Fair Value Measurements

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.

Assets and liabilities measured at fair value on a recurring basis

The following table presents Lonestar's assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2019 and 2018:



	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, 2019
Assets:
Commodity derivatives	$	—		$	6,849		$	—		$	6,849
Liabilities:
Commodity derivatives	—			(10,462		)	—			(10,462		)
Warrants	—			—			(364		)	(364		)
Stock-based compensation	(1,792		)	—			(573		)	(2,365		)
Total	$	(1,792	)	$	(3,613	)	$	(937	)	$	(6,342	)

December 31, 2018
Assets:
Commodity derivatives	$	—		$	23,143		$	—		$	23,143
Liabilities:
Commodity derivatives	—			(451		)	—			(451		)
Warrants	—			—			(1,055		)	(1,055		)
Stock-based compensation	(1,267		)	—			(636		)	(1,903		)
Total	$	(1,267	)	$	22,692		$	(1,691	)	$	19,734

Commodity Derivatives

The Company's commodity derivatives represent non-exchange-traded oil and natural gas fixed-price swaps that are based on NYMEX pricing and fixed-price basis swaps that are based on regional pricing other than NYMEX (e.g., Louisiana Light Sweet). The asset and liability measurements for the Company's commodity derivative contracts represent Level 2 inputs in the hierarchy, as they are valued based on observable inputs other than quoted prices.

Warrants

The fair value of the Company's warrants is based on Black-Scholes valuations. In addition to the Company's observable stock price, other significant inputs are considered unobservable, and the Company has designated these estimates as Level 3.

Stock-Based Compensation

The Company's stock-based compensation includes the liability associated with restricted stock units ("RSUs") and stock appreciation rights ("SARs") dependent on the fair value of Lonestar's publicly-traded common stock. The fair value of RSUs is measured based on measurable prices on a major exchange; the significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs. The Black-Scholes model used to determine the fair value of the SARs uses inputs, in addition to the Company's observable stock price, that are considered unobservable; to this end the Company has designated these estimates as Level 3. See Note 12. Stock-Based Compensation below for more information.

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 year ended December 31, 2019.



In thousands	Warrant			Stock-Based Compensation			Total
Balance at December 31, 2018	$	(1,055	)	$	(636	)	$	(1,691	)
Unrealized gains	691			63			754
Balance at December 31, 2019	$	(364	)	$	(573	)	$	(937	)

Assets and liabilities measured at fair value on a nonrecurring basis

Non-recurring fair value measurements include certain non-financial 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 debt or 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.

Other fair value measurements

The book values of cash and cash equivalents, accounts receivable 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 11.25% Senior Notes (as defined in Note 9. Long-Term Debt below) was approximately $173 million as of December 31, 2019, and are considered a Level 3 liability, as they are based on market transactions that occur infrequently as well as internally generated inputs.