Fair Value Measurements

9 Months Ended

Sep. 30, 2017

Fair Value Disclosures [Abstract]

Fair Value Measurements

6. Fair Value Measurements

Non-recurring fair value measurements include certain nonfinancial assets and liabilities as may be acquired in a business combination and thereby measured at fair value; impaired oil and natural gas property assessments; warrants issued in equity offerings and the initial recognition of asset retirement obligations for which fair value is used. These estimates are derived from historical costs as well as management’s expectation of future cost environments. As there is no corroborating market activity to support the assumptions used, the Company has designated these estimates as Level 3.

In accordance with ASC 820, Fair Value Measurements and Disclosures, fair value measurements are 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. ASC 820 prioritizes the inputs used in measuring fair value into the following fair value hierarchy:

Level 1 – Quoted prices for identical assets or liabilities in active markets.

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs for the asset or liability. The fair value input hierarchy level to which an asset or liability measurement falls in its entirety is determined based on the lowest level input that is significant to the measurement in its entirety.

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, for each fair value hierarchy level:

	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total
September 30, 2017 (Unaudited)	(In thousands)
Assets:
Commodity derivatives	$	—	$	3,894		$	—		$	3,894
Liabilities:
Commodity derivatives		—		(4,663	)		—			(4,663	)
Equity warrant liability		—		—			(439	)		(439	)
Equity warrant liability - related parties		—		—			(834	)		(834	)
Stock appreciation rights		—		—			(189	)		(189	)
Total	$	—	$	(769	)	$	(1,462	)	$	(2,231	)
December 31, 2016	(In thousands)
Assets:
Commodity derivatives	$	—	$	1,730		$	—		$	1,730
Liabilities:
Commodity derivatives		—		(4,110	)		—			(4,110	)
Equity warrant liability		—		—			(1,565	)		(1,565	)
Equity warrant liability - related parties		—		—			(2,994	)		(2,994	)
Total	$	—	$	(2,380	)	$	(4,559	)	$	(6,939	)

  Level 3 Gains and Losses

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the nine months ended September 30, 2017, in thousands.

	Equity Warrant Liability			Stock Appreciation Rights			Total
	(Unaudited)
Balance at December 31, 2016	$	(4,559	)	$	—		$	(4,559	)
Purchases, sales, issuances and settlements (net)		—			(72	)		(72	)
Realized gains/(losses)		—			—			—
Unrealized gains/(losses)		3,286			(117	)		3,169
Balance at September 30, 2017	$	(1,273	)	$	(189	)	$	(1,462	)

The derivative asset and liability fair values reported in the consolidated balance sheets are as of the balance sheet date and subsequently change as a result of changes in commodity prices, market conditions and other factors. The Company typically has numerous hedge positions that span several time periods and often result in both derivative assets and liabilities with the same counterparty, which positions are all offset to a single derivative asset or liability in the consolidated balance sheets, including the deferred premiums associated with its hedge positions.

The book values of cash and cash equivalents, receivables for oil, NGL and natural gas sales, joint interest billings, notes and other receivables and accounts payable approximate fair value due to the short-term nature of these instruments. The carrying value of debt approximates fair value since it is subject to a short-term floating interest rate that approximates the rate available to the Company, except for bonds, which are recorded at amortized cost less debt issuance costs.  The fair value of the 8.750% Senior Notes (as defined in Note 9 below) approximates $148 million as of September 30, 2017, and the notes are considered a Level 3 liability, as they are based on market transactions that occur infrequently as well as internally generated inputs.