Note 11 – Fair Value Measurements

The Company follows fair value measurement accounting guidance for all assets and liabilities measured at fair value. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The fair value hierarchy for grouping these assets and liabilities is based on the significance level of the following inputs:


•	Level 1 – quoted prices in active markets for identical assets or liabilities


•	Level 2 – quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable


•	Level 3 – significant inputs to the valuation model are unobservable

The following table is a listing of the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they are classified within the fair value hierarchy as of December 31, 2016:



	Level 1		Level 2		Level 3
	(in thousands)
Assets:
Derivatives ⁽¹⁾	$	—	$	122,096	$	—
Total property and equipment, net ⁽²⁾	$	—	$	—	$	88,205
Liabilities:
Derivatives⁽¹⁾	$	—	$	213,804	$	—
Net Profits Plan ⁽¹⁾	$	—	$	—	$	411

____________________________________________


⁽¹⁾	This represents a financial asset or liability that is measured at fair value on a recurring basis.


⁽²⁾	This represents a non-financial asset that is measured at fair value on a nonrecurring basis.



	Level 1		Level 2		Level 3
	(in thousands)
Assets:
Derivatives ⁽¹⁾	$	—	$	488,411	$	—
Total property and equipment, net ⁽²⁾	$	—	$	—	$	124,813
Liabilities:
Derivatives⁽¹⁾	$	—	$	8	$	—
Net Profits Plan ⁽¹⁾	$	—	$	—	$	7,611

____________________________________________


⁽¹⁾	This represents a financial asset or liability that is measured at fair value on a recurring basis.


⁽²⁾	This represents a non-financial asset that is measured at fair value on a nonrecurring basis.

Both financial and non-financial assets and liabilities are categorized within the above fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used by the Company as well as the general classification of such instruments pursuant to the above fair value hierarchy.

Derivatives

The Company uses Level 2 inputs to measure the fair value of oil, gas, and NGL commodity derivatives. Fair values are based upon interpolated data. The Company derives internal valuation estimates taking into consideration forward commodity price curves, counterparties’ credit ratings, the Company’s credit rating, and the time value of money. These valuations are then compared to the respective counterparties’ mark-to-market statements. The considered factors result in an estimated exit-price that management believes provides a reasonable and consistent methodology for valuing derivative instruments. The derivative instruments utilized by the Company are not considered by management to be complex, structured, or illiquid. The oil, gas, and NGL commodity derivative markets are highly active.

Generally, market quotes assume that all counterparties have near zero, or low, default rates and have equal credit quality. However, an adjustment may be necessary to reflect the credit quality of a specific counterparty to determine the fair value of the instrument. The Company monitors the credit ratings of its counterparties and may require counterparties to post collateral if their ratings deteriorate. In some instances, the Company will attempt to novate the trade to a more stable counterparty. All of the Company’s derivative counterparties are members of the Company’s credit facility lender group.

Valuation adjustments are necessary to reflect the effect of the Company’s credit quality on the fair value of any derivative liability position. This adjustment takes into account any credit enhancements, such as collateral margin that the Company may have posted with a counterparty, as well as any letters of credit between the parties. The methodology to determine this adjustment is consistent with how the Company evaluates counterparty credit risk, taking into account the Company’s credit rating, current credit facility margins, and any change in such margins since the last measurement date.

The methods described above may result in a fair value estimate that may not be indicative of net realizable value or may not be reflective of future fair values and cash flows. While the Company believes that the valuation methods utilized are appropriate and consistent with authoritative accounting guidance and with other marketplace participants, the Company recognizes that third parties may use different methodologies or assumptions to determine the fair value of certain financial instruments that could result in a different estimate of fair value at the reporting date.

Refer to Note 10 - Derivative Financial Instruments for more information regarding the Company’s derivative instruments.

