Fair Value Measurements

Financial Instruments

The financial instruments measured at fair value on a recurring basis consist of the following:



	December 31,			December 31,
	2019			2018
	(In thousands)
Derivative assets
Derivative assets - current	$	10,340		$	30,819
Derivative assets - non-current	33,105			58,314
Total derivative assets	43,445			89,133

Derivative liabilities
Derivative liabilities - current	(4,016		)	—
Derivative liabilities - non-current	(1,300		)	(696		)
Total derivative liabilities	(5,316		)	(696		)

Total derivative assets, net	$	38,129		$	88,437

Derivative assets and liabilities primarily represent unsettled amounts related to commodity derivative positions, including swaps, options, and interest rate swaps. Derivative liabilities also include the Series B Preferred Stock bifurcated derivative for the various redemption amounts that the Company could incur if a change of control event occurs. The Company utilizes Level 3 assumptions to estimate the probability of a change of control occurring and when that would occur as the timing impacts the Base Return Amount as defined in Note 12 - 10% Series B Redeemable Preferred Stock.

The tables below, set forth by level within the fair value hierarchy, represent the net components of the assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2019 and 2018.



	December 31, 2019
	Level 1		Level 2			Level 3			Total
	(In thousands)
Derivative assets
Commodity derivative assets - current	$	—	$	10,340		$	—		$	10,340
Commodity derivative assets - non-current	—		33,105			—			33,105
Total derivative assets	$	—	$	43,445		$	—		$	43,445

Derivative liabilities
Commodity derivative liabilities - current	$	—	$	(3,842	)	$	—		$	(3,842	)
Commodity derivative liabilities - non-current	—		(392		)	—			(392		)
Interest rate swaps - current	—		(174		)	—			$	(174	)
Interest rate swaps - non-current	—		(492		)	—			(492		)
Series B Preferred Stock bifurcated derivative - non-current	—		—			(416		)	(416		)
Total derivative liabilities	$	—	$	(4,900	)	$	(416	)	$	(5,316	)



	December 31, 2018
	Level 1		Level 2		Level 3			Total
	(In thousands)
Derivative assets
Commodity derivative assets - current	$	—	$	30,819	$	—		$	30,819
Commodity derivative assets - non-current	—		58,314		—			58,314
Total derivative assets	$	—	$	89,133	$	—		$	89,133

Derivative liabilities
Series B Preferred Stock bifurcated derivative - non-current	$	—	$	—	$	(696	)	$	(696	)
Total derivative liabilities	$	—	$	—	$	(696	)	$	(696	)

The table below sets forth a summary of changes in the fair value of the Company’s level 3 derivatives for the year ended December 31, 2019.



Balance at December 31, 2018	$	696
Gains reported in earnings	(280		)
Balance at December 31, 2019	$	416

The carrying amounts of the Company’s cash, cash equivalents, accounts receivable and accounts payable approximate their fair values because of the short-term maturities or liquid nature of these assets and liabilities. The Company’s revolving credit facility carrying value is representative of its fair value because the interest rate changes monthly based on the current market of the stated rates in the agreement. As of December 31, 2019 and December 31, 2018, the fair value of the 10% Senior Secured Second Lien Notes (the “Second Lien Notes”) was approximately $98.5 million and $95.2 million, respectively, which was determined using quoted prices for similar instruments, a Level 2 classification in the fair value hierarchy.

Non-Financial Assets and Liabilities

Non-financial assets and liabilities that are initially measured at fair value are comprised of asset retirement obligations, impairments, and stock-based compensation.

The initial measurement of ARO at fair value is calculated using discounted cash flow techniques and is based on internal estimates of future retirement costs associated with property and equipment. Significant Level 3 inputs used in the calculation of ARO include plugging costs and reserve lives.

If the carrying amount of oil and natural gas properties exceeds the estimated undiscounted future cash flows, the carrying amount of the oil and natural gas properties will be adjusted to their fair value. The fair value of oil and natural gas properties is determined using valuation techniques consistent with the income and market approach. The factors used to determine fair value are subject to management’s judgment and expertise and include, but are not limited to, (i) recent sales prices of comparable properties; (ii) the present value of future cash flows, net of estimated operating and development costs using estimates of proved oil and natural gas reserves; (iii) future commodity prices; (iv) future production estimates; (v) anticipated capital expenditures; and (vi) various discount rates commensurate with the risk and current market conditions associated with the projected cash flows. These assumptions represent “Level 3” inputs.

The Company measures stock-based compensation based on the fair value of the award on the date of grant. The fair value of the Company’s restricted stock, stock-settled time-based restricted stock units and cash-settled time-based restricted stock units are based on the Company’s trading stock price on the date of grant, which is a Level 1 input. The fair value of the Company’s market based performance share units is calculated using a Monte Carlo valuation model which performs an iterative run of likely outcomes of the performance metric based on assumptions such as expected volatility, correlation of coefficients, risk-free rates and expected dividend yields. These assumptions represent “Level 3” inputs.