Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Fair Value Measurements [Abstract]

Fair Value Measurements

(7) Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy with three levels based on the reliability of the inputs used to determine fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets and liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of June 30, 2013 and December 31, 2012, we held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis, primarily our commodity derivative instruments. The fair values of our derivative instruments were measured according to the market approach or, if necessary, the income approach using price inputs published by NYMEX and IntercontinentalExchange, Inc., or ICE. These price inputs include settled exchange prices and quoted prices for assets and liabilities similar to those held by us and meet the definition of Level 2 inputs within the fair value hierarchy.

In December 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 requires disclosure of information about offsetting and related arrangements to enable users of financial statements to understand the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. In January 2013, the FASB issued ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” to clarify that ASU 2011-11 applies to derivatives, repurchase agreements and securities lending transactions.  Our commodity derivative instruments are subject to the terms of agreements with each of our counterparties that provide for the liquidation and settlement of all transactions with that counterparty in the event of default or termination.  Our counterparties under these agreements are participants in our Senior Credit Facility.  Although our derivative instruments are subject to such enforceable set-off arrangements, we do not elect to offset amounts reported in our condensed consolidated balance sheet.

The following table presents the fair values of our commodity derivative instruments at their gross amounts and reflects the impact of our set-off arrangements which qualify for net presentation.

	June 30,		December 31,
	2013		2012
Fair value of commodity derivative instruments:	(in thousands)
Assets:
Current	$	10,758	$	3,302
Noncurrent		7,600		211
Total gross fair value		18,358		3,513
Less: counterparty set-off		(1,208)		(3,513)
Total net fair value		17,150		-
Liabilities:
Current	$	1,208	$	10,026
Noncurrent		-		3,637
Total gross fair value		1,208		13,663
Less: counterparty set-off		(1,208)		(3,513)
Total net fair value		-		10,150

The carrying values reported in the condensed consolidated balance sheet for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short term maturities of these instruments.  The fair value of the 8.25% Senior Notes is based on quoted prices, which are Level 1 inputs within the fair value hierarchy.  The carrying value of the Senior Credit Facility approximates its fair value because the interest rates are variable and reflective of market rates, which are Level 2 inputs within the fair value hierarchy.

The following table sets forth the carrying values and estimated fair values of our long-term indebtedness.

	June 30, 2013					December 31, 2012
	(In thousands)
		Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
8.25% Senior Notes	$	496,106	$	525,300	$	494,911	$	524,600
Senior Credit Facility		165,000		165,000		195,000		195,000
Total	$	661,106	$	690,300	$	689,911	$	719,600

Effective June 1, 2013, we entered into agreements with a group of capital market participants (the “Counterparties”) whereby if a named wind storm occurs in a specified area of the Gulf of Mexico and that storm meets certain strength criteria and one or more scheduled assets within that specified area are deemed totally destroyed, then the Counterparties will pay to us a fixed amount of cash proceeds specific for each such destroyed asset. These agreements are financial instruments and are considered weather derivatives under the applicable authoritative guidance related to financial instruments. We recognized the premiums paid as current assets, which we are amortizing to expense over the terms of the agreements. At June 30, 2013, we estimate that the fair value of these financial instruments approximates the carrying amount of approximately $6.7 million, based on the amount of premiums paid, which is a Level 3 input within the fair value hierarchy.

We evaluate our capitalized costs of proved oil and natural gas properties for potential impairment when circumstances indicate that the carrying values may not be recoverable. Our assessment of possible impairment of proved oil and natural gas properties is based on our best estimate of future prices, costs and expected net future cash flows by property (generally analogous to a field or lease). An impairment loss is indicated if undiscounted net future cash flows are less than the carrying value of a property. The impairment expense is measured as the shortfall between the net book value of the property and its estimated fair value, which is measured based on the discounted net future cash flows from the property. The inputs used to estimate the fair value of our oil and natural gas properties are based on our estimates of future events, including projections of future oil and natural gas sales prices, amounts of recoverable oil and natural gas reserves, timing of future production, future costs to develop and produce our oil and natural gas and discount factors. These inputs meet the definition of Level 3 inputs within the fair value hierarchy.  Impairments for the three and six months ended June 30, 2013 were primarily related to reservoir performance at a gas well in one of our smaller producing fields. This field was determined to have future net cash flows less than its carrying value resulting in the write down of this property to its estimated fair value at June 30, 2013. Impairments for the three and six months ended June 30, 2012 were primarily due to the decline in our estimate of future natural gas prices affecting certain of our natural gas producing fields and to reservoir performance of one of our natural gas producing fields.

As addressed in Note 2, “Acquisitions and Dispositions,” we apply fair value concepts in estimating and allocating the fair value of assets acquired and liabilities assumed in acquisitions in accordance with purchase accounting for business combinations. The inputs to the estimated fair values of assets acquired and liabilities assumed are described in Note 2.