FAIR VALUE MEASUREMENTS

The estimated fair value of our available-for-sale securities, reflected on our Unaudited Condensed Consolidated Balance Sheets as Non-current other assets, is based on market quotes. The following is a summary of available-for-sale securities:



	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In thousands)
Equity Securities:
September 30, 2017	$	830	$	85	$	—	$	915
December 31, 2016	$	—	$	—	$	—	$	—

During the second quarter of 2017, we received available-for-sale securities for early termination fees associated with a long-term drilling contract. We will evaluate the marketable equity securities to determine if any decline in fair value below cost is other-than-temporary. If a decline in fair value below cost is determined to be other-than-temporary, an impairment charge will be recorded and a new cost basis established. We will review several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, (i) the length of time a security is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near-term prospects of the issuer, and (iv) our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants (in either case, an exit price). To estimate an exit price, a three-level hierarchy is used prioritizing the valuation techniques used to measure fair value into three levels with the highest priority given to Level 1 and the lowest priority given to Level 3. The levels are summarized as follows:


•	Level 1—unadjusted quoted prices in active markets for identical assets and liabilities.


•	Level 2—significant observable pricing inputs other than quoted prices included within level 1 either directly or indirectly observable as of the reporting date. Essentially, inputs (variables used in the pricing models) that are derived principally from or corroborated by observable market data.


•	Level 3—generally unobservable inputs which are developed based on the best information available and may include our own internal data.

The inputs available to us determine the valuation technique we use to measure the fair values of our financial instruments.

The following tables set forth our recurring fair value measurements:



	September 30, 2017
	Level 1		Level 2			Level 3			Effect of Netting			Net Amounts Presented
	(In thousands)
Financial assets (liabilities):
Commodity derivatives:
Assets	$	—	$	662		$	1,964		$	(1,562	)	$	1,064
Liabilities	—		(2,002		)	(478		)	1,562			(918		)
Total commodity derivatives	—		(1,340		)	1,486			—			146
Equity securities	915		—			—			—			915
	$	915	$	(1,340	)	$	1,486		$	—		$	1,061



	December 31, 2016
	Level 1		Level 2			Level 3			Effect of Netting			Net Amounts Presented
	(In thousands)
Financial assets (liabilities):
Commodity derivatives:
Assets	$	—	$	878		$	43		$	(544	)	$	377
Liabilities	—		(15,358		)	(7,165		)	544			(21,979		)
	$	—	$	(14,480	)	$	(7,122	)	$	—		$	(21,602	)

All our counterparties are subject to master netting arrangements. If a legal right of set-off exists, we net the value of the derivative transactions we have with the same counterparty. We are not required to post cash collateral with our counterparties and no collateral has been posted as of September 30, 2017.

We used the following methods and assumptions to estimate the fair values of the assets and liabilities in the table above. There were no transfers between Level 2 and Level 3 financial assets (liabilities).

Level 1 Fair Value Measurements

Equity Securities. We measure the fair values of our available for sale securities based on market quotes.

Level 2 Fair Value Measurements

Commodity Derivatives. We measure the fair values of our crude oil and natural gas swaps using estimated internal discounted cash flow calculations based on the NYMEX futures index.

Level 3 Fair Value Measurements

Commodity Derivatives. The fair values of our natural gas and crude oil collars and three-way collars are estimated using internal discounted cash flow calculations based on forward price curves, quotes obtained from brokers for contracts with similar terms, or quotes obtained from counterparties to the agreements.

The following table is a reconciliation of our level 3 fair value measurements:



	Net Derivatives
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
	(In thousands)
Beginning of period	$	4,093		$	(4,761	)	$	(7,122	)	$	9,094
Total gains or losses (realized and unrealized):
Included in earnings ⁽¹⁾	(2,015		)	3,077			9,102			(3,257		)
Settlements	(592		)	(443		)	(494		)	(7,964		)
End of period	$	1,486		$	(2,127	)	$	1,486		$	(2,127	)
Total gains (losses) for the period included in earnings attributable to the change in unrealized gain relating to assets still held at end of period	$	(2,607	)	$	2,634		$	8,608		$	(11,221	)

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(1)	Commodity derivatives are reported in the Unaudited Condensed Consolidated Statements of Operations in gain (loss) on derivatives.

The following table provides quantitative information about our Level 3 unobservable inputs at September 30, 2017:



Commodity ⁽¹⁾	Fair Value			Valuation Technique	Unobservable Input	Range
	(In thousands)
Oil three-way collars	$	(9	)	Discounted cash flow	Forward commodity price curve	($3.65) - $5.02
Natural gas collar	$	25		Discounted cash flow	Forward commodity price curve	($0.11) - $0.06
Natural gas three-way collars	$	1,470		Discounted cash flow	Forward commodity price curve	($0.34) - $0.54

_______________________


(1)	The commodity contracts detailed in this category include non-exchange-traded crude oil and natural gas collars and three-way collars that are valued based on NYMEX. The forward pricing range represents the low and high price expected to be paid or received within the settlement period.

Our valuation at September 30, 2017 reflected that the risk of non-performance by our counterparties was immaterial.

Fair Value of Other Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with accounting guidance for financial instruments. We have determined the estimated fair values by using available market information and valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

At September 30, 2017, the carrying values on the Unaudited Condensed Consolidated Balance Sheets for cash and cash equivalents (classified as Level 1), accounts receivable, accounts payable, other current assets, and current liabilities approximate their fair value because of their short-term nature.

Based on the borrowing rates currently available to us for credit agreement debt with similar terms and maturities and considering the risk of our non-performance, long-term debt under our credit agreement approximates its fair value and at September 30, 2017 and December 31, 2016 was $162.1 million and $160.8 million, respectively. This debt would be classified as Level 2.

The carrying amounts of long-term debt associated with the Notes, net of unamortized discount and debt issuance costs, reported in the Unaudited Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 were $641.7 million and $640.1 million, respectively. We estimate the fair value of the Notes using quoted marked prices at September 30, 2017 and December 31, 2016 was $654.6 million and $649.9 million, respectively. The Notes would be classified as Level 2.

Fair Value of Non-Financial Instruments

The initial measurement of AROs at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with property, plant, and equipment. Significant Level 3 inputs used in the calculation of AROs include plugging costs and remaining reserve lives. A reconciliation of the Company’s AROs is presented in Note 7 – Asset Retirement Obligations.