Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.22.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Note 10 – Fair Value Measurements
We apply the authoritative accounting provisions included in GAAP for measuring the fair value of both our financial and nonfinancial assets and liabilities. Fair value is an exit price representing the expected amount we would receive upon the sale of an asset or that we would expect to pay to transfer a liability in an orderly transaction with market participants at the measurement date.
Our financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term maturities. As of March 31, 2022 and December 31, 2021, the carrying values of the borrowings outstanding under our credit facilities approximate fair value as the borrowings bear interest at variables rates tied to current market rates and the applicable margins represent market rates. The fair value of our fixed rate 9.25% Senior Notes due 2026 is estimated based on the published market prices for issuances of similar risk and tenor and is categorized as Level 2 within the fair value hierarchy. As of March 31, 2022, the carrying amount and estimated fair value of total debt (before amortization of issuance costs) was $536.7 million and $559.4 million, respectively. As of December 31, 2021, the carrying amount and estimated fair value of total debt (before amortization of issuance costs) was $619.0 million and $634.6 million.
Recurring Fair Value Measurements
The fair values of our derivative instruments are measured at fair value on a recurring basis on our condensed consolidated balance sheets. The following tables summarize the valuation of those assets and (liabilities) as of the dates presented:
  As of March 31, 2022
Level 1 Level 2 Level 3 Total
Financial assets:      
Commodity derivative assets – current $ —  $ 9,631  $ —  $ 9,631 
Commodity derivative assets – non-current —  2,912  —  2,912 
Total financial assets $ —  $ 12,543  $ —  $ 12,543 
Financial liabilities:      
Interest rate swap liabilities – current $ —  $ (458) $ —  $ (458)
Commodity derivative liabilities – current —  (148,550) —  (148,550)
Commodity derivative liabilities – non-current —  (42,620) —  (42,620)
Total financial liabilities $ —  $ (191,628) $ —  $ (191,628)
  As of December 31, 2021
Level 1 Level 2 Level 3 Total
Financial assets:      
Commodity derivative assets – current $ —  $ 11,478  $ —  $ 11,478 
Commodity derivative assets – non-current —  2,092  —  2,092 
Total financial assets $ —  $ 13,570  $ —  $ 13,570 
Financial liabilities:      
Interest rate swap liabilities – current $ —  $ (1,480) $ —  $ (1,480)
Commodity derivative liabilities – current —  (48,892) —  (48,892)
Commodity derivative liabilities – non-current —  (23,815) —  (23,815)
Total financial liabilities $ —  $ (74,187) $ —  $ (74,187)
We used the following methods and assumptions to estimate fair values for the financial assets and liabilities described below:
Commodity derivatives: We determine the fair values of our commodity derivative instruments using industry-standard models that consider various assumptions including current market and contractual prices for the underlying instruments, implied volatilities, time value and non-performance risk. For the current market prices, we use third-party quoted forward prices, as applicable, for NYMEX WTI, MEH crude oil, NYMEX HH natural gas and OPIS Mt Belv Ethane natural gas liquids closing prices as of the end of the reporting periods. Each of these is a Level 2 input.
Interest rate swaps: We determine the fair values of our interest rate swaps using an income approach valuation technique which discounts future cash flows back to a single present value. We estimate the fair value of the swaps based on published interest rate yield curves as of the date of the estimate. Each of these is a Level 2 input.
Non-performance risk is incorporated by utilizing discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position, and our own credit risk if the derivative is in a liability position. See Note 5 for additional details on our derivative instruments.
Non-Recurring Fair Value Measurements
The most significant non-recurring fair value measurements utilized in the preparation of our condensed consolidated financial statements are those attributable to the initial determination of AROs associated with the ongoing development of new oil and gas properties and certain share-based compensation awards. The determination of the fair value of AROs is based upon regional market and facility specific information. The amount of an ARO and the costs capitalized represent the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor after discounting the future cost back to the date that the abandonment obligation was incurred using a rate commensurate with the risk, which approximates our cost of funds. Because these significant fair value inputs are typically not observable, we have categorized the initial estimates as Level 3 inputs.