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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2015
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 of September 30, 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 Commodity 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 Commodity Derivative Contracts. The fair values of the Company’s natural gas basis swaps are 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 commodity derivative contracts. The significant unobservable input used in the fair value measurement of the Company’s natural gas basis swaps is 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 September 30, 2015 and December 31, 2014 are included in the table below.
Unobservable Input |  | Range |  | Weighted Average |  | Fair Value
|  | (Price per Mcf) |  | (In thousands)
September 30, 2015 |  |  |  |  |  |  |  |
Natural gas basis differential forward curve |  | $ | (0.11 | ) | – | $ | (0.31 | ) |  | $ | (0.20 | ) |  | $ | (3,436 | )
December 31, 2014 |  |  |  |  |  |  |  |
Natural gas basis differential forward curve |  | $ | (0.03 | ) | – | $ | (0.38 | ) |  | $ | (0.29 | ) |  | $ | 350 |
Long-Term Debt Holder Conversion Feature. In August 2015, the Company issued its 8.125% Convertible Senior Notes due 2022 and 7.5% Convertible Senior Notes due 2023 (collectively, “Convertible Senior Unsecured Notes”), each of which contain a conversion option whereby the Convertible Senior Unsecured Notes holders have the option to convert the notes into shares of Company common stock. Further, with respect to any such conversions prior to the second anniversary of the issuance of the Convertible Senior Unsecured Notes, in addition to the shares deliverable upon conversion, holders are entitled to receive an early conversion payment. These conversion features have been identified as embedded derivatives that meet the criteria to be bifurcated from their host contracts, the Convertible Senior Unsecured Notes, and accounted for separately from those notes. The holder conversion features are recorded at fair value each reporting period. The fair values of the holder conversion features were determined using a binomial lattice model based on certain assumptions including (i) the Company’s stock price, (ii) risk-free rate, (iii) recovery rate, (iv) hazard rate and (v) expected volatility. The significant unobservable input used in the fair value measurement of the conversion features is the hazard rate, an estimate of default probability. Significant increases (decreases) in the hazard rate could result in significantly (lower) higher fair value measurement. The significant unobservable inputs and range and weighted average of these inputs used in the fair value measurement of the conversion options at September 30, 2015 are included in the table below.
Unobservable Input |  | Range |  | Weighted Average |  | Fair Value
|  |  |  | (In thousands)
Long-term debt conversion feature hazard rate |  | 58.6 | % | – | 62.4 | % |  | 60.7 | % |  | $ | 5,474 |
See further discussion of the Convertible Senior Unsecured Notes at Note 7. Guarantee. As discussed in Note 2, the Company guaranteed on Fieldwood’s behalf certain plugging and abandonment obligations associated with the Gulf Properties from the date of closing until the Company was released from the guarantee in third quarter 2015. The fair value of this guarantee was 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 the Company’s release by the Bureau of Ocean Energy Management from its obligation under the guarantee (3.71% at December 31, 2014). The discount and probability of default rates were 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 guarantee was the estimate of future payments for plugging and abandonment, which was developed based upon third-party quotes and then-current actual costs. Significant increases (decreases) in the estimate of these payments could have resulted 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 |
Fair Value - Recurring Measurement Basis 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): September 30, 2015
| Fair Value Measurements |  | Netting(1) |  | Assets/Liabilities at Fair Value
| Level 1 |  | Level 2 |  | Level 3 |  |
Assets |  |  |  |  |  |  |  |  |
Commodity derivative contracts | $ | — |  |  | $ | 122,307 |  |  | $ | — |  |  | $ | (2,741 | ) |  | $ | 119,566 |
Investments | 10,444 |  |  | — |  |  | — |  |  | — |  |  | 10,444 |
| $ | 10,444 |  |  | $ | 122,307 |  |  | $ | — |  |  | $ | (2,741 | ) |  | $ | 130,010 |
Liabilities |  |  |  |  |  |  |  |  |
Commodity derivative contracts | $ | — |  |  | $ | — |  |  | $ | 3,436 |  |  | $ | (2,741 | ) |  | $ | 695 |
Long-term debt holder conversion feature | — |  |  | — |  |  | 5,474 |  |  | — |  |  | 5,474 |
| $ | — |  |  | $ | — |  |  | $ | 8,910 |  |  | $ | (2,741 | ) |  | $ | 6,169 |
December 31, 2014
| Fair Value Measurements |  | Netting(1) |  | Assets/Liabilities at Fair Value
| Level 1 |  | Level 2 |  | Level 3 |  |
Assets |  |  |  |  |  |  |  |  |
Commodity derivative contracts | $ | — |  |  | $ | 338,067 |  |  | $ | 350 |  |  | $ | — |  |  | $ | 338,417 |
Investments | 11,106 |  |  | — |  |  | — |  |  | — |  |  | 11,106 |
