Fair value measurements

3 Months Ended

Mar. 31, 2020

See the beginning of Note 10 in the 2019 Annual Report for information about the fair value hierarchy levels.

a. Fair value measurement on a recurring basis

See Notes 9 and 18.b for further discussion of the Company's derivatives, and see Note 2.f in the 2019 Annual Report for the Company's significant accounting policies for derivatives.

Balance sheet presentation

The following tables summarize the Company's derivatives' three-level fair value hierarchy by (i) assets and liabilities, (ii) current and noncurrent, (iii) commodity derivatives and contingent consideration derivative and (iv) oil, NGL, natural gas and/or deferred premiums, on a gross basis and the net presentation included in "Derivatives" on the unaudited consolidated balance sheets as of the dates presented:



	March 31, 2020
(in thousands)	Level 1		Level 2			Level 3		Total gross fair value			Amounts offset			Net fair value presented on the unaudited consolidated balance sheets
Assets:
Current:
Commodity - Oil	$	—	$	222,125		$	—	$	222,125		$	—		$	222,125
Commodity - NGL	—		32,721			—		32,721			—			32,721
Commodity - Natural gas	—		17,582			—		17,582			(1,742		)	15,840
Commodity - Oil deferred premiums	—		—			—		—			—			—
Noncurrent:
Commodity - Oil	$	—	$	29,220		$	—	$	29,220		$	—		$	29,220
Commodity - NGL	—		14,600			—		14,600			—			14,600
Commodity - Natural gas	—		4,382			—		4,382			195			4,577
Liabilities:
Current:
Commodity - Oil	$	—	$	—		$	—	$	—		$	—		$	—
Commodity - NGL	—		—			—		—			—			—
Commodity - Natural gas	—		(1,742		)	—		(1,742		)	1,742			—
Commodity - Oil deferred premiums	—		—			—		—			—			—
Contingent consideration - Oil	—		(875		)	—		(875		)	—			(875		)
Noncurrent:
Commodity - Natural gas	—		195			—		195			(195		)	—
Net derivative asset (liability) positions	$	—	$	318,208		$	—	$	318,208		$	—		$	318,208



	December 31, 2019
(in thousands)	Level 1		Level 2			Level 3			Total gross fair value			Amounts offset			Net fair value presented on the consolidated balance sheets
Assets:
Current:
Commodity - Oil	$	—	$	11,723		$	—		$	11,723		$	(5,301	)	$	6,422
Commodity - NGL	—		13,787			—			13,787			(1,297		)	12,490
Commodity - Natural gas	—		33,494			—			33,494			—			33,494
Commodity - Oil deferred premiums	—		—			—			—			(477		)	(477		)
Noncurrent:
Commodity - Oil	$	—	$	1,577		$	—		$	1,577		$	—		$	1,577
Commodity - NGL	—		9,547			—			9,547			—			9,547
Commodity - Natural gas	—		12,263			—			12,263			—			12,263
Liabilities:
Current:
Commodity - Oil	$	—	$	(5,649	)	$	—		$	(5,649	)	$	5,301		$	(348	)
Commodity - NGL	—		(1,297		)	—			(1,297		)	1,297			—
Commodity - Natural gas	—		—			—			—			—			—
Commodity - Oil deferred premiums	—		—			(477		)	(477		)	477			—
Contingent consideration - Oil	$	—	$	(7,350	)	$	—		$	(7,350	)	$	—		$	(7,350	)
Noncurrent:
Commodity - Natural gas	—		—			—			—			—			—
Net derivative asset (liability) positions	$	—	$	68,095		$	(477	)	$	67,618		$	—		$	67,618

Commodity

See Note 10.a in the 2019 Annual Report for discussion of (i) the significant Level 2 inputs associated with the calculation of discounted cash flows used in the fair value mark-to-market analysis of commodity derivatives and (ii) the Level 3 deferred premiums associated with the Company's commodity derivative contracts. These deferred premiums have settled as of March 31, 2020.

The Company reviewed the third-party specialist's valuations of commodity derivatives, including the related inputs, and analyzed changes in fair values between reporting dates.

The following table summarizes the changes in net assets and liabilities classified as Level 3 measurements for the periods presented:



	Three months ended March 31,
(in thousands)	2020			2019
Balance of Level 3 at beginning of period	$	(477	)	$	(16,565	)
Change in net present value of commodity derivative deferred premiums⁽¹⁾	—			(95		)
Settlements of commodity derivative deferred premiums	477			4,016
Balance of Level 3 at end of period	$	—		$	(12,644	)

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(1)	This amount is included in "Interest expense" on the unaudited consolidated statements of operations for the three months ended March 31, 2019.

Contingent consideration

See Note 10.a in the 2019 Annual Report for the significant Level 2 inputs for the option pricing model used in the fair value mark-to-market analysis of the contingent consideration. The Company reviewed the third-party specialist's valuations,

including the related inputs, and analyzed changes in fair values between the reporting dates. See Notes 3.b and 9.b for further discussion of this contingent consideration.

b. Fair value measurement on a nonrecurring basis

See Note 2.j in the 2019 Annual Report for the Level 2 fair value hierarchy input assumptions used in estimating the net realizable value of inventory used to account for the $1.3 million impairment expense of inventory recorded during the three months ended March 31, 2020, pertaining to line-fill and other inventories. There were no comparable impairments of inventory recorded during the three months ended March 31, 2019.

See Note 4.a in the 2019 Annual Report for the Level 3 fair value hierarchy input assumptions used in estimating the fair values of assets acquired and liabilities assumed for the acquisition of evaluated and unevaluated oil and natural gas properties accounted for as a business combination for the year ended December 31, 2019. There were no acquisitions of evaluated and unevaluated oil and natural gas properties accounted for as business combinations for the three months ended March 31, 2020 or 2019.

See Note 10.b in the 2019 Annual Report for the Level 3 fair value hierarchy input assumptions used in the fair value measurement of long-lived assets used to account for the $8.2 million impairment expense of long-lived assets recorded during the three months ended March 31, 2020, pertaining to midstream service assets. There were no comparable impairments of long-lived assets recorded during the three months ended March 31, 2019.

c. Items not accounted for at fair value

The carrying amounts reported on the unaudited consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, accrued capital expenditures, undistributed revenue and royalties and other accrued assets and liabilities approximate their fair values.

The Company has not elected to account for its debt instruments at fair value. The following table presents the carrying amounts and fair values of the Company's debt as of the dates presented:



	March 31, 2020				December 31, 2019
(in thousands)	Long-term debt		Fair value⁽¹⁾		Long-term debt		Fair value⁽¹⁾
January 2022 Notes	$	—	$	—	$	450,000	$	439,875
March 2023 Notes	—		—		350,000		332,500
January 2025 Notes	600,000		240,000		—		—
January 2028 Notes	400,000		152,000		—		—
Senior Secured Credit Facility	275,000		274,540		375,000		375,275
Total	$	1,275,000	$	666,540	$	1,175,000	$	1,147,650

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(1)

The fair values of the outstanding debt on the notes were determined using the Level 1 fair value hierarchy quoted market prices for each respective instrument as of March 31, 2020 and December 31, 2019. The fair values of the outstanding debt on the Senior Secured Credit Facility were estimated utilizing the Level 2 fair value hierarchy pricing model for similar instruments as of March 31, 2020 and December 31, 2019.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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