Fair Value Measurements

12 Months Ended

Dec. 31, 2020

FAIR VALUE MEASUREMENTS

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 that are 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 determine the valuation technique we use to measure the fair values presented in our financial instruments.

The following tables set forth our recurring fair value measurements:


	Successor
	December 31, 2020
	Level 2		Level 3		Effect of Netting		Total
	(In thousands)
Financial assets (liabilities):
Commodity derivatives:
Assets	$	3,436	$	—	$	(3,436)	$	—
Liabilities	(9,142)		—		3,436		(5,706)
	$	(5,706)	$	—	$	—	$	(5,706)


	Predecessor
	December 31, 2019
	Level 2		Level 3		Effect of Netting		Total
	(In thousands)
Financial assets (liabilities):
Commodity derivatives:
Assets	$	177	$	1,204	$	(748)	$	633
Liabilities	(775)		—		748		(27)
	$	(598)	$	1,204	$	—	$	606

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 any cash collateral with our counterparties and no collateral has been posted as of December 31, 2020.

The following methods and assumptions were used 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 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 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 tables are reconciliations of our recurring level 3 fair value measurements:


	Net Derivatives
	Successor		Predecessor
	Period September 1, 2020 through December 31, 2020		Period January 1, 2020 through August 31, 2020		For the Year Ended December 31, 2019

	(In thousands)
Beginning of period	$	—	$	1,204	$	10,630
Total gains or losses:
Included in earnings	—		978		(1,494)
Settlements	—		(2,182)		(7,932)
End of period	$	—	$	—	$	1,204
Total gains (losses) for the period included in earnings attributable to the change in unrealized loss relating to assets still held at end of period	$	—	$	(1,204)	$	(9,426)

Based on our valuation at December 31, 2020, we determined that the non-performance risk regarding our counterparties was immaterial.

Fair Value of Other Financial Instruments

We have determined the estimated fair values of other financial instruments 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 December 31, 2020, the carrying values on the Consolidated Balance Sheets for cash, restricted 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.

The Warrants are accounted for as a derivative liability as they are not indexed to the New Common Stock until all outstanding disputed claims against the company and UPC have been finally resolved and the strike price for the Warrants can be determined. Accordingly, the Warrants are recorded at their fair value using the Black-Scholes-Merton option model. The inputs to the model require various judgements, including estimating the strike price, expected term and the associated volatility. The Warrants are adjusted to fair value at each reporting period until determined to be an equity instrument, at which time they will be reported as shareholders' equity and no longer be subject to future fair value adjustment. At December 31, 2020, the Warrants have a fair value of $0.9 million. The Warrants are considered Level 3 fair value measurements.

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 agreements at December 31, 2020 would approximate its fair value. This debt is classified as Level 2.

The carrying amount of long-term debt, net of unamortized discount and debt issuance costs, associated with the Notes reported in the Consolidated Balance Sheets at December 31, 2019 was $646.7 million. On the Effective Date, our obligations with respect to the Notes were cancelled and holders of the Notes subsequently received their agreed on pro-rata share of New Common Stock. For further information, please see Note 2 – Emergence From Voluntary Reorganization Under Chapter 11. The estimated fair value of these Notes using quoted market prices at December 31, 2019 was $357.5 million. These Notes were 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 10 – Asset Retirement Obligations.

Non-recurring fair value measurements are also applied, when applicable, to determine the fair value of our long-lived assets and goodwill. During 2020 and 2019, we recorded non-cash impairment charges discussed further in Note 4 – Summary Of Significant Accounting Policies. The valuation of these assets requires the use of significant unobservable inputs classified as Level 3.

See Note 3 - Fresh Start Accounting for additional disclosures of non-recurring fair value measurements associated with the qualification of fresh start under ASC 852.