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.

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 cash flows is less than the carrying amount of the assets. If the estimated undiscounted future 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.

Proved Oil and Natural Gas Properties. Proved oil and natural gas properties are reviewed for impairment periodically or when events and circumstances indicate a possible decline in the recoverability of the carrying amount of such property. The Company estimates the expected future cash flows of our oil and natural gas properties and compares the undiscounted cash flows to the carrying amount of the oil and natural gas properties,

The key assumptions used to determine expected undiscounted future cash flows include, but are not limited to, future commodity prices, future price differentials, future production estimates, estimated future capital expenditures and estimated future operating expenses. As discussed in Note 1—Organization and Nature of Operations—Recent Events, the recent decline in commodity prices in addition to the ongoing effects of COVID-19 have impacted, among other things, our operations, future development plans and expected future cash flows. As a result of these impacts, the carrying amount of certain of the Company’s proved oil and natural gas properties exceeded their expected undiscounted future cash flows.

The Company evaluates future commodity pricing for oil and NGLs based on five-year NYMEX WTI futures prices and future commodity pricing for natural gas based on five-year NYMEX Henry Hub futures prices, each of which decreased from March 31, 2019 to March 31, 2020. The estimated decrease in value of undiscounted future cash flows from March 31, 2019 to March 31, 2020 is primarily due to decreased commodity prices.

It is reasonably possible that the estimate of undiscounted future cash flows may change in the future, resulting in the need to further 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.

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 in combination with other public sources (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.

The Company estimated the fair value of the applicable asset group by discounting the estimated future cash flows using discount rates and other assumptions that market participants would use in their estimates of fair value. At March 31, 2020, the Company’s estimates of commodity prices for purposes of determining discounted future cash flows ranged from oil prices of $29.02 per barrel in 2020 to $57.22 per barrel in 2028. Natural gas prices ranged from $2.03 per Mcf in 2020 to $3.04 per Mcf in 2028. Pricing subsequent to 2028 was escalated based on a 2% inflation factor. These prices were then adjusted for location and quality differentials. The expected future cash flows were discounted using a rate of 11%, which the Company believes is a market-based weighted average cost of capital for industry peers deemed appropriate at the time of the valuation for this analysis. As a result, the Company recognized non-cash impairment charges during the three months ended March 31, 2020 of $4.4 billion. Of this amount $3.1 billion and $1.3 billion were attributable to properties in the Company’s Midland and Delaware Basin areas, respectively. No such charges were recorded during the three months ended March 31, 2019.

Unproved Oil and Natural Gas Properties. Unproved oil and natural gas properties are assessed periodically 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 lease terms, as well as its ability to enter into leasehold exchange transactions that allow for higher concentrations of ownership and development. The Company recognizes leasehold abandonment expense for unproved properties at the earlier of the time when the lease term has expired, the continuous development clause has expired or management estimates the lease will expire before it is drilled, sold or traded. As a result of the recent significant commodity price decline and the ongoing effects of COVID-19, as discussed in Note 1 —Organization and Nature of Operations —Recent Events, the Company has reduced its development activity plans for 2020 and begun proactively shutting-in certain vertical wells with modest production spanning multiple counties. The acreage held by these wells is identified as unproved property, held by production (“HBP”) and the production from these wells has generally met the associated lease requirements.

ended March 31, 2020, the Company recorded $531.1 million of leasehold abandonment and impairment charges associated with the probable loss of HBP operated and non-operated acreage due to shutting-in vertical wells with modest production or because the Company believes the applicable operator has no current plans to drill or extend the applicable leases prior to their expiration. Additionally, during the three months ended March 31, 2020, the Company recorded non-cash leasehold abandonment and impairment charges of $13.0 million relating to acreage expiring in future years and $12.4 million associated with leases expiring during the current year, in each case because it has no current plans to drill or extend the leases prior to their expiration. Leasehold abandonment and impairment of unproved oil and natural gas properties is recorded in Exploration and abandonment costs in the Company’s condensed consolidated statements of operations. The Company recognized total leasehold abandonment and impairment charges of $556.5 million and $22.2 million relating to our unproved oil and natural gas properties during the three months ended March 31, 2020 and 2019, respectively.

Other Property, Plant and Equipment. During the three months ended March 31, 2020, the Company recognized an impairment of $0.1 million to reduce the carrying value of leasehold improvements associated with certain office space that is no longer being used by the Company and therefore will no longer provide any economic benefit to the Company. The impairment charges are included in Other operating income in the Company’s condensed consolidated statements of operations. There were no such charges incurred during the three months ended March 31, 2019.

Materials and Supplies. During the three months ended March 31, 2020, the Company recognized a valuation adjustment of $3.4 million primarily to reduce the carrying value of assets. The Company recorded no such adjustments recognized during three months ended March 31, 2019. The Company estimates the fair value of these assets using significant Level 2 assumptions based on third-party price quotes for the assets in an active market. The charges are included in Other (expense) income in the Company’s condensed consolidated statements of operations.

Commodity derivative contracts are marked-to-market each quarter and are thus stated at fair value in the Company’s condensed 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 because 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 table 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):


	March 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:

Commodity derivative instruments⁽¹⁾	$	—	$	624,766	$	—	$	624,766
Total assets	$	—	$	624,766	$	—	$	624,766

Liabilities:
Commodity derivative instruments⁽¹⁾	$	—	$	(210,087)	$	—	$	(210,087)
Total liabilities	$	—	$	(210,087)	$	—	$	(210,087)
Net asset	$	—	$	414,679	$	—	$	414,679


	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)


	March 31, 2020			December 31, 2019
	Carrying Amount	Fair Value	Carrying Amount	Fair Value




Long-term debt:
6.250% senior unsecured notes due 2024	—	—	400,000	417,028
5.375% senior unsecured notes due 2025	650,000	504,400	650,000	669,552
5.250% senior unsecured notes due 2025	450,000	347,198	450,000	464,697
5.875% senior unsecured notes due 2026	500,000	372,810	—	—
5.625% senior unsecured notes due 2027	700,000	495,502	700,000	742,840
4.125% senior unsecured notes due 2028	400,000	272,532	—	—
Revolving Credit Agreement	300,000	300,000	—	—

The fair values of the Notes were determined using the March 31, 2020 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 March 31, 2020, there are no indicators for change in the Company’s market spread.