6. Derivative Instruments and Fair Value Measurements

The following table provides our outstanding commodity derivative positions at September 30, 2016.

Commodity and Period	Contract Type	Volume Transacted	Contract Price
Crude Oil
October 2016 – December 2016	Swap	500 Bbls/d	$62.50/Bbl
October 2016 – December 2016	Swap	250 Bbls/d	$62.55/Bbl

Natural Gas
October 2016 – December 2016	Swap	100,000 MMBtu/month	$2.91/MMBtu
October 2016 – December 2016	Swap	100,000 MMBtu/month	$2.95/MMBtu
October 2016 – March 2017	Swap	100,000 MMBtu/month	$2.463/MMBtu
October 2016 – March 2017	Swap	300,000 MMBtu/month	$2.45/MMBtu
April 2017 – December 2017	Collar	200,000 MMBtu/month	$2.30/MMBtu - $2.60/MMBtu
November 2016 – March 2017	Swap	200,000 MMBtu/month	$3.287/MMBtu

After September 30, 2016, we entered into natural gas collars covering 100,000 MMBtu per month with a floor price of $3.00/MMBtu and a ceiling price of $3.65/MMBtu for January 2017 through December 2017, and natural gas collars covering 400,000 MMBtu per month with a floor price of $3.00/MMBtu and a ceiling price of $3.47/MMBtu for April 2017 through December 2017.

The following table summarizes the fair value of our open commodity derivatives as of September 30, 2016, and December 31, 2015 (in thousands).

	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	Fair Value				Balance Sheet Location	Fair Value
		September 30,		December 31,			September 30,			December 31,
		2016		2015			2016			2015
Derivatives not designated as hedging instruments
Commodity derivatives	Unrealized gain on commodity derivatives	$	1,057	$	6,737	Unrealized loss on commodity derivatives	$	(2,594	)	$	—

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

	Income Statement Location	Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2016		2015		2016			2015
Derivatives not designated as hedging instruments
Commodity derivatives	Unrealized gain (loss) on commodity derivatives	$	760	$	296	$	(8,273	)	$	(22,929	)
	Realized gain on commodity derivatives		781		12,755		5,690			37,937
		$	1,541	$	13,051	$	(2,583	)	$	15,008

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 values 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 September 30, 2016, 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 September 30, 2016, 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 for the three and nine months ended September 30, 2015, represents a nonrecurring Level 3 measurement. At September 30, 2016, we had no Level 3 measurements.

Nonrecurring Fair Value Measurements

We recorded no impairment of our proved properties for the three and nine months ended September 30, 2016. Due to the impact of the decline in forward commodity prices during the three and nine months ended September 30, 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. For the three and nine months ended September 30, 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 was the estimated fair value. 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 pricing, (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 rates.

Certain leases outside of our core development project were impaired during the three and nine months ended September 30, 2015, as we did not plan to develop them. As a result, we recorded a non-cash impairment loss of unproved property of $5.5 million for the three and nine months ended September 30, 2015.

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).

September 30, 2016

Carrying

Amount

Fair Value

Senior Notes

226,450

184,509

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.