Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 4 — Fair Value Measurements

     Certain assets and liabilities are measured at fair value on a recurring basis in the Company’s condensed consolidated balance sheets. The following methods and assumptions were used to estimate the fair values:

     Cash and Equivalents, Accounts Receivable and Accounts Payable The carrying amounts approximate fair value due to the short-term nature or maturity of the instruments.

     Commodity Derivative Instruments The Company’s oil and gas derivative instruments may consist of variable to fixed price swaps, collars and basis swaps. When possible, the Company estimates the fair values of these instruments based on published forward commodity price curves as of the date of the estimate. The discount rate used in the discounted cash flow projections is based on published LIBOR rates adjusted for counterparty credit risk. Counterparty credit risk is incorporated into derivative assets while the Company’s own credit risk is incorporated into derivative liabilities. Both are based on the current published credit default swap rates. See Note 3 — Derivative Instruments and Hedging Activities.

     Short-Term Investments Short term investments are included in other current assets in the condensed consolidated balance sheet. At December 31, 2010, these investments consisted of 218,095 shares of MHR common stock received as proceeds from the Appalachia Basin sale described in Note 2, which were subsequently sold in June 2011 for $1.5 million.

     Investment in Affiliate The Company’s 14.9% voting interest in CEP consists of 485,065 of CEP’s outstanding Class A Member Interests and 3,128,670 Class B Member Interests. Fair value for the Class B Member Interests which are publicly traded is based on market price. Fair value for the Class A Member Interests is based on the market price of the publicly traded interests and a premium reflecting certain additional rights. At September 30, 2011, the fair value used for the Class A units and the Class B units was $4.07 and $2.78 per unit, respectively.

     Measurement information for assets and liabilities that are measured at fair value on a recurring basis was as follows:

									Total Net Fair
	Level 1		Level 2			Level 3			Value
At December 31, 2010
Short term investments — other current assets	$	—	$	1,354		$	—		$	1,354
Derivative financial instruments — assets		—		71,221			—			71,221
Derivative financial instruments — liabilities		—		(620	)		(9,853	)		(10,473	)
Total	$	—	$	71,955		$	(9,853	)	$	62,102
At September 30, 2011
Investment in affiliate	$	8,697	$	1,976		$	—		$	10,673
Derivative financial instruments — assets		—		64,595			—			64,595
Derivative financial instruments — liabilities		—		(10,318	)		—			(10,318	)
Total	$	8,697	$	56,253		$	—		$	64,950

Level 1 — Quoted prices available in active markets for identical assets or liabilities at the reporting date.

Level 2 — Pricing inputs other than quoted prices in active markets included in Level 1 which are either directly or indirectly observable at the reporting date. Level 2 consists primarily of non-exchange traded commodity derivatives.

Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources.

     The Company classifies assets and liabilities within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement of each individual asset and liability taken as a whole.

     In June 2011, the Company transferred 23,517 shares of MHR common stock with a fair value of $159,000 from Level 2 to Level 1 due to the limited amount of time remaining until restrictions on the Company’s ability to trade these securities lapsed in July 2011. The lifting of restrictions enabled the Company to value these securities at published market prices. Following the lapse of restrictions, these securities were sold in July 2011 for approximately $168,000. There were no other movements between Levels 1 and 2 during the periods from January 1 to March 5 and March 6 to September 30, 2010, and for the nine months ended September 30, 2011.

     The following table sets forth a reconciliation of changes in the fair value of risk management assets and liabilities classified as Level 3 in the fair value hierarchy for the periods presented (in thousands). There were no purchases, sales or issuances during the time period presented.

	Predecessors
	January 1, 2010 to			March 6, 2010 to			Nine Months Ended
	March 5, 2010			September 30, 2010			September 30, 2011
Balance at beginning of period	$	1,530		$	5,455		$	(9,853	)
Realized and unrealized gains included in earnings		7,254			13,390			(2,025	)
Transfers out of Level 3 (1)		—			(16,456	)		9,949
Settlements		(3,329	)		(7,964	)		1,929
Balance at end of period	$	5,455		$	(5,575	)	$	—

(1) Availability of market based information allowed the Company to reclassify all if its swap contracts tied to Southern Star prices from Level 3 to Level 2 during the second quarter of 2011.

     Additional Fair Value Disclosures — The Company has 6,000 outstanding shares of Series A Cumulative Redeemable Preferred Stock (see Note 8 — Redeemable Preferred Stock and Warrants). The fair value and the carrying value of these securities were $68.5 million and $50.6 million, respectively, at December 31, 2010, and $51.0 million and $55.1 million, respectively, at September 30, 2011. The fair value was determined by discounting the cash flows over the remaining life of the securities utilizing a LIBOR interest rate and a risk premium which was based on companies with similar leverage ratios to PostRock.

     The Company’s long-term debt consists entirely of floating-rate facilities. The carrying amount of floating-rate debt approximates fair value because the interest rates paid on such debt are generally set for periods of six months or shorter.