Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2016

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

NOTE 9 – FAIR VALUE OF FINANCIAL INSTRUMENTS

We have established a hierarchy to measure our financial instruments at fair value, which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources; whereas, unobservable inputs reflect our own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:

Level 1 – Unadjusted quoted prices in active markets for identical, unrestricted assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3 – Unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

We use a market approach fair value methodology to value the assets and liabilities for our outstanding derivative instruments (see Note 8). We manage and report derivative assets and liabilities on the basis of our exposure to market risks and credit risks by counterparty. Commodity derivative instruments are valued based on observable market data related to the change in price of the underlying commodity and are therefore defined as Level 2 assets and liabilities within the same class of nature and risk. These derivative values were calculated by utilizing commodity indices, quoted prices for futures and options contracts traded on open markets that coincide with the underlying commodity, expiration period, strike price (if applicable) and pricing formula utilized in the derivative instrument.

Information for financial instruments measured at fair value at December 31, 2016 and 2015 was as follows (in thousands):

Successor Derivatives, Fair Value, as of December 31, 2016	Level 1		Level 2		Level 3		Total
Assets, gross
Commodity swaps	$	—	$	826	$	—	$	826
Total derivative assets, gross		—		826		—		826
Liabilities, gross
Commodity swaps		—		(50,240)		—		(50,240)
Total derivative liabilities, gross		—		(50,240)		—		(50,240)
Total derivatives, fair value, net	$	—	$	(49,414)	$	—	$	(49,414)

Predecessor Derivatives, Fair Value, as of December 31, 2015	Level 1		Level 2		Level 3		Total
Assets, gross
Commodity swaps	$	—	$	355,329	$	—	$	355,329
Commodity puts		—		2,393		—		2,393
Total derivatives, fair value, net	$	—	$	357,722	$	—	$	357,722

Other Financial Instruments

Our other current assets and liabilities on our consolidated balance sheets are considered to be financial instruments. The estimated fair values of these instruments approximate their carrying amounts due to their short-term nature and thus are categorized as Level 1. The estimated fair value of our long-term debt at December 31, 2016, which consists of our First Lien Credit Facility and Second Lien Credit Facility, approximated carrying value of $696.8 million. At December 31, 2016, the carrying value of outstanding borrowings under our First Lien Credit Facility, which bears interest at variable interest rates, approximated estimated fair value. The estimated fair value of our Second Lien Credit Facility was based upon the market approach and calculated using yields of our Second Lien Credit Facility as provided by financial institutions and thus were categorized as Level 3 values.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

We estimated the fair values of natural gas and oil properties transferred to our Predecessor and us upon consolidation of certain Drilling Partnerships in separate transactions (see Note 10) based on discounted cash flow model, which considered the estimated remaining lives of the wells based on reserve estimates, our future operating and development costs of the assets, the respective natural gas, oil and natural gas liquids forward price curves and estimated salvage values using our historical experience and external estimates of recovery values. We used a discount rate of 10%, which is consistent with our and our Predecessor’s weighted average cost of capital.  These estimates of fair value are Level 3 measurements as they are based on unobservable inputs.

We estimated the fair value of asset retirement obligations assumed by us and our Predecessor in separate transactions upon consolidation of certain Drilling Partnerships (see Note 6) based on discounted cash flow projections using our historical experience in plugging and abandoning wells, the estimated remaining lives of those wells based on reserve estimates, external estimates as to the cost to plug and abandon the wells in the future considering inflation rates, federal and state regulatory requirements, and a discount rate consistent with that used in valuing the related natural gas and oil properties acquired. These estimates of fair value are Level 3 measurements as they are based on unobservable inputs.

We estimated the fair value of our enterprise value and reorganizational value of assets and liabilities upon our emergence from bankruptcy through fresh-start accounting (see Note 3) utilizing the discounted cash flow method for both our gas and oil production business and our partnership management business based on the financial projections in our disclosure statement. The resulting fair value of our equity was used to value shares issued under our incentive plan.  These estimates of fair value are Level 3 measurements as they are based on unobservable inputs.

During the year ended December 31, 2014, our Predecessor completed the Eagle Ford, Rangely and GeoMet acquisitions (see Note 4). The fair value measurements of assets acquired and liabilities assumed for these acquisitions were based on inputs that were not observable in the market and therefore represented Level 3 inputs. The fair values of natural gas and oil properties were measured using a discounted cash flow model, which considered the estimated remaining lives of the wells based on reserve estimates, future operating and development costs of the assets, as well as the respective natural gas, oil and natural gas liquids forward price curves. The fair values of the asset retirement obligations were measured under our Predecessor’s existing methodology for recognizing an estimated liability for the plugging and abandonment of its gas and oil wells (see Note 6). These inputs required significant judgments and estimates by our Predecessor’s management at the time of the valuations, which were finalized in 2015.