5. Fair Value Measurements

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.

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.

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

	Fair Value Measurements Using
In thousands	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total
December 31, 2017
Assets:
Commodity derivatives	$	—	$	472		$	—		$	472
Liabilities:
Commodity derivatives		—		(22,138	)		—			(22,138	)
Equity warrant liability		—		—			(508	)		(508	)
Equity warrant liability - related parties		—		—			(963	)		(963	)
Stock appreciation rights		—		—			(314	)		(314	)
Total	$	—	$	(21,666	)	$	(1,785	)	$	(23,451	)

December 31, 2016
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 liability for the year ended December 31, 2017.

In thousands	Equity Warrant Liability			Stock Appreciation Rights			Total
Balance at December 31, 2016	$	(4,559	)	$	—		$	(4,559	)
Purchases, sales, issuances and settlements (net)		—			(72	)		(72	)
Unrealized gains/(losses)		3,088			(242	)		2,846
Balance at December 31, 2017	$	(1,471	)	$	(314	)	$	(1,785	)

Long-Lived Assets

Due to declines in commodity prices and estimated reserves over the last three years, there were indications that the carrying value of certain oil and natural gas properties may be impaired and undiscounted future cash flows attributed to these assets indicated their carrying amounts were not expected to be recovered. Their fair value was measured using an income approach based upon internal estimates of future production levels, prices, drilling and operating costs and discount rates, which are Level 3 inputs. We also considered the potential sale of certain of these properties. During 2017, we impaired $4.8 million of proved undeveloped leasehold costs in Wilson County. During 2016, we impaired $21.1 million of proved undeveloped leasehold costs in Texas, in connection with the sale of the Company’s conventional oil and natural gas assets.

Other Fair Value Measurements

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 $158.9 million as of December 31, 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. The Company’s other Level 3 financial liabilities measured at fair value consist of the warrant liability as of December 31, 2017. Significant unobservable inputs used in the fair value measurement of the warrants include the estimated term. Significant decreases in the estimated remaining period to exercise would result in a significantly lower fair value measurement.