Assets and Liabilities Measured at Fair Value

12 Months Ended

Dec. 31, 2019

Assets and Liabilities Measured at Fair Value

Fair Values – Recurring

The Company carries certain assets and liabilities at fair value in its Consolidated Balance Sheet. The fair value hierarchy is based on the quality of inputs used to measure fair value, with Level 1 being the highest quality and Level 3 being the lowest quality. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1. Level 3 inputs are unobservable inputs which reflect assumptions about pricing by market participants.

The fair value measurements for these assets and liabilities at December 31, 2019 and 2018 are presented in the following table



	December 31, 2019					December 31, 2018
(Thousands of dollars)	Level 1		Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Assets:
Commodity derivative contracts	$	—	—	—	—	—	3,837	—	3,837
	$	—	—	—	—	—	3,837	—	3,837

Liabilities:
Nonqualified employee savings plans	$	17,035	—	—	17,035	13,845	—	—	13,845
Commodity derivative contracts	—		33,364	—	33,364	—	—	—	—
Contingent consideration	—		—	146,787	146,787	—	—	47,730	47,730
	$	17,035	33,364	146,787	197,186	13,845	—	47,730	61,575

The nonqualified employee savings plan is an unfunded savings plan through which participants seek a return via phantom investments in equity securities and/or mutual funds. The fair value of this liability was based on quoted prices for these equity securities and mutual funds. The income effect of changes in the fair value of the nonqualified employee savings plan is recorded in Selling and general expenses in the Consolidated Statements of Operations.

The fair value of West Texas Intermediate (WTI) crude oil contracts in 2019 and 2018 was based on active market quotes for WTI crude oil. The income effect of changes in fair value of crude oil derivative contracts is recorded in Gain (loss) on crude contracts in the Consolidated Statements of Operations, while the effects of changes in fair value of foreign exchange derivative contracts is recorded in Interest and other income (loss).

The Company’s contingent consideration liabilities (with PAI and LLOG, as further described in Note D) are measured at fair value on a recurring basis and are categorized as Level 3 in the fair value hierarchy. The contingent consideration liabilities are valued using a Monte Carlo simulation model, which used the following assumptions as of December 31, 2019: (i) the remaining expected life of 3 years for LLOG and 6 years for PAI, (ii) West Texas Intermediate forward strip pricing with historical volatility of 30.0%, and (iii) a risk-free interest rate of 1.66%. The income effect of changes in the fair value of the contingent consideration is recorded in Other (income) expense in the Consolidated Statements of Operations.

The Company offsets certain assets and liabilities related to derivative contracts when the legal right of offset exists. There were no offsetting positions recorded at December 31, 2019 and 2018.

The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at December 31, 2019 and 2018. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The table excludes cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses, all of which had fair values approximating carrying amounts. The fair value of current and long-term debt was estimated based on rates offered to the Company at that time for debt of the same

maturities. The Company has off-balance sheet exposures relating to certain letters of credit. The fair value of these, which represents fees associated with obtaining the instruments, was nominal.



	December 31,
	2019					2018
(Thousands of dollars)	Carrying Amount			Fair Value		Carrying Amount		Fair Value
Financial assets (liabilities):
Current and long-term debt	$	(2,803,381	)	(3,074,929	)	(3,109,986	)	(2,899,912	)

Fair Values – Nonrecurring

In 2018, as a result of our assessment of market value and our expected recoverable value of select Midland properties in the U.S., the Company recognized a pretax noncash impairment charge of $20.0 million.

The fair values were determined by internal discounted cash flow models using estimates of future production, prices from futures exchanges, costs and a discount rate believed to be consistent with those used by principal market participants in the applicable region.

The fair value information associated with these impaired properties is presented in the following table

Year Ended December 31, 2018

Net Book

Value

Prior to

Impairment

Total

Pretax

Impairment

Fair Value

(Thousands of dollars)

Level 1

Level 2

Level 3

Assets:

Impaired proved properties

United States Midland

—

37,690

57,690

20,000