FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2013

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

5. FAIR VALUE MEASUREMENTS

Certain of our assets and liabilities are reported at fair value in our consolidated balance sheets.  The following methods and assumptions were used to estimate the fair values for each class of financial instruments:

Cash and Cash Equivalents, Accounts Receivable and Accounts Payable.  The carrying amounts approximate fair value due to the short-term nature or maturity of the instruments.

Derivative Instruments.  Our derivative instruments typically consist from time to time of variable to fixed price commodity swaps, costless collars, put options and interest rate swaps.  The fair value measurement of our unrealized commodity price and interest rate instruments were obtained from financial institutions and were reviewed by management using our hedge agreements and future commodity and interest rate curves.  Differences between management’s calculation and that of the financial institutions were evaluated for reasonableness.  See Note 6 — “Derivative Instruments” for further information.

Impairments.  We review oil and gas properties for impairment when events and circumstances indicate a decline in the recoverability of the carrying value of such properties, such as a downward revision of the reserve estimates or lower commodity prices.  We estimate the future cash flows expected in connection with the properties and compare such future cash flows to the carrying amounts of the properties to determine if the carrying amounts are recoverable.  The factors used to determine fair value include, but are not limited to, estimates of proved, probable and possible reserves, future commodity prices, the timing of future production and capital expenditures and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and gas properties.  Because these significant fair value inputs are typically not observable, we classify impairments of long-lived assets as a level 3 fair value measurement.  See Note 7 — “Oil and Gas Properties” for further information.

Asset Retirement Obligations.  The initial measurement of asset retirement obligations (“AROs”) at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties.  The factors used to determine fair value include, but are not limited to, plugging costs and reserve lives.  Because these significant factors are typically not observable, we classify asset retirement obligations as a level 3 fair value measurement.  See Note 8 — “Asset Retirement Obligations” for further information.

Debt.  The fair value of floating-rate debt is estimated to be equivalent to the carrying amounts because the interest rates paid on such debt are set for periods of three months or less.  See Note 9 — “Debt” for further information.

Accounting guidance has established a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three levels.  The fair value hierarchy gives the highest priority to quoted market prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  Level 2 inputs are inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly.  There have been no transfers between Level 1, Level 2 or Level 3 during this quarter.

Fair value information related to our derivative instruments measured at fair value on a recurring basis was as follows at June 30, 2013:

	Total		Fair Value Measurements Using
	Carrying Value		Level 1		Level 2		Level 3
Derivatives
Commodity price contracts - assets	$	2,720,236	$	—	$	2,720,236	$	—

At June 30, 2013, we did not measure assets or liabilities at fair value on a non-recurring basis.

Fair value information related to our derivative instruments measured at fair value on a recurring basis was as follows at December 31, 2012:

	Total		Fair Value Measurements Using
	Carrying Value		Level 1		Level 2		Level 3
Derivatives
Commodity price contracts - assets	$	1,960,005	$	—	$	1,960,005	$	—