| $ | 11,106 |  |  | $ | 338,067 |  |  | $ | 350 |  |  | $ | — |  |  | $ | 349,523 |
Liabilities |  |  |  |  |  |  |  |  |
Guarantee | $ | — |  |  | $ | — |  |  | $ | 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. Level 3 - Commodity Derivative Contracts. The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for commodity derivative contracts during the three and nine-month periods ended September 30, 2015 (in thousands):
Level 3 Fair Value Measurements - Commodity Derivative Contracts |  | Three Months Ended September 30, 2015 |  | Nine Months Ended September 30, 2015
Beginning balance |  | $ | (2,207 | ) |  | $ | 350 |
Purchases |  | — |  |  | (2,894 | )
Loss on commodity derivative contracts |  | (1,229 | ) |  | (892 | )
Ending balance |  | $ | (3,436 | ) |  | $ | (3,436 | )
Losses due to changes in fair value of the Company’s Level 3 commodity derivative contracts have been included in gain on derivative contracts in the accompanying unaudited condensed consolidated statements of operations. There were no outstanding Level 3 commodity derivative contracts at September 30, 2014. See Note 8 for further discussion of the Company’s derivative contracts. Level 3 - Long-Term Debt Holder Conversion Feature. The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for long-term debt holder conversion features during the three and nine-month periods ended September 30, 2015 (in thousands):
Level 3 Fair Value Measurements - Long-Term Debt Holder Conversion Feature |  |
Beginning balance |  | $ | — |
Issuances |  | 16,994 |
Gain on derivative holder conversion feature |  | (10,146 | )
Conversions |  | (1,374 | )
Ending balance |  | $ | 5,474 |
The fair value of the conversion features are determined quarterly with changes in fair value recorded as interest expense. Level 3 - Guarantee. The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for the guarantee during the three and nine-month periods ended September 30, 2015 and 2014 (in thousands):
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
Level 3 Fair Value Measurements - Guarantee |  | 2015 |  | 2014 |  | 2015 |  | 2014
Beginning balance |  | $ | 3,736 |  |  | $ | 12,028 |  |  | $ | 5,104 |  |  | $ | — |
Issuances(1) |  | — |  |  | — |  |  | — |  |  | 9,446 |
(Gain) loss on guarantee |  | — |  |  | (1,598 | ) |  | — |  |  | 984 |
Settlements |  | (3,736 | ) |  | — |  |  | (5,104 | ) |  | — |
Ending balance |  | $ | — |  |  | $ | 10,430 |  |  | $ | — |  |  | $ | 10,430 |
____________________
(1) | For the nine-month period ended September 30, 2014, balance represents the fair value of the guarantee 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.
While in effect, the fair value of the guarantee was 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 guarantee as of December 31, 2014 is included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet. Transfers. 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 nine-month periods ended September 30, 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 8.75% Senior Secured Notes due 2020 (“Senior Secured Notes”), its 8.75% Senior Notes due 2020, 7.5% Senior Notes due 2021, 8.125% Senior Notes due 2022, and 7.5% Senior Notes due 2023 (collectively, “Senior Unsecured Notes”) and the Convertible Senior Unsecured Notes using pricing 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 September 30, 2015 and December 31, 2014 were as follows (in thousands):
| September 30, 2015 |  | December 31, 2014
| Fair Value |  | Carrying Value |  | Fair Value |  | Carrying Value
8.75% Senior Secured Notes due 2020 | $ | 757,813 |  |  | $ | 1,250,000 |  |  | $ | — |  |  | $ | — |
Senior Unsecured Notes |  |  |  |  |  |  |
8.75% Senior Notes due 2020(1) | $ | 95,128 |  |  | $ | 401,149 |  |  | $ | 303,750 |  |  | $ | 445,402 |
7.5% Senior Notes due 2021(2) | $ | 218,605 |  |  | $ | 996,309 |  |  | $ | 752,000 |  |  | $ | 1,178,486 |
8.125% Senior Notes due 2022 | $ | 129,255 |  |  | $ | 601,187 |  |  | $ | 472,500 |  |  | $ | 750,000 |
7.5% Senior Notes due 2023(3) | $ | 134,846 |  |  | $ | 622,923 |  |  | $ | 519,750 |  |  | $ | 821,548 |
Convertible Senior Unsecured Notes |  |  |  |  |  |  |
8.125% Convertible Senior Notes due 2022(4) | $ | 30,143 |  |  | $ | 36,406 |  |  | $ | — |  |  | $ | — |
7.5% Convertible Senior Notes due 2023(5) | $ | 23,599 |  |  | $ | 29,020 |  |  | $ | — |  |  | $ | — |
____________________
(1) | Carrying value is net of $3,649 and $4,598 discount at September 30, 2015 and December 31, 2014, respectively.
(2) | Carrying value includes a premium of $2,652 and $3,486 at September 30, 2015 and December 31, 2014, respectively.
(3) | Carrying value is net of $2,436 and $3,452 discount at September 30, 2015 and December 31, 2014, respectively.
(4) | Carrying value includes holder conversion feature liabilities with fair value of $3,113 and is net of $105,691 discount at September 30, 2015.
(5) | Carrying value includes holder conversion feature liabilities with fair value of $2,361 and is net of $87,412 discount at September 30, 2015.
See Note 7 for discussion of the Company’s long-term debt.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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