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 March 31, 2015 and December 31, 2014, as described below.

Level 1 Fair Value Measurements

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 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 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 May 31, 2015, or approximately 60 days subsequent to the Company’s submission to the Bureau of Ocean Energy Management of its request for release of the guarantee (3.59% and 3.71% at March 31, 2015 and December 31, 2014, respectively). 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 March 31, 2015 and 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 basis swaps outstanding during the three-month period ended March 31, 2015 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 natural gas basis swaps was the estimate of future natural gas basis differentials. Significant increases (decreases) in natural gas 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 March 31, 2015 and December 31, 2014 are included in the table below.



Unobservable Input	Range							Weighted Average			Fair Value
	(Price per Mcf)										(In thousands)
March 31, 2015
Natural gas basis differential forward curve	$	(0.21	)	–	$	(0.47	)	$	(0.34	)	$	1,332
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):

March 31, 2015



	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	$	—	$	249,955	$	1,735	$	(284	)	$	251,406
Investments	11,679		—		—		—			11,679
	$	11,679	$	249,955	$	1,735	$	(284	)	$	263,085
Liabilities
Guarantees	$	—	$	—	$	4,791	$	—		$	4,791
Commodity derivative contracts	—		—		403		(284		)	119
	$	—	$	—	$	5,194	$	(284	)	$	4,910

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

____________________

(1)Represents the effect 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-month periods ended March 31, 2015 and 2014 (in thousands):



	Three Months Ended March 31,
Level 3 Fair Value Measurements - Guarantees	2015			2014
Beginning balance	$	5,104		$	—
Issuances(1)	—			9,446
(Gain) loss on guarantees	(313		)	34
Ending balance	$	4,791		$	9,480

____________________


(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, for the three-month period ended March 31, 2014.

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 March 31, 2015 and December 31, 2014 is included in other current liabilities in the accompanying unaudited condensed consolidated balance sheets.

The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for commodity derivative contracts during the three-month period ended March 31, 2015 (in thousands):



Level 3 Fair Value Measurements - Commodity Derivative Contracts	Three Months Ended March 31, 2015
Beginning balance	$	350
Purchases	347
Loss on derivative contracts	635
Ending balance	$	1,332

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 unaudited condensed consolidated statements of operations. There were no outstanding Level 3 commodity derivative contracts at March 31, 2014.

See Note 8 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-month periods ended March 31, 2015 and 2014, 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 unsecured senior fixed rate notes (“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 March 31, 2015 and December 31, 2014 were as follows (in thousands):



	March 31, 2015				December 31, 2014
	Fair Value		Carrying Value		Fair Value		Carrying Value
8.75% Senior Notes due 2020(1)	$	292,500	$	445,580	$	303,750	$	445,402
7.5% Senior Notes due 2021(2)	$	728,500	$	1,178,372	$	752,000	$	1,178,486
8.125% Senior Notes due 2022	$	460,125	$	750,000	$	472,500	$	750,000
7.5% Senior Notes due 2023(3)	$	503,250	$	821,626	$	519,750	$	821,548

____________________


(1)	Carrying value is net of $4,420 and $4,598 discount at March 31, 2015 and December 31, 2014, respectively.


(2)	Carrying value includes a premium of $3,372 and $3,486 at March 31, 2015 and December 31, 2014, respectively.


(3)	Carrying value is net of $3,374 and $3,452 discount at March 31, 2015 and December 31, 2014, respectively.

See Note 7 for discussion of the Company’s long-term debt.