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, 2015 and 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 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.

Mandatory Prepayment Feature - PGC Senior Secured Notes. In conjunction with the acquisition of and termination of a gathering agreement with PGC in October 2015, the Company issued the PGC Senior Secured Notes with a $78.0 million principal value. These notes bear payment terms identical to and are secured by the same assets as the 8.75% Senior Secured Notes due 2020 issued by the Company in June 2015 as discussed in Note 12. The 8.75% Senior Secured Notes due 2020 issued in June 2015 and PGC Senior Secured Notes (collectively, “Senior Secured Notes”) will mature on June 1, 2020; provided, however, that if on October 15, 2019, the aggregate outstanding principal amount of the Company’s unsecured 8.75% Senior Notes due 2020 exceeds $100.0 million, the Senior Secured Notes will mature on October 16, 2019. The issuance of the PGC Senior Secured Notes at a substantial discount, as discussed in Note 12 and Note 13, resulted in the treatment of the mandatory prepayment feature contained in those notes as an embedded derivative that meets the criteria to be bifurcated from its host contract, the PGC Senior Secured Notes, and accounted for separately from those notes. The mandatory prepayment feature contained in the PGC Senior Secured Notes is recorded at fair value each reporting period based upon values determined through the use of discounted cash flow models of the PGC Senior Secured Notes both (i) with the mandatory prepayment feature and (ii) excluding the mandatory prepayment feature.

Level 3 Fair Value Measurements

Commodity Derivative Contracts. The fair value 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 December 31, 2015 and 2014 are included in the table below.



Unobservable Input	Range							Weighted Average			Fair Value
	(Price per Mcf)										(In thousands)
December 31, 2015
Natural gas basis differential forward curve	$	(0.06	)	–	$	(0.28	)	$	(0.22	)	$	(1,748	)
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 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 features at December 31, 2015 are included in the table below.



Unobservable Input	Range					Weighted Average		Fair Value
								(In thousands)
December 31, 2015
Long-term debt conversion feature hazard rate	114.0	%	–	135.2	%	119.2	%	$	29,355

See further discussion of the Convertible Senior Unsecured Notes at Note 12.

Guarantees. As discussed in Note 3, 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 the third quarter of 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 BOEM 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 guarantees was the estimate of future payments for plugging and abandonment of approximately $372.0 million, 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.

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):

December 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	$	—	$	85,524	$	—	$	(1,175	)	$	84,349
Investments	10,106		—		—		—			10,106
	$	10,106	$	85,524	$	—	$	(1,175	)	$	94,455
Liabilities
Commodity derivative contracts	$	—	$	—	$	1,748	$	(1,175	)	$	573
Long-term debt holder conversion feature	—		—		29,355		—			29,355
Mandatory prepayment feature - PGC Senior Secured Notes	—		2,941		—		—			2,941
	$	—	$	2,941	$	31,103	$	(1,175	)	$	32,869

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
Guarantee	$	—	$	—	$	5,104	$	—	$	5,104
	$	—	$	—	$	5,104	$	—	$	5,104

____________________

(1)Represents the impact of netting assets and liabilities with 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 years ended December 31, 2015, 2014 and 2013 (in thousands):



Level 3 Fair Value Measurements - Commodity Derivative Contracts	2015			2014		2013
Beginning balance	$	350		$	—	$	(512	)
Loss on commodity derivative contracts	(350		)	—		(133		)
Purchases	(1,748		)	350		—
Settlements paid	—			—		645
Level 3 commodity derivative contracts at December 31	$	(1,748	)	$	350	$	—

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.

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 year ended December 31, 2015 (in thousands):



Level 3 Fair Value Measurements - Long-Term Debt Holder Conversion Feature
Beginning balance	$	—
Issuances	31,200
Gain on derivative holder conversion feature	10,198
Conversions	(12,043		)
Ending balance	$	29,355

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 guarantees during the years ended December 31, 2015 and 2014 (in thousands):



Level 3 Fair Value Measurements - Guarantee	2015			2014
Beginning balance	$	5,104		$	—
Issuances	—			9,446
Loss on guarantee	—			(4,342		)
Settlements	(5,104		)	—
Ending balance	$	—		$	5,104

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 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.

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 years ended December 31, 2015, 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 - Long-Term Debt

The Company measures the fair value of its 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 December 31, 2015 and 2014 were as follows (in thousands):



	December 31, 2015				December 31, 2014
	Fair Value		Carrying Value		Fair Value		Carrying Value
8.75% Senior Secured Notes due 2020(1)	$	403,098	$	1,301,098	$	—	$	—
Senior Unsecured Notes
8.75% Senior Notes due 2020(2)	$	39,740	$	392,666	$	303,750	$	445,402
7.5% Senior Notes due 2021(3)	$	79,812	$	759,711	$	752,000	$	1,178,486
8.125% Senior Notes due 2022	$	57,749	$	527,737	$	472,500	$	750,000
7.5% Senior Notes due 2023(4)	$	58,799	$	541,572	$	519,750	$	821,548
Convertible Senior Unsecured Notes
8.125% Convertible Senior Notes due 2022(5)	$	44,199	$	82,294	$	—	$	—
7.5% Convertible Senior Notes due 2023(6)	$	15,125	$	26,428	$	—	$	—

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(1)	Carrying value includes mandatory prepayment feature liabilities with fair value of $2,941 and is net of $29,842 discount at December 31, 2015.


(2)	Carrying value is net of $3,269 and $4,598 discount at December 31, 2015 and 2014, respectively.


(3)	Carrying value includes a premium of $1,944 and $3,486 at December 31, 2015 and 2014, respectively.


(4)	Carrying value is net of $1,989 and $3,452 discount at December 31, 2015 and 2014, respectively.


(5)	Carrying value includes holder conversion feature liabilities with fair value of $21,874 and is net of $180,751 discount at December 31, 2015.


(6)	Carrying value includes holder conversion feature liabilities with fair value of $7,481 and is net of $59,549 discount at December 31, 2015.