Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Common Stock Warrants

As of September 30, 2018 and December 31, 2017, we had 354,350 common stock warrants outstanding. We estimate the fair value of our outstanding common stock warrants using the difference between the strike price of the warrant and the market price of our common stock, which is a Level 3 fair value measurement. As of September 30, 2018 and December 31, 2017, the warrants had a weighted-average exercise price of $0.09 and $0.09 and a remaining term of 3.92 years and 4.67 years, respectively.

The estimated fair value of the common stock warrants was $20.33 and $19.21 per share as of September 30, 2018 and December 31, 2017, respectively.

Derivative Instruments

We utilize crude oil commodity derivative contracts to manage our price exposure to our inventory positions, future purchases of crude oil, future purchases and sales of refined products, and cost of crude oil consumed in the refining process. We utilize interest rate swaps to manage our interest rate risk.

We classify financial assets and liabilities according to the fair value hierarchy. Financial assets and liabilities classified as Level 1 instruments are valued using quoted prices in active markets for identical assets and liabilities. These include our exchange traded futures. Level 2 instruments are valued using quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Our Level 2 instruments include OTC swaps and options. These commodity derivatives are valued using market quotations from independent price reporting agencies and commodity exchange price curves that are corroborated with market data. Level 3 instruments are valued using significant unobservable inputs that are not supported by sufficient market activity. The valuation of our J. Aron repurchase obligation derivative requires that we make estimates of the prices and differentials assuming settlement at the end of the reporting period; therefore, it is classified as a Level 3 instrument. We do not have other commodity derivatives classified as Level 3 at September 30, 2018 or December 31, 2017. Please read Note 10—Derivatives for further information on derivatives.

Financial Statement Impact

Fair value amounts by hierarchy level as of September 30, 2018 and December 31, 2017 are presented gross in the tables below (in thousands):



	September 30, 2018
	Level 1			Level 2			Level 3			Gross Fair Value			Effect of Counter-Party Netting			Net Carrying Value on Balance Sheet (1)
Assets
Commodity derivatives	$	1,056		$	13,675		$	—		$	14,731		$	(14,731	)	$	—
Interest rate derivatives	—			554			—			554			—			554
Total	$	1,056		$	14,229		$	—		$	15,285		$	(14,731	)	$	554

Liabilities
Common stock warrants	$	—		$	—		$	(7,204	)	$	(7,204	)	$	—		$	(7,204	)
Commodity derivatives	(2,801		)	(14,003		)	—			(16,804		)	14,731			(2,073		)
J. Aron repurchase obligation derivative	—			—			(8,752		)	(8,752		)	—			(8,752		)
Total	$	(2,801	)	$	(14,003	)	$	(15,956	)	$	(32,760	)	$	14,731		$	(18,029	)



	December 31, 2017
	Level 1			Level 2			Level 3			Gross Fair Value			Effect of Counter-Party Netting			Net Carrying Value on Balance Sheet (1)
Assets
Commodity derivatives	$	557		$	21,907		$	—		$	22,464		$	(19,650	)	$	2,814
Interest rate derivatives	—			3,810			—			3,810			—			3,810
Total	$	557		$	25,717		$	—		$	26,274		$	(19,650	)	$	6,624

Liabilities
Common stock warrants	$	—		$	—		$	(6,808	)	$	(6,808	)	$	—		$	(6,808	)
Commodity derivatives	(596		)	(19,093		)	—			(19,689		)	19,650			(39		)
J. Aron repurchase obligation derivative	—			—			(19,564		)	(19,564		)	—			(19,564		)
Total	$	(596	)	$	(19,093	)	$	(26,372	)	$	(46,061	)	$	19,650		$	(26,411	)

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(1)	Does not include cash collateral of $10.0 million and $7.2 million as of September 30, 2018 and December 31, 2017, respectively, included within Prepaid and other current assets and Other long-term assets on our condensed consolidated balance sheets.

A roll forward of Level 3 financial instruments measured at fair value on a recurring basis is as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Balance, at beginning of period	$	(10,559	)	$	(7,324	)	$	(26,372	)	$	(25,134	)
Settlements	—			—			—			—
Total unrealized income (loss) included in earnings	(5,397		)	(25,016		)	10,416			(7,206		)
Balance, at end of period	$	(15,956	)	$	(32,340	)	$	(15,956	)	$	(32,340	)

The carrying value and fair value of long-term debt and other financial instruments as of September 30, 2018 and December 31, 2017 are as follows (in thousands):



	September 30, 2018
	Carrying Value		Fair Value
5.00% Convertible Senior Notes due 2021 (1) (3)	$	99,145	$	148,793
7.75% Senior Secured Notes due 2025 (1)	290,453		299,250
Common stock warrants (2)	7,204		7,204



	December 31, 2017
	Carrying Value		Fair Value
5.00% Convertible Senior Notes due 2021 (1) (3)	$	95,486	$	149,007
7.75% Senior Secured Notes due 2025 (1)	289,326		300,423
Common stock warrants (2)	6,808		6,808

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(1)	The fair values measurements of the 5.00% Convertible Senior Notes and the 7.75% Senior Secured Notes are considered Level 2 measurements as discussed below.


(2)	The fair value of the common stock warrants is considered a Level 3 measurement in the fair value hierarchy.


(3)	The carrying value of the 5.00% Convertible Senior Notes excludes the fair value of the equity component, which was classified as equity upon issuance.

The fair value of the 5.00% Convertible Senior Notes was determined by aggregating the fair value of the liability and equity components of the notes. The fair value of the liability component of the 5.00% Convertible Senior Notes was determined using a discounted cash flow analysis in which the projected interest and principal payments were discounted at an estimated market yield for a similar debt instrument without the conversion feature. The equity component was estimated based on the Black-Scholes model for a call option with strike price equal to the conversion price, a term matching the remaining life of the 5.00% Convertible Senior Notes, and an implied volatility based on market values of options outstanding as of September 30, 2018. The fair value of the 5.00% Convertible Senior Notes is considered a Level 2 measurement in the fair value hierarchy.

The fair value of the 7.75% Senior Secured Notes was determined using a market approach based on quoted prices. Because the 7.75% Senior Secured Notes may not be actively traded, the inputs used to measure the fair value are classified as Level 2 inputs within the fair value hierarchy.

The fair value of all non-derivative financial instruments recorded in current assets, including cash and cash equivalents, restricted cash, and trade accounts receivable, and current liabilities, including accounts payable, approximate their carrying value due to their short-term nature.