The inputs available determine the valuation technique that we use to measure the fair value of the assets and liabilities presented in our consolidated financial statements. Fair value measurements are categorized into one of three different levels depending on the observability of the inputs used in the measurement. The levels are summarized as follows:

•Level 2—other observable pricing inputs, such as quoted prices in inactive markets, or other inputs that are either directly or indirectly observable as of the reporting date, including inputs that are derived 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 or estimates about how market participants would value such assets and liabilities.


	Balances as of December 31, 2022
	Level 1		Level 2		Level 3		Total
	(In thousands)
Financial liabilities:

Commodity derivative liabilities	$	—	$	23,566	$	—	$	23,566
Warrant liability	—		—		—		—
	$	—	$	23,566	$	—	$	23,566


	Balances as of December 31, 2021
	Level 1		Level 2		Level 3		Total
	(In thousands)
Financial liabilities:

Commodity derivative liabilities	—		58,731		—		58,731
Warrant liability	—		—		19,822		19,822
	$	—	$	58,731	$	19,822	$	78,553

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).

Commodity Derivatives. We measure the fair values of our crude oil and natural gas swaps and collars using estimated discounted cash flow calculations based on the NYMEX futures index. We consider these Level 2 measurements within the fair value hierarchy as the inputs in the model are substantially observable over the term of the commodity derivative contract and there is a wide availability of quoted market prices for similar commodity derivative contracts.

We determined that the non-performance risk regarding our commodity derivative counterparties was immaterial based on our valuation at December 31, 2022.

Warrant Liability. We used the Black-Scholes option pricing model to measure the fair value of the warrants. Key inputs for the Black-Scholes model include the stock price, exercise price, expected term, risk-free rate, volatility, and dividend yield. We consider this a Level 3 measurement within the fair value hierarchy as estimated volatility is generally unobservable and requires management's estimation.

The following table presents the activity of our recurring Level 3 fair value measurements during the periods presented:


	Year Ended December 31,
	2022		2021
	(In thousands)
Beginning of period	$	19,822	$	885

Loss on change in warrant liability	29,323		18,937

Reclassification of warrant liability to capital in excess of par value	(49,145)		—
End of period	$	—	$	19,822

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.

The carrying values on the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, other current assets, and current liabilities approximate their fair values 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 agreements at December 31, 2022 would approximate its fair value. This debt is classified as Level 2.

ARO. The initial measurement of ARO at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with property and equipment. Significant Level 3 inputs used in the calculation of AROs include plugging costs and remaining reserve lives. A summary of the Company’s ARO activity is presented in Note 10 – Asset Retirement Obligations.

Stock-Based Compensation. We use the Black-Scholes option pricing model to estimate the fair value of stock options and SARs while the value of our restricted stock grants is based on the grant date closing stock price. Key assumptions for the Black-Scholes models include the stock price, exercise price, expected term, risk-free rate, volatility, and dividend yield. We consider this a Level 3 measurement within the fair value hierarchy as estimated volatility and expected term are generally unobservable and requires management's estimation.