Proved and Unproved Oil and Gas Properties and Other Property and Equipment

Proved oil and gas properties. Proved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication the carrying costs may not be recoverable. The Company uses Level 3 inputs and the income valuation technique, which converts future cash flow amounts to a single present value amount, to measure the fair value of proved properties through an application of discount rates and price forecasts representative of the current operating environment, as selected by the Company’s management. The calculation of the discount rates is based on the best information available and the rates used ranged from 10 percent to 15 percent based on the reservoir specific weightings of future estimated proved and unproved cash flows as of December 31, 2016, and 2015. The Company believes the discount rates are representative of current market conditions and consider estimates of future cash payments, reserve categories, expectations of possible variations in the amount and/or timing of cash flows, the risk premium, and nonperformance risk. The prices for oil and gas are forecast based on NYMEX strip pricing, adjusted for basis differentials, for the first five years, after which a flat terminal price is used for each commodity stream. The prices for NGLs are forecast using OPIS Mont Belvieu pricing, for as long as the market is actively trading, after which a flat terminal price is used. Future operating costs are also adjusted as deemed appropriate for these estimates.

The following table presents impairment of proved properties expense recorded for the periods presented:



	For the Years Ended December 31,
	2016		2015		2014
	(in millions)
Impairment of proved properties	$	354.6	$	468.7	$	84.5

Impairments of proved properties during the year ended December 31, 2016, related primarily to the decline in expected reserve cash flows for the Company’s outside-operated Eagle Ford shale assets driven by commodity price declines during the first quarter of 2016, and downward performance reserve revisions in the fourth quarter of 2016 for the Company’s Powder River Basin assets. Impairments of proved properties during the year ended December 31, 2015, were due to the decline in expected reserve cash flows driven by commodity price declines and were recorded mainly in the Company’s east Texas and Powder River Basin programs with smaller impacts on other legacy and non-core assets in the Rocky Mountain region. Impairments of proved properties during the year ended December 31, 2014, resulted from the significant decline in commodity prices in late 2014 and recognition of the outcomes of exploration and delineation wells in certain prospects in the Company’s South Texas & Gulf Coast and Permian regions.

Unproved oil and gas properties. Unproved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs may not be recoverable. To measure the fair value of unproved properties, the Company uses a market approach, which takes into account the following significant assumptions: remaining lease terms, future development plans, risk weighted potential resource recovery, estimated reserve values, and estimated acreage value based on price(s) received for similar, recent acreage transactions by the Company or other market participants.

The following table presents abandonment and impairment of unproved properties expense recorded for the periods presented:



	For the Years Ended December 31,
	2016		2015		2014
	(in millions)
Abandonment and impairment of unproved properties	$	80.4	$	78.6	$	75.6

Abandonment and impairment of unproved properties during the year ended December 31, 2016, related primarily to a decrease in the fair value of the Company’s unproved Powder River Basin properties due to downward performance reserve revisions and lower market prices based on recent third-party acreage transactions. In all other periods, abandonment and impairment expense resulted from lease expirations and acreage the Company no longer intended to develop in light of changes in drilling plans in response to the decline in commodity prices.

Other property and equipment. Other property and equipment costs are evaluated for impairment and reduced to fair value when there is an indication the carrying costs may not be recoverable. To measure the fair value of other property and equipment, the Company uses an income valuation technique or market approach depending on the quality of information available to support management’s assumptions and the circumstances. The valuation includes consideration of the proved and unproved assets supported by the property and equipment, future cash flows associated with the assets, and fixed costs necessary to operate and maintain the assets. During the year ended December 31, 2015, the Company recorded impairment of other property and equipment expense of $49.4 million on the Company’s gathering system assets in its east Texas program. These assets were impaired in conjunction with the impairment of the associated proved and unproved properties, which the Company did not intend to develop and subsequently sold. There were no other property and equipment impairments in 2016 or 2014.

Oil and gas properties held for sale. Proved and unproved oil and gas properties classified as held for sale, including the corresponding asset retirement obligation liability, are valued using a market approach, based on an estimated net selling price, as evidenced by the most current bid prices received from third parties, if available. If an estimated selling price is not available, the Company utilizes the various income valuation techniques discussed above. Any initial write-down and subsequent changes to the fair value less estimated cost to sell is included within the net gain on divestiture activity line item in the accompanying statements of operations. There were no assets held for sale recorded at fair value as of December 31, 2016, or 2015, as the carrying values were below the estimated fair values less costs to sell. Please refer to Note 3 – Acquisitions, Divestitures, and Assets Held for Sale for additional discussion.

