XML 130 R12.htm IDEA: XBRL DOCUMENT v2.4.0.6
Fair Value Measurements
 12 Months Ended
Dec. 31, 2012
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements

The Company measures and reports certain assets and liabilities on a fair value basis and has classified and disclosed its fair value measurements using the following levels of the fair value hierarchy:
Level 1
  
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
 
 
Level 2
  
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
 
 
 
Level 3
  
Measurement based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable for objective sources (i.e., supported by little or no market activity).

Assets and liabilities that are measured at fair value are classified 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, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values, stated below, considers the market for the Company’s financial assets and liabilities, the associated credit risk and other factors. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. The Company has assets and liabilities classified as Level 1, Level 2 and Level 3, as described below.

Level 1 Fair Value Measurements

Restricted deposits. The fair value of restricted deposits invested in mutual funds or municipal bonds is based on quoted market prices. For restricted deposits held in savings accounts, carrying value approximates fair value.

Investments. The fair value of investments, consisting of assets attributable to the Company’s deferred compensation plan, is based on quoted market prices. Investments are included in other assets in the accompanying consolidated balance sheets.

Level 2 Fair Value Measurements

Derivative contracts. The fair value of the Company’s oil and natural gas fixed price swaps, oil and natural gas collars and interest rate swap are based upon inputs that are either readily available in the public market, such as oil and natural gas futures prices, volatility factors, interest rates and discount rates, or can be corroborated from active markets. Fair value is determined through the use of a discounted cash flow model or option pricing model using the applicable inputs, discussed above. The Company applies a weighted average credit default risk rating factor for its counterparties or gives effect to its credit default risk rating, as applicable, in determining the fair value of these derivative contracts. Credit default risk ratings are based on current published credit default swap rates.

Level 3 Fair Value Measurements

Derivative contracts. The fair value of the Company’s oil basis swaps are based upon quotes obtained from counterparties to the derivative contracts. These values are reviewed internally for reasonableness through the use of a discounted cash flow model using non-exchange traded regional pricing information. Additionally, the Company applies a weighted average credit default risk rating factor for its counterparties or gives effect to its credit risk, as applicable, in determining the fair value of these derivative contracts. The significant unobservable input used in the fair value measurement of the Company’s oil basis swaps is the estimate of future oil basis differentials. Significant increases (decreases) in oil basis differentials could result in a significantly higher (lower) fair value measurement. At December 31, 2012, derivative contracts that were valued using Level 3 inputs consisted of oil basis swaps with a fair value of $(0.5) million. Prices of future oil basis differentials used in the fair value measurement ranged from $10.00 per barrel to $21.98 per barrel and had a weighted average value of $14.74 per barrel.

The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis by the fair value hierarchy (in thousands):

December 31, 2012
 
Fair Value Measurements
 
Netting(1)
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Restricted deposits
$
27,947

 
$
—

 
$
—

 
$
—

 
$
27,947

Commodity derivative contracts
—

 
130,220

 
183

 
(35,764
)
 
94,639

Investments
10,348

 
—

 
—

 
—

 
10,348

 
$
38,295

 
$
130,220

 
$
183

 
$
(35,764
)
 
$
132,934

Liabilities
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
—

 
$
107,321

 
$
695

 
$
(35,764
)
 
$
72,252

Interest rate swap
—

 
2,395

 
—

 
—

 
2,395

 
$
—

 
$
109,716

 
$
695

 
$
(35,764
)
 
$
74,647


December 31, 2011
 
Fair Value Measurements
 
Netting(1)
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Restricted deposits
$
27,912

 
$
—

 
$
—

 
$
—

 
$
27,912

Commodity derivative contracts
—

 
62,746

 
397

 
(32,662
)
 
30,481

Investments
7,138

 
—

 
—

 
—

 
7,138

 
$
35,050

 
$
62,746

 
$
397

 
$
(32,662
)
 
$
65,531

Liabilities
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
—

 
$
182,694

 
$
4,650

 
$
(32,662
)
 
$
154,682

Interest rate swap
—

 
10,448

 
—

 
—

 
10,448

 
$
—

 
$
193,142

 
$
4,650

 
$
(32,662
)
 
$
165,130

____________________
(1)Represents the impact of netting assets and liabilities with counterparties with which the right of offset exists.

