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Fair Value Measurements
 12 Months Ended
Dec. 31, 2011
Fair Value Measurements [Abstract]  
Fair Value Measurements

3. Fair Value Measurements

In accordance with FASB's authoritative guidance on fair value measurements, the Company's financial assets and liabilities are measured at fair value on a recurring basis. The Company recognizes its non-financial assets and liabilities, such as asset retirement obligations and proved oil and natural gas properties upon impairment, at fair value on a non-recurring basis.

As defined in the authoritative guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). To estimate fair value, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.

The authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1" measurements) and the lowest priority to unobservable inputs ("Level 3" measurements). The three levels of the fair value hierarchy are as follows:

Level 1 — Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 — Pricing inputs, other than unadjusted quoted prices in active markets included in Level 1, are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 — Pricing inputs are generally less observable from objective sources, requiring internally developed valuation methodologies that result in management's best estimate of fair value.

 

As required, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The following tables set forth by level within the fair value hierarchy the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis:

 

      September 30,       September 30,       September 30,       September 30,  
       At fair value as of December 31, 2011  
       Level 1        Level 2        Level 3      Total  
       (In thousands)  

Assets (liabilities):

                                          

Money market funds

      $ 250,419         $ —           $ —         $ 250,419   

Commodity derivative instruments (see Note 4)

        —             —             (5,050 )       (5,050 ) 
      

 

 

       

 

 

       

 

 

     

 

 

  

Total assets (liabilities)

      $ 250,419         $ —           $ (5,050 )     $ 245,369   
      

 

 

       

 

 

       

 

 

     

 

 

  
      September 30,       September 30,       September 30,       September 30,  
   
       At fair value as of December 31, 2010  
       Level 1        Level 2        Level 3      Total  
       (In thousands)  

Assets (liabilities):

                                          

Commodity derivative instruments (see Note 4)

      $ —           $ —           $ (10,486 )     $ (10,486 ) 
      

 

 

       

 

 

       

 

 

     

 

 

  

Total assets (liabilities)

      $ —           $ —           $ (10,486 )     $ (10,486 ) 
      

 

 

       

 

 

       

 

 

     

 

 

  

 

The Level 1 instruments presented in the table above consist of money market funds included in Cash and cash equivalents on the Company's Consolidated Balance Sheet at December 31, 2011. The Company's money market funds represent cash equivalents backed by the assets of high-quality major banks and financial institutions. The Company identified the money market funds at Level 1 instruments due to the fact that the money market funds have daily liquidity, quoted prices for the underlying investments can be obtained and there are active markets for the underlying investments. 
 

The Level 3 instruments presented in the tables above consist of oil collars and deferred premium puts. The fair values of the Company's oil collars and deferred premium puts are based upon mark-to-market valuation reports provided by its counterparties for monthly settlement purposes to determine the valuation of its derivative instruments. The Company has a third-party reviewer evaluate other readily available market prices for its derivative contracts as there is an active market for these contracts. However, the Company does not have access to the specific valuation models used by its counterparties or third party reviewer. The determination of the fair values presented above also incorporates a credit adjustment for non-performance risk, as required by GAAP. The Company calculated the credit adjustment for derivatives in an asset position using current credit default swap values for each counterparty. The credit adjustment for derivatives in a liability position is based on the Company's current cost of prime based borrowings (prime rate and associated margin effect). Based on these calculations, the Company recorded a downward adjustment to the fair value of its derivative instruments in the amount of $0.3 million for each year ended December 31, 2011 and 2010.

The following table presents a reconciliation of the changes in fair value of the derivative instruments classified as Level 3 in the fair value hierarchy for the years presented.

 

      September 30,       September 30,       September 30,  
       2011      2010      2009  
       (In thousands)  

Balance as of January 1

      $ (10,486 )     $ (2,953 )     $ 4,090   

Total gains or (losses) (realized or unrealized):

                             

Included in earnings

        1,595         (7,653 )       (4,747 ) 

Included in other comprehensive income

        —           —           —     

Purchases, issuances and settlements

        3,841         120         (2,296 ) 

Transfers in and out of Level 3

        —           —           —     
      

 

 

     

 

 

     

 

 

  

Balance as of December 31

      $ (5,050 )     $ (10,486 )     $ (2,953 ) 
      

 

 

     

 

 

     

 

 

  

Change in unrealized gains (losses) included in earnings relating to derivatives still held at December 31

      $ 5,436       $ (7,533 )     $ (7,043 ) 
      

 

 

     

 

 

     

 

 

  

At December 31, 2011, the Company's financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The carrying amount of the Company's long-term debt reported in the Consolidated Balance Sheet at December 31, 2011 is $800.0 million, with a fair value of $811.0 million. The carrying amount of the Company's ARO in the Consolidated Balance Sheet at December 31, 2011 is $13.1 million, which approximates fair value as the Company determines the ARO by calculating the present value of estimated cash flows related to the liability based on the calculation of the estimated value (see Note 2 — Summary of Significant Accounting Policies).

The Company reviews its proved oil and natural gas properties for impairment whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred. Therefore, the Company's proved oil and natural gas properties are measured at fair value on a non-recurring basis. No impairment charge on proved oil and natural gas properties was recorded for the years ended December 31, 2011 and 2010. During the year ended December 31, 2009, the Company recorded a $0.8 million non-cash impairment charge on its proved oil and natural gas properties, as further discussed in Note 2 — Summary of Significant Accounting Policies. The 2009 impairment charge related to certain dry holes, which had a fair value of zero.