v3.3.1.900
Derivative Instruments and Fair Value Measurements
 12 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Fair Value Measurements
7. Derivative Instruments and Fair Value Measurements

At December 31, 2015, we had the following commodity derivatives positions outstanding:

 

Commodity and Period

    Contract
Type		      Volume Transacted    Contract Price

Crude Oil

           

January 2016 — December 2016

    Swap      500 Bbls/d    $62.50/Bbl

January 2016 — December 2016

    Swap      250 Bbls/d    $62.55/Bbl

January 2016 — June 2016

    Swap      500 Bbls/d    $40.25/Bbl

January 2016 — June 2016

    Swap      1,000 Bbls/d    $40.00/Bbl

Natural Gas

           

March 2016 — December 2016

    Swap      100,000 MMBtu/month    $2.91/MMBtu

March 2016 — December 2016

    Swap      100,000 MMBtu/month    $2.95/MMBtu

 

After December 31, 2015, we entered into natural gas swaps covering 400,000 MMBtu per month at an average price of $2.45/MMBtu for February 2016 through March 2017, and natural gas collars covering 200,000 MMBtu per month with a floor price of $2.30/MMBtu and a ceiling price of $2.60/MMBtu for April 2017 through December 2017.

The following summarizes the fair value of our open commodity derivatives as of December 31, 2015 and 2014 (in thousands):

 

    

Balance Sheet Location

    Fair Value  
          December 31,
2015		      December 31,
2014		  

Derivatives not designated as hedging instruments

         

Commodity derivatives

   

Unrealized gain on commodity derivatives

    $ 6,737       $ 39,951   

The following summarizes the change in the fair value of our commodity derivatives (in thousands):

 

    

Income Statement Location

       
          Year Ended December 31,  
          2015     2014      2013  

Derivatives not designated as hedging instruments

           

Commodity derivatives

   

Unrealized (loss) gain on commodity derivatives

    $ (33,214 )    $ 42,113       $ (4,596 ) 
  

Realized gain (loss) on commodity derivatives

      52,489        2,359         (1,048 ) 
     

 

 

    

 

 

     

 

 

  
      $ 19,275      $ 44,472       $ (5,644 ) 
     

 

 

    

 

 

     

 

 

  

Unrealized gains and losses, at fair value, are included on our consolidated balance sheets as current or non-current assets or liabilities based on the anticipated timing of cash settlements under the related contracts. Changes in the fair value of our commodity derivative contracts are recorded in earnings as they occur and included in income (expense) on our consolidated statements of operations. We estimate the fair value of swap contracts based on the present value of the difference in exchange-quoted forward price curves and contractual settlement prices multiplied by notional quantities. We internally valued the option contracts using industry-standard option pricing models and observable market inputs. We use our internal valuations to determine the fair values of the contracts that are reflected on our consolidated balance sheets. Realized gains and losses are also included in income (expense) on our consolidated statements of operations.

We are exposed to credit losses in the event of nonperformance by the counterparties on our commodity derivatives positions and have considered the exposure in our internal valuations. However, we do not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions.

To estimate the fair value of our commodity derivatives positions, we use market data or 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. We primarily apply the market approach for recurring fair value measurements and attempt to use the best available information. We determine the fair value based upon the hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and lowest priority to unobservable inputs (Level 3 measurement). The three levels of fair value hierarchy are as follows:

 

  •   Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. At December 31, 2015, we had no Level 1 measurements.

 

  •   Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Our derivatives, which consist primarily of commodity swaps and collars, are valued using commodity market data which is derived by combining raw inputs and quantitative models and processes to generate forward curves. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2. At December 31, 2015, all of our commodity derivatives were valued using Level 2 measurements.

 

  •   Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The fair value of oil and gas properties used in estimating our recognized impairment loss represents a nonrecurring Level 3 measurement.

Nonrecurring Fair Value Measurements

Due to the impact of the decline in forward commodity prices during the year ended December 31, 2015, there were indications that the carrying values of certain of our oil and gas properties may be impaired and undiscounted cash flows attributable to these assets indicated their carrying amounts were not expected to be recovered. We estimated the fair value of the proved oil and gas properties and equipment using a discounted cash flow model, which is a Level 3 fair value measurement. Significant inputs used to determine the fair value include estimates of (i) future sales prices for oil and gas based on NYMEX strip prices, (ii) pricing adjustments for differentials, (iii) production costs, (iv) capital expenditures, (v) future oil and gas reserves to be recovered and the timing thereof, and (vi) discount rate.

For the year ended December 31, 2015, we recognized an impairment loss of $214.7 million related primarily to our vertical Canyon wells, due to the impact of the decline in forward commodity prices. At September 30, 2015, we had $22 million in value recorded for these properties, which is the estimated fair value. Our estimates of future cash flows attributable to our oil and gas properties could decline further with commodity prices which may result in additional impairment losses.

Financial Instruments Not Recorded at Fair Value

The following table sets forth the fair values of financial instruments that are not recorded at fair value on our financial statements (in thousands).

 

     December 31, 2015  
     Carrying
Amount		      Fair Value  

Senior Notes, net

    $ 225,839       $ 82,915   
  

 

 

     

 

 

  

 

The fair value of the Senior Notes is based on quoted market prices, but the Senior Notes are not actively traded in the public market. Accordingly, the fair value of the Senior Notes would be classified as Level 2 in the fair value hierarchy.