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 in each level of the hierarchy as of December 31, 2014 or 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 consolidated balance sheet as of December 31, 2013. The Company did not have restricted deposits as of December 31, 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 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 oil and natural gas collars 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

Guarantees. As discussed in Note 3, 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 February 25, 2015, the date the Company was permitted to terminate the guarantee under the terms of the agreement with Fieldwood (3.71% at December 31, 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 December 31, 2014 is included in the table below (in thousands).



Unobservable Input
Estimated future payments for plugging and abandonment	$	372,034

Derivative contracts. The fair value of the Company’s natural gas and oil basis swaps were based upon quotes obtained from counterparties to the derivative contracts. These values were reviewed 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 natural gas and oil basis swaps is the estimate of future natural gas and oil basis differentials. Significant increases (decreases) in natural gas and 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 natural gas basis swaps at December 31, 2014 are included in the table below. All of the outstanding oil basis swaps contractually matured during December 31, 2013.



Unobservable Input	Range							Weighted Average			Fair Value
	(Price per Mcf)										(In thousands)
December 31, 2014
Natural gas basis differential forward curve	$	(0.03	)	–	$	(0.38	)	$	(0.29	)	$	350

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, 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	$	—	$	338,067	$	350	$	—	$	338,417
Investments	11,106		—		—		—		11,106
	$	11,106	$	338,067	$	350	$	—	$	349,523
Liabilities
Guarantees	$	—	$	—	$	5,104	$	—	$	5,104
	$	—	$	—	$	5,104	$	—	$	5,104

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 with 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 year ended December 31, 2014 (in thousands):



Level 3 Fair Value Measurements - Guarantees	Year Ended December 31, 2014
Beginning balance	$	—
Issuances(1)	9,446
Gain on guarantees	(4,342		)
Ending balance	$	5,104

____________________


(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 3 for discussion of the sale of the Gulf Properties. The fair value of the guarantees as of December 31, 2014 is included in other current liabilities in the accompanying 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 years ended December 31, 2014, 2013 and 2012 (in thousands):



	2014		2013			2012
Level 3 commodity derivative contracts at January 1	$	—	$	(512	)	$	(4,252	)
Loss on derivative contracts	—		(133		)	(5,460		)
Purchases	350		—			5,697
Settlements paid	—		645			3,503
Level 3 commodity derivative contracts at December 31	$	350	$	—		$	(512	)

Losses due to changes in fair value of the Company’s Level 3 commodity derivative contracts have been included in (gain) loss on derivative contracts in the accompanying consolidated statements of operations. There were no outstanding Level 3 commodity derivative contracts at December 31, 2013.

See Note 13 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 years ended December 31, 2014, 2013 and 2012, 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 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, 2014 and 2013 were as follows (in thousands):



	December 31, 2014				December 31, 2013
	Fair Value		Carrying Value		Fair Value		Carrying Value
8.75% Senior Notes due 2020(1)	$	303,750	$	445,402	$	486,000	$	444,736
7.5% Senior Notes due 2021(2)	$	752,000	$	1,178,486	$	1,230,813	$	1,178,922
8.125% Senior Notes due 2022	$	472,500	$	750,000	$	795,000	$	750,000
7.5% Senior Notes due 2023(3)	$	519,750	$	821,548	$	837,375	$	821,249

___________________


(1)	Carrying value is net of $4,598 and $5,264 discount at December 31, 2014 and 2013, respectively.


(2)	Carrying value includes a premium, applicable to notes issued in August 2012, of $3,486 and $3,922 at December 31, 2014 and 2013, respectively.


(3)	Carrying value is net of $3,452 and $3,751 discount at December 31, 2014 and 2013, respectively.

See Note 12 for discussion of the Company’s long-term debt, including the purchase, redemption and issuance of senior notes in 2012 and 2013.

Fair Value of Non-Financial Assets and Liabilities

See Note 3 for information regarding the Company’s valuation of its acquisitions and Note 8 for discussion of the Company’s impairment valuation.