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Fair Value Measurements
 3 Months Ended
Mar. 31, 2013
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. Restricted deposits are included in other assets in the accompanying unaudited condensed consolidated balance sheets.

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 unaudited condensed consolidated balance sheets.

Level 2 Fair Value Measurements

Derivative contracts. The fair values 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. The significant unobservable inputs and the range and weighted average of these inputs used in the fair value measurements of the Company’s oil basis swaps at March 31, 2013 and December 31, 2012 are included in the table below.
 
 
Unobservable Input
 
Range
 
Weighted Average
 
Fair Value
 
 
 
 
(price per Bbl)
 
(price per Bbl)
 
(in thousands)
March 31, 2013
 
Oil basis differential forward curve
 
$11.31
–
$15.49
 
$13.28
 
$
(211
)
December 31, 2012
 
Oil basis differential forward curve
 
$10.00
–
$21.98
 
$14.74
 
$
(512
)


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):

March 31, 2013
 
Fair Value Measurements
 
Netting(1)
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Restricted deposits
$
27,950

 
$
—

 
$
—

 
$
—

 
$
27,950

Commodity derivative contracts
—

 
90,585

 
122

 
(39,795
)
 
50,912

Investments
11,584

 
—

 
—

 
—

 
11,584

 
$
39,534

 
$
90,585

 
$
122

 
$
(39,795
)
 
$
90,446

Liabilities
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
—

 
$
92,816

 
$
333

 
$
(39,795
)
 
$
53,354

 
$
—

 
$
92,816

 
$
333

 
$
(39,795
)
 
$
53,354


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

____________________
(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 commodity derivative contracts measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three-month periods ended March 31, 2013 and 2012 (in thousands): 
 
 
Three Months Ended March 31,
 
 
2013
 
2012

 
 
 
 
Beginning balance of Level 3
 
$
(512
)
 
$
(4,253
)
Total realized and unrealized gains (losses)
 
(873
)
 
2,032

Settlements (received) paid
 
1,174

 
(454
)
Ending balance of Level 3
 
$
(211
)
 
$
(2,675
)


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. During the three-month periods ended March 31, 2013 and 2012, the Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements.

Unrealized losses (gains) on the Company’s Level 3 commodity derivative contracts outstanding at period end were $0.9 million and $(1.6) million for the three-month periods ended March 31, 2013 and 2012, respectively, and have been included in loss on derivative contracts in the accompanying unaudited condensed consolidated statements of operations.

See Note 9 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 March 31, 2013 and December 31, 2012 were as follows (in thousands):
 
March 31, 2013
 
December 31, 2012
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
9.875% Senior Notes due 2016(1)
$
—

 
$
—

 
$
392,913

 
$
356,657

8.0% Senior Notes due 2018
—

 
—

 
790,313

 
750,000

8.75% Senior Notes due 2020(2)
484,875

 
444,275

 
490,500

 
444,127

7.5% Senior Notes due 2021(3)
1,222,000

 
1,179,230

 
1,257,250

 
1,179,328

8.125% Senior Notes due 2022
800,625

 
750,000

 
823,125

 
750,000

7.5% Senior Notes due 2023(4)
855,938

 
821,038

 
882,750

 
820,971

____________________
(1)Carrying value is net of $8,843 discount at December 31, 2012.
(2)Carrying value is net of $5,725 and $5,873 discount at March 31, 2013 and December 31, 2012, respectively.
(3)
Carrying value includes a premium of $4,230 and $4,328 at March 31, 2013 and December 31, 2012, respectively, applicable to notes issued in August 2012.
(4)Carrying value is net of $3,962 and $4,029 discount at March 31, 2013 and December 31, 2012, respectively.

See Note 8 for discussion of the Company’s long-term debt, including the redemption in March 2013 of all of the outstanding 9.875% Senior Notes due 2016 and 8.0% Senior Notes due 2018.