Fair Value Disclosures

9 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Abstract]

FAIR VALUE DISCLOSURES

5. FAIR VALUE DISCLOSURES

We follow the guidance of ASC 820, “Fair Value Measurements and Disclosures,” in the estimation of fair values. ASC 820 provides a hierarchy of fair value measurements, based on the inputs to the fair value estimation process. It requires disclosure of fair values classified according to defined “levels,” which are based on the reliability of the evidence used to determine fair value, with Level 1 being the most reliable and Level 3 the least. Level 1 evidence consists of observable inputs, such as quoted prices in an active market. Level 2 inputs typically correlate the fair value of the asset or liability to a similar, but not identical item which is actively traded. Level 3 inputs include at least some unobservable inputs, such as valuation models developed using the best information available in the circumstances.

We utilize the modified Black-Scholes option pricing model to estimate the fair value of oil and natural gas derivative contracts. Inputs to this model include observable inputs from the New York Mercantile Exchange (“NYMEX”) for futures contracts, and inputs derived from NYMEX observable inputs, such as implied volatility of oil and natural gas prices. We have classified the fair values of all our oil and natural gas derivative contracts as Level 2.

The fair value of our interest rate derivative contracts was calculated using the modified Black-Scholes option pricing model and is also considered a Level 2 fair value.

Our senior notes are carried at historical cost, net of amortized discount; we estimate the fair value of the senior notes for disclosure purposes (see Note 2). This estimation is based on the most recent trading values of the notes at or near the reporting dates.

Oil and natural gas properties are subject to impairment testing and potential impairment write down. Oil and gas properties with a carrying amount of $31.8 million were written down to their fair value of $15.3 million, resulting in an impairment charge of $16.5 million for the nine months ended September 30, 2011. Oil and gas properties with a carrying amount of $7.3 million were written down to their fair value of $4.8 million, resulting in an impairment charge of $2.5 million for the nine months ended September 30, 2010. For the three months ended September 30, 2011, oil and gas properties with a carrying amount of $7.4 million were written down to their fair value of $1.7 million, resulting in an impairment charge of $5.7 million, and for the three months ended September 30, 2010, oil and gas properties with a carrying amount of $2.9 million were written down to their fair value of $2.5 million, resulting in an impairment charge of $0.4 million. Significant Level 3 assumptions used in the calculation of estimated discounted cash flows in the impairment analysis included our estimate of future oil and natural gas prices, production costs, development expenditures, estimated timing of production of proved reserves, appropriate risk-adjusted discount rates, and other relevant data.

In connection with the Meridian acquisition, we recorded oil and natural gas properties with a fair value of $147.4 million in the second quarter of 2010. In connection with the Sydson and TODD acquisitions, we recorded oil and natural gas properties with a fair value of $28.4 million, and $23.4 million, respectively, in the second quarter of 2011. For information on these acquisitions, see Note 3. Significant Level 3 inputs used were the same as those used in determining impairments based on estimated discounted cash flows for the acquired properties.

New additions to asset retirement obligations result from estimations for new properties, and fair values for them are categorized as Level 3. Such estimations are based on present value techniques which utilize company-specific information for such inputs as cost and timing of plug and abandonment of wells and facilities. We recorded $3.3 million and $34.6 million in additions to asset retirement obligations measured at fair value during the nine months ended September 30, 2011 and 2010, respectively. The significant additions in 2010 were the result of the purchase of Meridian.

The following table presents information about our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value:

	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
At September 30, 2011 (unaudited):
Financial Assets:
Derivative contracts for oil and natural gas	$	—	$	93,586	$	—	$	93,586
Financial Liabilities:
Derivative contracts for oil and natural gas		—		43,693		—		43,693
Derivative contracts for interest rate		—		1,959		—		1,959
At December 31, 2010:
Financial Assets:
Derivative contracts for oil and natural gas	$	—	$	61,623	$	—	$	61,623
Financial Liabilities:
Derivative contracts for oil and natural gas		—		37,022		—		37,022
Derivative contracts for interest rate		—		5,388		—		5,388

The amounts above are presented on a gross basis; presentation on our consolidated balance sheets utilizes netting of assets and liabilities with the same counterparty where master netting agreements are in place. For additional information on derivative contracts, see Note 6.