Acquisitions of proved and unproved properties. Assets acquired and liabilities assumed under transactions that meet the criteria of a business combination under ASC Topic 805, Business Combinations are recorded at fair value on the acquisition date using an income valuation technique based on inputs that are not observable in the market and therefore represent Level 3 inputs. Significant inputs to the valuation of acquired oil and gas properties include estimates of: (i) reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices, including price differentials; (v) future cash flows; and (vi) a market participant-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Company’s management at the time of the valuation. The Rock Oil Acquisition closed on October 4, 2016, and therefore, was not recorded at fair value as of December 31. 2016.

Assets acquired and liabilities assumed under transactions that do not meet the criteria of a business combination under ASC Topic 805, Business Combinations are accounted for as an asset acquisition and are recorded based on the fair value of the total consideration transferred on the acquisition date using the lowest observable inputs available. In connection with the QStar Acquisition, the Company issued approximately 13.4 million shares of common stock as a component of the total consideration transferred to the sellers on December 21, 2016. Fair value of the equity consideration transferred was based on the closing price of the Company’s common stock on the date of acquisition, as adjusted using an option pricing model to account for the lack of marketability of the shares issued.

Please refer to Note 3 – Acquisitions, Divestitures, and Assets Held for Sale for additional discussion.

Net Profits Plan

The Net Profits Plan is a liability for which there is no available market price, principal market, or market participants. The inputs available for this instrument are unobservable and are therefore classified as Level 3 inputs. The Company employs the income valuation technique, which converts expected future cash flow amounts to a single present value amount. The estimate is highly dependent on commodity prices, cost assumptions, discount rates, and overall market conditions. Due to divestitures of assets subject to the Net Profits Plan in recent years, the liability has been significantly reduced and is no longer considered a significant accounting estimate. The Net Profits Plan liability is included in the other noncurrent liabilities line on the accompanying balance sheets.

The following table reflects the activity for the Company’s Net Profits Plan liability measured at fair value using Level 3 inputs:



	For the Years Ended December 31,
	2016			2015			2014
	(in thousands)
Beginning balance	$	7,611		$	27,136		$	56,985
Net increase (decrease) in liability ⁽¹⁾	23,757			(12,238		)	(12,492		)
Net settlements ^{(1) (2)}	(30,957		)	(7,287		)	(17,357		)
Transfers in (out) of Level 3	—			—			—
Ending balance	$	411		$	7,611		$	27,136

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⁽¹⁾	Net changes in the Company’s Net Profits Plan liability are shown in the change in Net Profits Plan liability line item of the accompanying statements of operations.


⁽²⁾	Settlements represent cash payments made or accrued under the Net Profits Plan and are recognized as compensation expense or a reduction to the net gain on divestiture activity line in the accompanying statements of operations, as discussed in Note 7 – Compensation Plans.

Long-Term Debt

The following table reflects the fair value of the Senior Notes and Senior Convertible Notes measured using Level 1 inputs based on quoted secondary market trading prices. These notes were not presented at fair value on the accompanying balance sheets as of December 31, 2016, or 2015, as they are recorded at carrying value, net of any unamortized discounts and deferred financing costs. Please refer to Note 5 - Long-Term Debt for additional discussion.



	As of December 31,
	2016				2015
	Principal Amount		Fair Value		Principal Amount		Fair Value
	(in thousands)
6.50% Senior Notes due 2021	$	346,955	$	354,546	$	350,000	$	262,938
6.125% Senior Notes due 2022	$	561,796	$	570,925	$	600,000	$	440,250
6.50% Senior Notes due 2023	$	394,985	$	403,134	$	400,000	$	296,000
5.0% Senior Notes due 2024	$	500,000	$	475,975	$	500,000	$	334,065
5.625% Senior Notes due 2025	$	500,000	$	485,000	$	500,000	$	326,875
6.75% Senior Notes due 2026	$	500,000	$	516,565	$	—	$	—
1.50% Senior Convertible Notes due 2021	$	172,500	$	202,189	$	—	$	—

The carrying value of the Company’s credit facility approximates its fair value, as the applicable interest rates are floating, based on prevailing market rates.