The table below sets forth a reconciliation of the Company’s assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2010, 2011 and 2012 (in thousands):
 
Commodity
Derivative
Contracts
 
Interest
Rate
Swaps
 
Total
Balance of Level 3 at January 1, 2010
$
46,153

 
$
(8,299
)
 
$
37,854

Total realized and unrealized gains (losses)
(50,872
)
 
(16,540
)
 
(67,412
)
Purchases
23,196

 
—

 
23,196

Settlements (received) paid
(224,337
)
 
8,145

 
(216,192
)
Balance of Level 3 at December 31, 2010
(205,860
)
 
(16,694
)
 
(222,554
)
Total realized and unrealized gains (losses)
44,075

 
(3,168
)
 
40,907

Settlements paid
50,713

 
9,414

 
60,127

Transfers(1)
106,820

 
10,448

 
117,268

Balance of Level 3 at December 31, 2011
(4,252
)
 
—

 
(4,252
)
Total realized and unrealized gains (losses)
(5,460
)
 
—

 
(5,460
)
Purchases
5,697

 
—

 
5,697

Settlements paid
3,503

 
—

 
3,503

Balance of Level 3 at December 31, 2012
$
(512
)
 
$
—

 
$
(512
)
____________________
(1)
Fair values related to the Company’s oil and natural gas fixed price swaps, natural gas collars and interest rate swap were transferred from Level 3 to Level 2 in the fourth quarter of 2011 due to enhancements to the Company’s internal valuation process, including the use of observable inputs to assess the fair value. During the years ended December 31, 2012 and 2010, the Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements. The Company’s policy is to recognize transfers between fair value hierarchy levels as of the end of the quarterly reporting period in which the event or change in circumstances causing the transfer occurred.

Unrealized losses of $0.5 million on the Company’s Level 3 commodity derivative contracts outstanding at December 31, 2012 have been included in (gain) loss on derivative contracts in the accompanying consolidated statement of operations for the year ended December 31, 2012.

See Note 14 for further discussion of the Company’s derivative contracts.

Fair Value of Financial Instruments

The Company measures the fair value of its senior notes using pricing for the Company’s senior notes that is readily available in the public market. The Company classifies these inputs as Level 2 in the fair value hierarchy. The estimated fair values and carrying values of the Company’s senior notes at December 31, 2012 and 2011 were as follows (in thousands):
 
December 31, 2012
 
December 31, 2011
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Senior Floating Rate Notes due 2014
$
—

 
$
—

 
$
339,381

 
$
350,000

9.875% Senior Notes due 2016(1)
392,913

 
356,657

 
396,568

 
354,579

8.0% Senior Notes due 2018
790,313

 
750,000

 
765,000

 
750,000

8.75% Senior Notes due 2020(2)
490,500

 
444,127

 
475,875

 
443,568

7.5% Senior Notes due 2021(3)
1,257,250

 
1,179,328

 
909,000

 
900,000

8.125% Senior Notes due 2022
823,125

 
750,000

 
—

 
—

7.5% Senior Notes due 2023(4)
882,750

 
820,971

 
—

 
—

 ____________________
(1)Carrying value is net of $8,843 and $10,921 discount at December 31, 2012 and 2011, respectively.
(2)Carrying value is net of $5,873 and $6,432 discount at December 31, 2012 and 2011, respectively.
(3)
Carrying value includes a premium of $4,328 at December 31, 2012 applicable to notes issued in August 2012.
(4)Carrying value is net of $4,029 discount at December 31, 2012.

The carrying value of the Company’s mortgage note payable at December 31, 2011 approximated fair value based on rates applicable to similar instruments. See Note 13 for discussion of the Company’s long-term debt, including the purchase and redemption of all outstanding Senior Floating Rate Notes due 2014 (the “Senior Floating Rate Notes”) and the issuance of the 8.125% Senior Notes due 2022, additional 7.5% Senior Notes due 2021 and 7.5% Senior Notes due 2023 (collectively, the “2012 Senior Notes”), all of which occurred during 2012.

Allocation of Purchase Price in Business Combinations

The estimated fair values of assets acquired and liabilities assumed in business combinations are based on market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates and risk-adjusted discount rates. See Note 3 for additional information regarding the Company’s acquisitions.

Impairment Assessments

As deemed necessary based on events in the fourth quarter of 2012, the Company analyzed its gas treating plants and CO2 compression facilities for impairment. Estimated fair values of these assets were calculated using a discounted cash flow method, under which estimated future cash flows were calculated based on management’s expectations for the future use of these assets and estimates of future natural gas production and discounted at a risk-adjusted rate. See Note 8 for further discussion of these impairment assessments.