Fair Value Measurements of Financial Instruments

6 Months Ended

Jun. 30, 2013

Fair Value Measurements of Financial Instruments

Fair Value Measurements of Financial Instruments

3. Fair Value Measurements of Financial Instruments

The Company uses a valuation framework based upon inputs that market participants use in pricing an asset or liability, which are classified into two categories: observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources; whereas, unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. These two types of inputs are further divided into the following fair value input hierarchy:

· Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

· Level 2 — Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. Fair value assets and liabilities that are generally included in this category are commodity derivative contracts with fair values based on inputs from actively quoted markets. The Company uses a discounted cash flow approach to estimate the fair values of its commodity derivative contracts, utilizing commodity futures price strips for the underlying commodities provided by a reputable third-party. The Company also factors the credit standing of its derivative contract counterparties into the valuation to account for the possible risk of nonperformance.

· Level 3 — Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Derivative Instruments — Commodity derivative contracts reflected in the condensed consolidated balance sheets are recorded at estimated fair value. At June 30, 2013 and December 31, 2012, all of the Company’s commodity derivative contracts were with nine and five bank counterparties, respectively, and were classified as Level 2.

Derivative instruments listed below are presented gross and include collars and swaps that are carried at fair value. The Company records the net change in the fair value of these positions in “Gains on commodity derivative contracts — net” in the Company’s unaudited condensed consolidated statements of operations. See Note 4 for additional information on the Company’s derivative instruments and balance sheet presentation.

	Fair Value Measurements at June 30, 2013
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Assets:
Commodity derivative oil swaps	$	—	$	11,428	$	—	$	11,428
Commodity derivative NGL swaps	—		3,461		—		3,461
Commodity derivative gas swaps	—		5,670		—		5,670
Commodity derivative oil collars	—		488		—		488
Commodity derivative gas collars	—		1,539		—		1,539
Commodity derivative differential swaps	—		147		—		147
Total assets	—		22,733		—		22,733
Liabilities:
Commodity derivative oil swaps	$	—	$	17,430	$	—	$	17,430
Commodity derivative NGL swaps	—		—		—		—
Commodity derivative gas swaps	—		—		—		—
Commodity derivative oil collars	—		118		—		118
Commodity derivative gas collars	—		48				48
Commodity derivative differential swaps	—		878		—		878
Total liabilities	$	—	$	18,474	$	—	$	18,474

	Fair Value Measurements at December 31, 2012
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Assets:
Commodity derivative oil swaps	$	—	$	16,133	$	—	$	16,133
Commodity derivative NGL swaps	—		2,353		—		2,353
Commodity derivative oil collars	—		428		—		428
Commodity derivative gas collars	—		2,026		—		2,026
Commodity derivative differential swaps	—		2,661		—		2,661
Total assets	—		23,601		—		23,601
Liabilities:
Commodity derivative oil swaps	$	—	$	15,091	$	—	$	15,091
Commodity derivative NGL swaps	—		458		—		458
Commodity derivative oil collars	—		287		—		287
Commodity derivative gas collars	—		185		—		185
Commodity derivative differential swaps	—		11,693		—		11,693
Total liabilities	$	—	$	27,714	$	—	$	27,714