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Fair Value Measurements
 3 Months Ended
Mar. 31, 2017
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 levels of the fair value hierarchy noted below. The carrying values of cash, restricted cash, accounts receivable, prepaid expenses, other current assets, accounts payable and accrued expenses and other current liabilities included in the unaudited condensed consolidated balance sheets approximated fair value at March 31, 2017 and December 31, 2016. As a result, these financial assets and liabilities are not discussed below. The fair values of property, plant and equipment and related impairments, which are calculated using Level 3 inputs, are discussed in Note 4.

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 Level 1 and Level 2 of the hierarchy as of March 31, 2017 and December 31, 2016, 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 of $6.1 million and $2.8 million are included in other current assets at March 31, 2017 and December 31, 2016, respectively, and investments of $4.8 million are included in other assets at December 31, 2016 in the 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 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

Debt Holder Conversion Feature. The Predecessor Company’s 8.125% Convertible Senior Notes due 2022 and 7.5% Convertible Senior Notes due 2023 (collectively, the “Convertible Senior Unsecured Notes”) each contained a conversion option whereby, prior to Chapter 11 filings, the Convertible Senior Unsecured Notes holders had the option to convert the notes into shares of Predecessor Company common stock. These conversion features were identified as embedded derivatives that met the criteria to be bifurcated from their host contracts and accounted for separately from the Convertible Senior Unsecured Notes.

The fair values of the holder conversion features were determined using a binomial lattice model based on certain assumptions including (i) the Predecessor 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 was the hazard rate, an estimate of default probability.

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):

March 31, 2017
 
Fair Value Measurements
 
Netting(1)
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
—

 
$
9,833

 
$
—

 
$
(3,180
)
 
$
6,653

Investments
6,124

 
—

 
—

 
—

 
6,124

 
$
6,124

 
$
9,833

 
$
—

 
$
(3,180
)
 
$
12,777

Liabilities
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
—

 
$
4,725

 
$
—

 
$
(3,180
)
 
$
1,545

 
$
—

 
$
4,725

 
$
—

 
$
(3,180
)
 
$
1,545


December 31, 2016
 
Fair Value Measurements
 
Netting(1)
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Investments
$
7,541

 
$
—

 
$
—

 
$
—

 
$
7,541

 
$
7,541

 
$
—

 
$
—

 
$
—

 
$
7,541

Liabilities
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
—

 
$
29,714

 
$
—

 
$
—

 
$
29,714

 
$
—

 
$
29,714

 
$
—

 
$
—

 
$
29,714

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

Level 3 - Debt Holder Conversion Feature. The table below sets forth a reconciliation of the Predecessor Company’s Level 3 fair value measurements for debt holder conversion features (in thousands):
 
Three Months Ended March 31, 2016
Beginning balance
$
29,355

Gain on derivative holder conversion feature
(880
)
Conversions
(21,194
)
Ending balance
$
7,281



Prior to commencement of the Chapter 11 Proceedings, the fair value of the conversion features were determined quarterly with changes in fair value recorded as interest expense.

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-month periods ended March 31, 2017 and 2016, 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 measured the fair value of its non-interest bearing 0.00% Convertible Senior Subordinated Notes due 2020, (the “Convertible Notes”) using pricing that was readily available in the public market. The Company measured the fair value of its $35.0 million initial principal note, as amended in February 2017, which is secured by first priority mortgages on the Company’s real estate in Oklahoma City, Oklahoma (the “Building Note”) using a discounted cash flow analysis. The Company classifies these inputs as Level 2 in the fair value hierarchy. The estimated fair values and carrying values of the Company’s long-term debt are as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Convertible Notes
$
—

 
$
—

 
$
334,800

 
$
268,780

Building Note
$
40,301

 
$
37,516

 
$
40,608

 
$
36,528



See Note 5 for additional discussion of the Company’s long-term debt.