Fair Value Measurements

6 Months Ended

Jun. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 5 — 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.

Equity Investment The Company owns an equity investment in Constellation Energy Partners LLC (“CEP”). At June 30, 2012, the investment included 483,531 Class A Member Interests and 5,918,894 Class B Member Interests, for a total 26.5% voting interest in CEP. Fair value for the Class B Member Interests, which are publicly traded, is based on market price and classified as a Level 1 measurement under the fair value hierarchy. Fair value for the Class A Member Interests, classified as a Level 2 measurement, is based on the market price of the publicly traded interests and a premium reflecting certain additional rights. At June 30, 2012, the fair values used for the Class A units and the Class B units were $2.32 and $1.58 per unit, respectively.

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

	Level 1		Level 2			Level 3		Total Net Fair Value
At December 31, 2011
Equity investment	$	11,601	$	1,393		$	—	$	12,994
Derivative financial instruments — assets		—		72,319			—		72,319
Derivative financial instruments — liabilities		—		(9,834	)		—		(9,834	)
Total	$	11,601	$	63,878		$	—	$	75,479
At June 30, 2012
Equity investment	$	9,352	$	1,119		$	—	$	10,471
Derivative financial instruments — assets		—		51,594			—		51,594
Derivative financial instruments — liabilities		—		(8,423	)		—		(8,423	)
Total	$	9,352	$	44,290		$	—	$	53,642

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.

There were no movements between Levels 1 and 2 during the six months ended June 30, 2012. 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. These securities were subsequently sold in July 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 six months ended June 30, 2011 (in thousands). With respect to Level 3 assets or liabilities, there were no transfers, purchases, sales or issuances during this time period. The Company did not own any Level 3 assets and liabilities during the six month period ended June 30, 2012.

	Six Months Ended June  30, 2011
Balance at beginning of period	$	(9,853	)
Realized and unrealized gains included in earnings		(2,025	)
Transfers out of Level 3 (1)		9,949
Settlements		1,929
Balance at end of period	$	—

(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 9 — Redeemable Preferred Stock and Warrants). The fair value and the carrying value of these securities were $62.2 million and $56.7 million, respectively, at December 31, 2011, and $76.6 million and $60.5 million, respectively, at June 30, 2012. 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 of approximately 13.0% and 9.9% at December 31, 2011, and June 30, 2012, respectively, which was based on companies with similar leverage ratios to PostRock. The Company has classified the valuation of these securities under Level 2 of the fair value hierarchy.

The Company’s 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.