NOTE 10. FAIR VALUE MEASUREMENTS

The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values determined based on quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. Level 3 refers to fair values determined based on the Company’s own assumptions used to measure assets and liabilities at fair value.

Recurring Basis

The following table presents the fair value hierarchy table for the Company’s net assets and liabilities that are required to be measured at fair value on a recurring basis:


	Successor
			Fair Value Measurements
			at the End of the Reporting Period
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
As of December 31, 2018:
Assets:
Oil, natural gas and natural gas liquids derivatives	$	26,613	$	—	$	26,613	$	—
Equity securities		47,082		47,082		—		—
	$	73,695	$	47,082	$	26,613	$	—

Liabilities:
Oil, natural gas and natural gas liquids derivatives	$	3,827	$	—	$	3,827	$	—


	Predecessor
			Fair Value Measurements
			at the End of the Reporting Period
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
As of December 31, 2017:
Assets:
Oil, natural gas and natural gas liquids derivatives	$	2,696	$	—	$	2,696	$	—
Interest rate swaps		706		—		706		—
	$	3,402	$	—	$	3,402	$	—

Liabilities:
Oil, natural gas and natural gas liquids derivatives	$	721	$	—	$	721	$	—
Interest rate swaps		25		—		25		—
	$	746	$	—	$	746	$	—

The Company’s derivatives consist of over–the–counter (“OTC”) contracts which are not traded on a public exchange. As the fair value of these derivatives is based on inputs using market prices obtained from independent brokers or determined using quantitative models that use as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third party pricing services, brokers and market transactions, the Company has categorized these derivatives as Level 2. The Company values these derivatives using the income approach using inputs such as the forward curve for commodity prices based on quoted market prices and prospective volatility factors related to changes in the forward curves and yield curves based on money market rates and interest rate swap data, such as forward LIBOR curves. The estimates of fair value have been determined at discrete points in time based on relevant market data. Furthermore, fair values are adjusted to reflect the credit risk inherent in the transaction, which may include amounts to reflect counterparty credit quality and/or the effect of the Company’s creditworthiness. These assumed credit risk adjustments are based on published credit ratings, public bond yield spreads and credit default swap spreads. There were no changes in valuation techniques or related inputs in 2018.

At December 31, 2018, equity securities consisted of 4.2 million shares of common stock of Magnolia which are traded on a public exchange. The Company categorized these equity securities as Level 1, as the fair value of these shares is based market price and the 120-day lock up period upon issuance had expired.

Nonrecurring Basis

The following table presents the fair value hierarchy table for the Company’s net assets and liabilities that are required to be measured at fair value on a nonrecurring basis:

Fair Value Measurements

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Total

Fair Value

(Level 1)

(Level 2)

(Level 3)

Losses

Predecessor:

Year Ending December 31, 2017:

Long–lived assets held and used

48,694

—

48,694

66,931

Long–lived Assets Held and Used

The Company did not incur any impairment charges during the seven months ended December 31, 2018 for any of its oil and natural gas properties that were held and used as of December 31, 2018. The Predecessor did not incur any impairment charges during the five months ended May 31, 2018 for any of its oil and natural gas properties that were held and used as of May 31, 2018. As a result of reductions in estimated future net cash flows primarily caused by the decrease in prices for oil, natural gas and natural gas liquids, the Company incurred impairment charges of $66.9 million in 2017 to write down oil and natural gas properties that were held and used to their fair value. These impairment charges were included in earnings in the periods indicated. The Predecessor did not incur any impairment charges during 2016 for any of its oil and natural gas properties that were held and used as of December 31, 2016.

The fair values were determined using the income approach and were based on the expected present value of the future net cash flows from reserves. Significant Level 3 assumptions associated with the calculation of discounted cash flows used in the impairment analysis included estimates of future prices, production costs, development expenditures, anticipated production, appropriate risk–adjusted discount rates and other relevant data.

Financial Instruments

The estimated fair values of the Company’s financial instruments have been determined at discrete points in time based on relevant market information. The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, derivatives and long–term debt. The carrying amounts of the Company’s financial instruments other than derivatives and long–term debt approximate fair value because of the short–term nature of the items. Derivatives are recorded at fair value (see above).

The carrying value of debt outstanding under the Company’s Exit Credit Facility approximates fair value because the credit facility’s variable interest rate resets frequently and approximates current market rates available to us. The estimated fair value of the Predecessor’s Senior Notes was $176.8 million at December 31, 2017, which differed from the carrying value of $342.5 million at December 31, 2017. The fair value of the Senior Notes was determined using Level 2 inputs.