NOTE 7. 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 for the Company’s assets and liabilities that are required to be measured at fair value on a recurring basis:


			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 June 30, 2019:
Assets:
Oil, natural gas and natural gas liquids derivatives	$	18,918	$	—	$	18,918	$	—

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	$	—

The Company’s derivatives consist of over–the–counter 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 with 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. 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 the six months ended June 30, 2019.

At December 31, 2018, the Company’s 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 on market price. The Company sold all of its 4.2 million shares of common stock of Magnolia during January 2019 for net proceeds of $51.7 million.

Nonrecurring Basis

During the three and six months ended June 30, 2019, the Company recognized an impairment expense of $72.1 million related to proved oil and natural gas properties in the Barnett Shale; which were held for sale as of June 30, 2019. During the three and six months ended June 30, 2019, the Company also recognized an impairment expense of $1.1 million and $27.2 million, respectively, related to proved oil and natural gas properties in the San Juan Basin and the Mid-Continent area, which were sold during April 2019. During the one month ended June 30, 2018, the Predecessor did not recognize any impairment expense related to proved oil and natural gas properties. During the two and five months ended May 31, 2018, the Predecessor did not recognize any impairment expense related to proved oil and natural gas properties.

The fair values of the oil and natural gas properties sold during April 2019 were determined using the transaction price of the then pending transactions.

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, accounts receivable, accounts payable and accrued liabilities, derivatives and long–term debt. The carrying amounts of the Company’s financial instruments other than 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 Exit Credit Facility (as defined in Note 9) approximated fair value because the credit facility’s variable interest rate resets frequently and approximates current market rates available to the Company.