11. Financial Instruments

Fair Value Measurements:

Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, prioritizing and defining the types of inputs used to measure fair value. The fair values of the Company’s interest rate swaps, natural gas and crude oil price collars and swaps are designated as Level 3. The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016:


June 30, 2017	Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Balance at June 30, 2017
(Thousands of dollars)
Assets
Commodity derivative contracts	$	—	$	—	$	1,106		$	1,106

Total assets	$	—	$	—	$	1,106		$	1,106

Liabilities
Commodity derivative contracts	$	—	$	—	$	(334	)	$	(334	)

Total liabilities	$	—	$	—	$	(334	)	$	(334	)


December 31, 2016	Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Balance at December 31, 2016
(Thousands of dollars)
Assets
Commodity derivative contracts	$	—	$	—	$	57		$	57

Total assets	$	—	$	—	$	57		$	57

Liabilities
Commodity derivative contract	$	—	$	—	$	(3,639	)	$	(3,639	)

Total liabilities	$	—	$	—	$	(3,639	)	$	(3,639	)

The derivative contracts were measured based on quotes from the Company’s counterparties. Such quotes have been derived using valuation models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. These estimates are verified using comparable NYMEX futures contracts or are compared to multiple quotes obtained from counterparties for reasonableness.

The significant unobservable inputs for Level 3 derivative contracts include basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties’ valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy for the six months ended June 30, 2017.


(Thousands of dollars)
Net Liabilities – December 31, 2016	$	(3,582	)
Total realized and unrealized (gains) losses:
Included in earnings (a)		4,149
Purchases, sales, issuances and settlements		205

Net Assets – June 30, 2017	$	772

a)	Derivative instruments are reported in revenues as realized gain/loss and on a separately reported line item captioned unrealized gain/loss on derivative instruments, and interest rate swap instruments are reported as an increase or reduction to interest expense.

Derivative Instruments:

The Company is exposed to commodity price and interest rate risk, and management considers periodically the Company’s exposure to cash flow variability resulting from the commodity price changes and interest rate fluctuations. Futures, swaps and options are used to manage the Company’s exposure to commodity price risk inherent in the Company’s oil and gas production operations. The Company does not apply hedge accounting to any of its commodity based derivatives. Both realized and unrealized gains and losses associated with commodity derivative instruments are recognized in earnings.

Interest rate swap derivatives are treated as cash-flow hedges and are used to fix our floating interest rates on existing debt. Settlements of the swaps, which began in January 2014 and concluded in January 2016, was recognized within interest expense. There were no remaining interest rate swaps as of June 30, 2017 and December 31, 2016.The value of interest rate swaps if applicable, would be recorded in accumulated other comprehensive loss, net of tax.

The following table sets forth the effect of derivative instruments on the consolidated balance sheets at June 30, 2017 and December 31, 2016:


			Fair Value
(Thousands of dollars)	Balance Sheet Location		June 30, 2017			December 31, 2016
Asset Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contracts		Other Current Assets	$	575		$	—
Natural gas commodity contracts		Other Current Assets		131			—
Crude oil commodity contracts		Other Assets		295			—
Natural gas commodity contracts		Other Assets		105			57

Total			$	1,106		$	57

Liability Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contracts		Derivative liability short-term		—			(1,065	)
Natural gas commodity contracts		Derivative liability short-term		(250	)		(1,482	)
Natural gas commodity contracts		Derivative liability long-term		(62	)		(463	)
Crude oil commodity contracts		Derivative liability long-term		(22	)		(629	)

Total			$	(334	)	$	(3,639	)

Total derivative instruments			$	(772	)	$	(3,582	)

The following table sets forth the effect of derivative instruments on the consolidated statements of operations for the six month period ended June 30, 2017 and 2016:


		Amount of gain/loss recognized in income
(Thousands of dollars)	Location of gain/loss recognized in income	2017			2016
Derivative designated as cash-flow hedge instruments:
Interest rate swap contracts	Interest expense	$	—		$	(7	)
Derivatives not designated as cash-flow hedge instruments:
Natural gas commodity contracts	Unrealized (loss) gain on derivative instruments, net		1,852			—
Crude oil commodity contracts	Unrealized (loss) gain on derivative instruments, net		2,502			—
Natural gas commodity contracts	Realized gain (loss) on derivative instruments, net		(205	)		—
Crude oil commodity contracts	Realized gain (loss) on derivative instruments, net		—			—

		$	4,149		$	(7	)