(10) 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 natural gas, crude oil price swaps and natural gas liquid 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 September 30, 2018 and December 31, 2017:


September 30, 2018	Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Balance at September 30, 2018
(Thousands of dollars)
Assets
Commodity derivative contracts	$	—	$	—	$	68		$	68

Total assets		—	$	—	$	68		$	68

Liabilities
Commodity derivative contracts	$	—	$	—	$	(11,254	)	$	(11,254	)

Total liabilities	$	—	$	—	$	(11,254	)	$	(11.254	)


December 31, 2017	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, 2017
(Thousands of dollars)
Assets
Commodity derivative contracts	$	—	$	—	$	388		$	388

Total assets	$	—	$	—	$	388		$	388

Liabilities
Commodity derivative contract	$	—	$	—	$	(3,422	)	$	(3,422	)

Total liabilities	$	—	$	—	$	(3,422	)	$	(3,422	)

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 , crude oil, natural gas liquids, 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 nine months ended September 30, 2018.


(Thousands of dollars)
Net Liabilities – December 31, 2017	$	(3,034	)
Total realized and unrealized gains (losses):
Included in earnings (a)		(11,077	)
Purchases, sales, issuances and settlements		2,925

Net Liabilities – September 30, 2018	$	(11,186	)

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.

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.

The following table sets forth the effect of derivative instruments on the consolidated balance sheets at September 30, 2018 and December 31, 2017:


			Fair Value
(Thousands of dollars)	Balance Sheet Location		September 30, 2018		December 31, 2017
Asset Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Natural gas commodity contracts		Other Current Assets	$	55	$	—
Natural gas liquid contracts		Other Current Assets		—		—
Crude oil commodity contracts		Other Current Assets		—		344
Natural gas commodity contracts		Other Assets		13		44
Natural gas liquid contracts		Other Assets		—		—

Total			$	68	$	388

Liability Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contracts		Derivative liability short-term		(7,420)		(1,504)
Natural gas commodity contracts		Derivative liability short-term		(47)		(4)
Natural gas liquid contracts		Derivative liability short-term		(561)		—
Crude oil commodity contracts		Derivative liability long-term		(3,143)		(1,910)
Natural gas commodity contracts		Derivative liability long-term		—		(4)
Natural gas liquid contracts		Derivative liability long-term		(83)		—

Total			$	(11,254)	$	(3,422)

Total derivative instruments			$	(11,186)	$	(3,034)

The following table sets forth the effect of derivative instruments on the consolidated statements of operations for the nine month period ended September 30, 2018 and 2017:


	Location of gain (loss) recognized in income	Amount of gain/loss recognized in income
(Thousands of dollars)	Location of gain (loss) recognized in income	2018			2017
Derivatives not designated as cash-flow hedge instruments:
Natural gas commodity contracts	Unrealized (loss) gain on derivative instruments, net	$	(359	)	$	1,709
Crude oil commodity contracts	Unrealized (loss) gain on derivative instruments, net	$	(7,148	)		1,383
Natural gas liquids contracts	Unrealized gain on derivative instruments, net		(645	)		—
Natural gas commodity contracts	Realized (loss) on derivative instruments, net		124			(130	)
Crude oil commodity contracts	Realized (loss) on derivative instruments, net		(2,895	)		81
Natural gas liquids contracts	Realized gain on derivative instruments, net		(154	)		—

		$	(11,077	)	$	3,043