Fair Value Measurements

12 Months Ended

Dec. 31, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurements

NOTE 5. 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 our own assumptions used to measure assets and liabilities at fair value.

Recurring Basis

The following table represents the fair value hierarchy for our liabilities required to be measured at fair value on a recurring basis:

			Fair Value Measurements at the End of the Reporting Period:
	Fair Value		Level 1		Level 2		Level 3
As of December 31, 2016:
Embedded derivative liabilities:
First Lien Notes	$	27,012	$	—	$	—	$	27,012
Second Lien Notes		23,111		—		—		23,111
Total	$	50,123	$	—	$	—	$	50,123

The fair values of these embedded derivatives were estimated using the “with” and “without” method.  Using this methodology, the First Lien Notes and Second Lien Notes were first valued with the embedded derivatives (the “with” scenario) and subsequently valued without the embedded derivative (the “without” scenario).  The fair values of the embedded derivatives were estimated as the difference between the fair values of the First Lien Notes and Second Lien Notes in the “with” and “without” scenarios.  The fair values of the First Lien Notes and Second Lien Notes in the “with” and “without” scenarios were estimated using a risk–neutral probability of default model.  Significant Level 3 assumptions used in the valuation of the embedded derivatives were the fair values of our long–term debt, the expected recovery rates, the risk–neutral probability of default and the risk–free rates. The initial measurement of fair value for these embedded derivatives was at December 6, 2016, the date we entered into the First Lien Notes and Second Lien Notes (see Note 7).

The reconciliation of changes in the fair value of our embedded derivatives is as follows for the year ended December 31:

	2016
Beginning of period	$	—
Issuance of First Lien Notes and Second Lien Notes		47,618
Change in fair value		2,505
End of period	$	50,123

Nonrecurring Basis

In 2015, as a result of a reduction in future net cash flows, we recognized a $256.8 million impairment charge to write down proved oil and natural gas properties to their fair value of $68.4 million.  The fair value was determined using the income approach and was based on the expected present value of the future net cash flows from estimated 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 of our estimated reserves, appropriate risk–adjusted discount rates and other relevant data. 

Financial Instruments

The estimated fair values of our financial instruments have been determined at discrete points in time based on relevant market information. Our financial instruments consist of cash and cash equivalents, joint interest and other receivables, held–to–maturity investments, accounts payable and accrued liabilities. The carrying amounts of our financial instruments, other than held–to–maturity–investments and long–term debt, approximate fair value because of the short–term nature of the items.   

There were no significant unrecognized holding gains or losses related to our held–to–maturity investments as of December 31, 2016 and 2015.  Accordingly, the carrying value of our held–to–maturity investments approximates their fair value.  Our held–to–maturity investments are not traded on a public exchange and the fair value of these investments is based on inputs using valuations obtained from independent brokers.  As these valuations use readily observable market parameters that are actively quoted and can be validated through external sources, we have categorized these investments as Level 2.    

The estimated fair value of our long–term debt is as follows as of December 31:

	2016		2015
10.75% first lien notes due 2021	$	482,250	$	—
7.75% second lien notes due 2023		327,449		—
2.625% convertible senior notes due 2019		305,378		791,209
3.125% convertible senior notes due 2024		332,344		577,291
	$	1,447,421	$	1,368,500

The fair values of our long–term debt were estimated using quoted market prices.  As these valuations use quoted prices in active markets for identical assets or liabilities, we have categorized the long–term debt as Level 1.