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Fair Value Measurements
 12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurements

15. FAIR VALUE MEASUREMENTS

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

Level 1 - Quoted prices for identical assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.

 

Level 2 - Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data. Level 2 also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data.

 

Level 3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data.

 

The Company has processes and controls in place to attempt to ensure that fair value is reasonably estimated. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are evaluated through a management review process.

 

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following is a description of the valuation methodologies used for complex financial instruments measured at fair value:

 

Oil Price Risk Derivative Valuation Methodologies

 

The Company determines its estimate of the fair value of derivative instruments using a market approach based on several factors, including quoted market prices in active markets, quotes from third parties, the credit rating of the counterparty and the Company’s own credit rating. In consideration of counterparty credit risk, the Company assessed the likelihood that the counterparty to the derivative would default by failing to make any contractually required payments. Additionally, the Company considers that it is of adequate credit quality and has the financial resources and willingness to meet its potential repayment obligations associated with the derivative transactions. The crude oil derivative markets are highly active. Although the Company’s derivative instruments are valued using indices, the instruments themselves are traded with third-party counterparties and are not openly traded on an exchange. As such, the Company has classified these instruments as Level 2.

 

Warrant Valuation Methodologies

 

The warrants contain a dilutive issuance and other liability provisions which cause the warrants to be accounted for as a liability. Such warrant instruments are initially recorded and valued as a level 3 liability and are accounted for at fair value with changes in fair value reported in earnings.

 

The Company estimated the value of the warrants on December 31, 2016 using the Monte Carlo model with the following assumptions: a term expiring June 21, 2022, exercise price of $2.05, volatility rate of 90%, and a risk-free interest rate of 2.01%. The Company remeasured the warrants as of December 31, 2017, using the same Monte Carlo model, using the following assumptions: a term expiring June 21, 2022, exercise price of $2.05, stock price of $1.50, average volatility rate of 90%, and a risk-free interest rate of 2.15%. As of December 31, 2017, the fair value of the warrants was $1,200,000, or $1.20 per warrant, and was recorded as a liability on the accompanying consolidated balance sheets. An increase in any of the variables would cause an increase in the fair value of the warrants. Likewise, a decrease in any variable would cause a decrease in the value of the warrants.

 

Marketable Equity Securities Valuation Methodologies

 

The fair value of available for sale securities is based on quoted market prices obtained from independent pricing services. Accordingly, the Company has classified these instruments as Level 1.

 

Other Financial Instruments

 

The carrying amount of cash and equivalents, oil and gas sales receivable, other current assets, accounts payable and accrued expenses approximate fair value because of the short-term nature of those instruments. The recorded amounts for the Credit Facility discussed in Note 7 approximates the fair market value due to the variable nature of the interest rates, and the fact that market interest rates have remained substantially the same since the latest amendment to the Credit Facility.

 

Recurring Fair Value Measurements

 

Recurring measurements of the fair value of assets and liabilities as of December 31, 2017 and 2016 are as follows:

 

    December 31, 2017     December 31, 2016  
    Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
                                                 
Marketable equity securitites:                                                                
Sutter Gold Mining Company   $ -     $ 8     $ -     $ 8     $ -     $ 16     $ -     $ 16  
Anfield Resources, Inc.     868       -       -       868       930       -       -       930  
Total   $ 868     $ 8     $ -     $ 876     $ 930     $ 16     $ -     $ 946  
                                                                 
Outstanding warrant liability     -       -       1,200       1,200       -       -       1,030       1,030  
Crude oil price risk derivatives     -       161       -       161       -       -       -       -  
Total   $ -     $ 161     $ 1,200     $ 1,361     $ -     $ -     $ 1,030     $ 1,030  

  

The following table presents a reconciliation of changes in assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2017 and 2016:

 

    Assets     Liabilities  
    Marketable Securities     Crude Oil     Crude Oil     Executive              
    Sutter     Anfield     Derivatives     Derivatives     Retirement     Warrants        
    (Level 2)     (Level 1)     (Level 2)     (Level 2)     (Level 3)     (Level 3)     Net  
                                           
Fair value, December 31, 2015     13       238       1,634       -       (583 )     -       1,302  
Acquisition of investment     -       750       -       -       -       -       750  
Issuance of warrants     -       -       -       -       -       1,240       1,240  
Other comprehensive loss     3       -       -       -       -       -       3  
Fair value adjustments included in net loss:     -                                                  
Net unrealized gain on warrant valuation     -       -       -       -       -       (210 )     (210 )
Net unrealized loss on Anfield Shares     -       (58 )     -       -       -       -       (58 )
Offset of derivative assets and liabilities     -       -       (194 )     -       -       -       (194 )
Cash settlements paid     -       -       (1,440 )     -       583       -       (857 )
                                                         
Fair value, December 31, 2016   $ 16     $ 930     $ -       -     $ -     $ 1,030     $ 1,976  
Total net losses included in:                                                        
Acquisition of investment     -       777       -       -       -       -       777  
Other comprehensive loss     (8 )     -       -       -       -       -       (8 )
Fair value adjustments included in net loss:                             -                          
Net unrealized loss on oil price risk derivatives     -       -       -       (26 )     -       -       (26 )
Net unrealized loss on warrant valuation     -       -       -       -       -       170       170  
Net unrealized loss on Anfield Shares     -       (839 )     -       -       -       -       (839 )
Cash settlements paid     -       -       -       (135 )     -       -       (135 )
                              -                          
Fair value, December 31, 2017   $ 8     $ 868     $ -       (161 )   $ -     $ 1,200     $ 1,915