimated fair value		Carrying value (1)		Estimated fair value
Credit facility	$	130,000	$	130,000	$	—	$	—
Other secured debt (2)	371		371		8,942		8,942
8.75% Senior Notes due 2023	300,000		133,050		300,000		213,618

____________________________________________________________


(1)	The carrying value excludes deductions for debt issuance costs and discounts.


(2)	The balance on December 31, 2019, consisted of only equipment installment notes while the balance on December 31, 2018, consisted of real estate and equipment installment notes.

The carrying value of our credit facility and other secured long-term debt approximates fair value as the rates are comparable to those at which we could currently borrow under similar terms, are variable and incorporate a measure of our credit risk. The fair value of our Senior Notes was estimated based on quoted market prices.

See “Note 1: Nature of operations and summary of significant accounting policies” for additional information regarding our accounting policies for fair value measurements.

Concentrations of credit risk

Financial instruments that potentially subject us to concentrations of credit risk consist principally of derivative instruments and accounts receivable. Derivative instruments are exposed to credit risk from counterparties. Our derivative contracts are executed with institutions, or affiliates of institutions, that are parties to our credit facility at the time of execution, and we believe the credit risks associated with all of these institutions are acceptable. We do not require collateral or other security from counterparties to support derivative instruments. Master agreements are in place with each of our derivative counterparties that provide for net settlement in the event of default or termination of the contracts under each respective agreement. As a result of the netting provisions, our maximum amount of loss under derivative transactions due to credit risk is limited to the net amounts due from the counterparties under the derivatives. Our loss is further limited as any amounts due from a defaulting counterparty that is a Lender, or an affiliate of a Lender, under our credit facilities can be offset against amounts owed to such counterparty Lender. As of December 31, 2019, the counterparties to our open derivative contracts consisted of eight financial institutions.

The following table summarizes our derivative assets and liabilities, which are offset in the consolidated balance sheets under our master netting agreements.



	Offset in the consolidated balance sheets									Gross amounts not offset in the consolidated balance sheets
	Gross assets (liabilities)			Offsetting assets (liabilities)			Net assets (liabilities)			Derivatives (1)			Amounts outstanding under credit facilities (2)			Net amount
December 31, 2019
Derivative assets	$	6,811		$	(5,864	)	$	947		$	—		$	(947	)	$	—
Derivative liabilities	(22,896		)	5,864			(17,032		)	—			947			(16,085		)
	$	(16,085	)	$	—		$	(16,085	)	$	—		$	—		$	(16,085	)
December 31, 2018
Derivative assets	$	29,622		$	(3,398	)	$	26,224		$	(1,542	)	$	—		$	24,682
Derivative liabilities	(4,940		)	3,398			(1,542		)	$	1,542		—			—
	$	24,682		$	—		$	24,682		$	—		$	—		$	24,682

____________________________________________________________


(1)	Since positive and negative positions with a counterparty are netted on the balance sheet only to the extent that they related to the same current versus noncurrent classification, these represent remaining amounts that could have been offset under our master netting agreements.


(2)	The amount outstanding under our credit facilities that is available to offset out net derivative assets due from counterparties that are lenders under our credit facilities.

We did not post additional collateral under any of these contracts as all of our counterparties are secured by the collateral under our credit facilities. Payment on our derivative contracts could be accelerated in the event of a default on our Credit Agreement. The aggregate fair value of our derivative liabilities subject to acceleration in the event of default was $22,896 at December 31, 2019.

Accounts receivable are primarily from purchasers of oil and natural gas products, and exploration and production companies who own interests in properties we operate. The industry concentration has the potential to impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic, industry or other conditions.

Commodity sales to our top three purchasers accounted for the following percentages of our total commodity sales, excluding the effects of hedging activities, for the years ended December 31:



	Successor
	2019		2018		2017
Coffeyville Resources LLC	*		*		20.9	%
Phillips 66 Company	21.4	%	26.0	%	14.6	%
Sunoco, Inc.	15.1	%	7.2	%	*
Alta Mesa Resources, Inc.	*		6.7	%	*
Tom Stack LLC.	10.0	%	*		*
Valero Energy Corporation	*		*		13.3	%

____________________________________________________________

* Not disclosed as not a top three purchaser during the fiscal year.

If we were to lose a purchaser, we believe we are able to secure other purchasers for the commodities we produce.