FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Energen classifies the fair value of multiple derivative instruments executed under master netting arrangements as net derivative assets and liabilities. The following fair value hierarchy tables present information about Energen’s assets and liabilities measured at fair value on a recurring basis:



	December 31, 2017
(in thousands)	Level 2			Level 3			Total
Liabilities
Derivative instruments	$	43,241		$	28,138		$	71,379
Noncurrent derivative instruments	7,736			1,150			8,886
Total liabilities	50,977			29,288			80,265
Net derivative liability	$	(50,977	)	$	(29,288	)	$	(80,265	)



	December 31, 2016
(in thousands)	Level 2			Level 3			Total
Assets
Derivative instruments	$	50		$	—		$	50
Total assets	50			—			50
Liabilities
Derivative instruments	57,927			7,540			65,467
Noncurrent derivative instruments	1,694			1,312			3,006
Total liabilities	59,621			8,852			68,473
Net derivative liability	$	(59,571	)	$	(8,852	)	$	(68,423	)

Energen prepared a sensitivity analysis to evaluate the hypothetical effect that changes in the prices used to estimate fair value would have on the fair value of its Level 3 instruments. We estimate that a 10 percent increase or decrease in commodity prices would result in an approximate $9.2 million change in the fair value of open Level 3 derivative contracts and to our results of operations.

The table below sets forth a summary of changes in the fair value of Energen’s Level 3 derivative commodity instruments as follows:



Years ended December 31, (in thousands)	2017			2016			2015
Balance at beginning of period	$	(8,852	)	$	(16,059	)	$	24,436
Realized gains (losses)	(10,121		)	(14,120		)	13,145
Unrealized gains (losses) relating to instruments held at the reporting date*	(19,027		)	5,745			(40,495		)
Settlements during period	8,712			14,120			(13,145		)
Transfer out of Level 3	—			1,462			—
Balance at end of period	$	(29,288	)	$	(8,852	)	$	(16,059	)

*Includes losses of $26.6 million, $8.9 million and $16.1 million related to open contracts held at the reporting date for the years ended December 31, 2017, 2016 and 2015, respectively.

Changes in Fair Value Levels: The availability of observable market data is monitored to assess the appropriate classification for financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. For the years ended December 31, 2017, 2016 and 2015, except for the transfer out of Level 3 noted below, there were no significant transfers in or out of Levels 1, 2, or 3.

Transfer of Gas Basin Specific Contracts and Gas Basis Contracts: During 2016 the Company determined that its gas basin specific contracts and gas basis contracts met the requirements to be categorized as a Level 2 fair value. The transfer of these assets out of Level 3 was primarily the result of increased price observability of the inputs used in assessing the assets’ fair value throughout the full term of the derivatives.

The tables below set forth quantitative information about Energen’s Level 3 fair value measurements of derivative commodity instruments as follows:



(in thousands, except price data)	Fair Value as of December 31, 2017			Valuation Technique*	Unobservable Input*	Range
Oil Basis - WTI/WTI
2018	$	(11,374	)	Discounted Cash Flow	Forward Basis	($0.03) - $0.11 Bbl
2019	$	(626	)	Discounted Cash Flow	Forward Basis	($0.36) - ($0.24) Bbl
Natural Gas Liquids
2018	$	(16,764	)	Discounted Cash Flow	Forward Basis	$0.74 - $0.78 Gal
2019	(524		)	Discounted Cash Flow	Forward Basis	$0.68 Gal

*Discounted cash flow represents an income approach in calculating fair value including the referenced unobservable input and a discount reflecting credit quality of the counterparty.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are reported at fair value on a nonrecurring basis in Energen’s consolidated balance sheets. The following methods and assumptions were used to estimate the fair values of these assets and liabilities.

Asset retirement obligations: Energen’s asset retirement obligations (ARO) primarily relate to the future plugging, abandonment and reclamation of wells and facilities. We recognize a liability for the fair value of the ARO in the periods incurred. See Note 13, Asset Retirement Obligations, for further discussion related to these ARO’s. These assumptions are classified as Level 3 fair value measurements.

Asset Impairments: We monitor our oil and natural gas properties as well as the market and business environments in which we operate and make assessments about events that could result in potential impairment. Such potential events may include, but are not limited to, commodity price declines, unanticipated increased operating costs, and lower than expected field production performance. If a material event occurs, Energen makes an estimate of undiscounted future cash flows to determine whether the asset is impaired. If the asset is impaired, we will record an impairment loss for the difference between the net book value of the properties and the fair value of the properties. The fair value of the properties typically is estimated using discounted cash flows and values derived from purchase and sale agreements and similar support as applicable. Cash flow and fair value estimates require Energen to make projections and assumptions for pricing, demand, competition, operating costs, legal and regulatory issues, discount rates and other factors for many years into the future.

These assumptions are classified as Level 3 fair value measurements. See Note 14, Asset Impairment, for impairments recognized by Energen during the years ended December 31, 2017, 2016 and 2015.

Financial Instruments Not Carried at Fair Value

The stated value of cash and cash equivalents, short-term investments, accounts receivables (net of allowance for doubtful accounts), and short-term debt approximates fair value due to the short maturity of the instruments. Short-term investments purchased and sold during 2015 of $919 million are not considered readily convertible into cash and accordingly are not classified in cash and cash equivalents. In addition, the Company also invested in certain short-term investments that qualify and were classified as cash and cash equivalents. The fair value of Energen’s long-term debt, including the current portion and notes payable to banks, approximates $798.9 million and $559.9 million and has a carrying value of $785.0 million and $554.0 million at December 31, 2017 and 2016, respectively. The fair values are based on market prices of similar issues having the same remaining maturities, redemption terms and credit rating. Short-term debt is classified as Level 1 fair value and long-term debt is classified as Level 2 fair value measurements.

Concentration of Credit Risk

Revenues and related accounts receivable from oil and natural gas operations primarily are generated from the sale of produced oil, natural gas liquids and natural gas to energy marketing companies. Such sales are typically made on an unsecured credit basis with payment due the month following delivery. This concentration of sales to the energy marketing industry has the potential to affect Energen’s overall exposure to credit risk, either positively or negatively, in that our oil, natural gas liquids and natural gas purchasers may be affected similarly by changes in economic, industry or other conditions. Energen considers the credit quality of its purchasers and, in certain instances, may require credit assurances such as a deposit, letter of credit or parent guarantee. The two largest purchasers of Energen’s oil, natural gas liquids and natural gas, Plains Marketing, LP (Plains) and Shell Trading (US) Company (Shell), accounted for approximately 50 percent and 18 percent, respectively, of Energen’s accounts receivable for commodity sales as of December 31, 2017. Energen’s other purchasers each accounted for less than 7 percent of these accounts receivable as of December 31, 2017. During the year ended December 31, 2017, Plains and Shell accounted for approximately 56 percent and 13 percent, respectively, of total revenues from oil, natural gas liquids and natural gas sales. All other oil and natural gas purchasers each accounted for less than 10 percent of total revenues for the year ended December 31, 2017.