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 of June 30, 2014 or December 31, 2013, 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 sheet at December 31, 2013. There were no restricted deposits outstanding at June 30, 2014.

Investments. The fair value of investments, consisting of assets attributable to the Company’s non-qualified 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 and collars are based upon inputs that are either readily available in the public market, such as oil and natural gas futures prices, volatility factors 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

Guarantees. As discussed in Note 2, the Company has guaranteed on Fieldwood’s behalf certain plugging and abandonment obligations associated with the Gulf Properties. The fair value of these guarantees is based on the present value of estimated future payments for plugging and abandonment obligations associated with the Gulf Properties, adjusted for the cumulative probability of Fieldwood’s default prior to expiration of the guarantee by February 25, 2015 (3.71% at June 30, 2014). The discount and probability of default rates are based upon inputs that are readily available in the public market, such as historical option adjusted spreads of the Company’s senior notes, which are publicly traded, and historical default rates of publicly traded companies with credit ratings similar to Fieldwood. The significant unobservable input used in the fair value measurement of the guarantees is the estimate of future payments for plugging and abandonment, which was developed based upon third-party quotes and current actual costs. Significant increases (decreases) in the estimate of these payments could result in a significantly higher (lower) fair value measurement. The significant unobservable input used in the fair value measurement of the Company’s financial guarantee liability at June 30, 2014 is included in the table below (in thousands).



Unobservable Input
Estimated future payments for plugging and abandonment	$	426,661

Derivative contracts. The fair value of the Company’s oil basis swaps outstanding during the six-month period ended June 30, 2013 was based upon quotes obtained from counterparties to the derivative contracts. These values were reviewed internally for reasonableness through the use of a discounted cash flow model using non-exchange traded regional pricing information. Additionally, the Company applied a weighted average credit default risk rating factor for its counterparties or gave 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 was the estimate of future oil basis differentials. Significant increases (decreases) in oil basis differentials could have resulted in a significantly higher (lower) fair value measurement. All of the oil basis swaps outstanding during 2013 contractually matured during the six-month period ended June 30, 2013.

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):

June 30, 2014



	Fair Value Measurements						Netting(1)			Assets/Liabilities at Fair Value
	Level 1		Level 2		Level 3		Netting(1)			Assets/Liabilities at Fair Value
Assets
Commodity derivative contracts	$	—	$	6,490	$	—	$	(3,549	)	$	2,941
Investments	10,740		—		—		—			10,740
	$	10,740	$	6,490	$	—	$	(3,549	)	$	13,681
Liabilities
Guarantees	$	—	$	—	$	12,028	$	—		$	12,028
Commodity derivative contracts	—		65,810		—		(3,549		)	62,261
	$	—	$	65,810	$	12,028	$	(3,549	)	$	74,289

December 31, 2013



	Fair Value Measurements						Netting(1)			Assets/Liabilities at Fair Value
	Level 1		Level 2		Level 3		Netting(1)			Assets/Liabilities at Fair Value
Assets
Restricted deposits	$	27,955	$	—	$	—	$	—		$	27,955
Commodity derivative contracts	—		50,274		—		(23,369		)	26,905
Investments	13,708		—		—		—			13,708
	$	41,663	$	50,274	$	—	$	(23,369	)	$	68,568
Liabilities
Commodity derivative contracts	$	—	$	78,200	$	—	$	(23,369	)	$	54,831
	$	—	$	78,200	$	—	$	(23,369	)	$	54,831

____________________

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

The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for guarantees during the three and six-month periods ended June 30, 2014 (in thousands):



Level 3 Fair Value Measurements - Guarantees	Three Months Ended June 30, 2014		Six Months Ended June 30, 2014
Beginning balance	$	9,480	$	—
Issuances(1)	—		9,446
Loss on guarantees	2,548		2,582
Ending balance	$	12,028	$	12,028

____________________


(1)	Represents the fair value of the guarantees of certain plugging and abandonment obligations on behalf of Fieldwood as of February 25, 2014, the closing date for the sale of the Gulf Properties.

The fair value of the guarantees is determined quarterly with changes in fair value recorded as an adjustment to the full cost pool. See Note 2 for discussion of the sale of the Gulf Properties. The fair value of the guarantees as of June 30, 2014 is included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet.

The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for commodity derivative contracts during the three and six-month periods ended June 30, 2013 (in thousands):



Level 3 Fair Value Measurements - Commodity Derivative Contracts	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013
Beginning balance	$	(211	)	$	(512	)
Gain (loss) on derivative contracts	740			(133		)
Settlements (received) paid	(529		)	645
Ending balance	$	—		$	—

There were no outstanding Level 3 commodity derivative contracts at June 30, 2014 or 2013.

See Note 9 for further discussion of the Company’s derivative contracts.

The Company recognizes transfers between fair value hierarchy levels as of the end of the reporting period in which the event or change in circumstances causing the transfer occurred. During the three and six-month periods ended June 30, 2014 and 2013, the Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements.

Fair Value of Financial Instruments

The Company measures the fair value of its senior notes using pricing for the 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 June 30, 2014 and December 31, 2013 were as follows (in thousands):



	June 30, 2014				December 31, 2013
	Fair Value		Carrying Value		Fair Value		Carrying Value
8.75% Senior Notes due 2020(1)	$	483,750	$	445,062	$	486,000	$	444,736
7.5% Senior Notes due 2021(2)	1,273,465		1,178,708		1,230,813		1,178,922
8.125% Senior Notes due 2022	825,000		750,000		795,000		750,000
7.5% Senior Notes due 2023(3)	893,063		821,395		837,375		821,249

____________________

(1)Carrying value is net of $4,938 and $5,264 discount at June 30, 2014 and December 31, 2013, respectively.

(2)Carrying value includes a premium, applicable to notes issued in August 2012, of $3,708 and $3,922 at

June 30, 2014 and December 31, 2013, respectively.

(3)Carrying value is net of $3,605 and $3,751 discount at June 30, 2014 and December 31, 2013, respectively.

See Note 8 for discussion of the Company’s long-term debt.