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Disclosures about Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2019

Disclosures about Fair Value of Financial Instruments

DISCLOSURES ABOUT FAIR VALUE 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 prioritized into the following fair value input hierarchy:



Level 1:		Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.
Level 2:		Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable as of the reporting date.
Level 3:		Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. These assets and liabilities can include inventory, assets and liabilities acquired in a business combination or exchanged in non-monetary transactions, proved and unproved oil and natural gas properties, asset retirement obligations and other long-lived assets that are written down to fair value when they are impaired.

The Company periodically reviews its long-lived assets to be held and used, including proved oil and natural gas properties, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable (e.g., if there was a sustained decline in commodity prices or the productivity of the Company’s wells). The Company reviews its oil and natural gas properties by field. An impairment loss is recognized if the sum of the expected undiscounted future net cash flows is less than the carrying amount of the assets. If the estimated undiscounted future net cash flows are less than the carrying amount of a particular asset, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset exceeds the estimated fair value of such asset.

Unproved oil and natural gas properties are assessed quarterly for impairment by considering future drilling plans, the results of exploration activities, commodity price outlooks, planned future sales, remaining lease terms and the expiration of all or a portion of such projects. The Company’s periodic assessment also considers its ability to prioritize expenditures to drill leases and to make payments to extend the lease term as well as its ability to enter into exchange transactions that allow for higher concentrations of ownership and development. The Company recognizes leasehold abandonment expense for unproved properties at the time when the lease term has expired or sooner based on management’s periodic assessments. During the years ended December 31, 2019, 2018 and 2017, the Company recognized leasehold abandonment and impairment expense of $99.2 million, $160.8 million and $32.9 million.

Other Property, Plant and Equipment. During the year ended December 31, 2019, the Company recognized an impairment of $2.6 million to reduce the carrying value of leasehold improvements that will no longer provide economic benefit after the cease-use date associated with certain office space. The impairment charges are included in Other operating expense in the Company’s consolidated statements of operations. There were no such charges incurred during the years ended December 31, 2018 or 2017.

Materials and Supplies. During the years ended December 31, 2018 and 2017, the Company recognized impairments of $0.5 million and $1.1 million, respectively, primarily to reduce the carrying value of oil and gas drilling and repair items. There were no such impairments recognized during the year ended December 31, 2019. The Company estimates fair value of the inventory using significant Level 2 assumptions based on third-party price quotes for the asset in an active market. The impairment charges are included in Other income (expense) in the Company’s consolidated statements of operations.

Proved Oil and Natural Gas Properties. During the years ended December 31, 2019 and 2018, the Company did not recognize impairment charges, as the carrying amount of the assets exceeds the undiscounted future cash flows of the assets.

The Company calculates the estimated fair values using a discounted future cash flow model. Management’s assumptions associated with the calculation of discounted future cash flows include commodity prices based on NYMEX futures price strips (Level 1), as well as Level 3 assumptions including (i) pricing adjustments for differentials, (ii) production costs, (iii) capital expenditures, (iv) production volumes, and (v) estimated reserves.

It is reasonably possible that the estimate of undiscounted future net cash flows may change in the future resulting in the need to impair carrying values. The primary factors that may affect estimates of future cash flows are (i) commodity futures prices, (ii) increases or decreases in production and capital costs, (iii) future reserve adjustments, both positive and negative, to proved reserves, and (iv) results of future drilling activities.

Financial Assets and Liabilities Measured at Fair Value

Commodity derivative contracts are marked-to-market each quarter and are thus stated at fair value in the Company’s consolidated balance sheets and in Note 4—Derivative Financial Instruments. The Company adjusts the valuations from the valuation model for nonperformance risk and for counterparty risk. The fair values of the Company’s commodity derivative instruments are classified as Level 2 measurements as they are calculated using industry standard models that utilize assumptions and inputs which are substantially observable in active markets throughout the full term of the instruments. These include market price curves, contract terms and prices, credit risk adjustments, implied market volatility and discount factors. The following summarizes the fair value of the Company’s derivative assets and liabilities according to their fair value hierarchy as of the reporting dates indicated (in thousands):



	December 31, 2019
	Level 1		Level 2			Level 3		Total
Assets:
Commodity derivative instruments⁽¹⁾	$	—	$	127,632		$	—	$	127,632
Total assets	$	—	$	127,632		$	—	$	127,632

Liabilities:
Commodity derivative instruments⁽¹⁾	$	—	$	(158,522	)	$	—	$	(158,522	)
Total liabilities	$	—	$	(158,522	)	$	—	$	(158,522	)
Net liability	$	—	$	(30,890	)	$	—	$	(30,890	)



	December 31, 2018
	Level 1		Level 2			Level 3		Total
Assets:
Commodity derivative instruments⁽¹⁾	—		211,421			—		211,421
Total assets	—		211,421			—		211,421

Liabilities:
Commodity derivative instruments⁽¹⁾	—		(168,963		)	—		(168,963		)
Total liabilities	—		(168,963		)	—		(168,963		)
Net asset	$	—	$	42,458		$	—	$	42,458




(1)	Includes deferred premiums to be settled upon expiration of the contract.

Financial Instruments Not Carried at Fair Value

The following table provides the fair value of financial instruments that are not recorded at fair value in the consolidated balance sheets (in thousands):



	December 31, 2019			December 31, 2018
	Carrying Amount		Fair Value	Carrying Amount		Fair Value
Long-term debt:
6.250% senior unsecured notes due 2024	$	400,000	417,028	$	400,000	$	394,144
5.375% senior unsecured notes due 2025	650,000		669,552	650,000		605,885
5.250% senior unsecured notes due 2025	450,000		464,697	450,000		424,980
5.625% senior unsecured notes due 2027	700,000		742,840	700,000		636,041
Revolving Credit Agreement	—		—	—		—

The fair values of the Notes were determined using the December 31, 2019 quoted market price, a Level 1 classification in the fair value hierarchy. The book value of the Revolving Credit Agreement approximates its fair value as the interest rate is variable. As of December 31, 2019, there were no indicators for change in the Company’s market spread.

- 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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