Annual report pursuant to Section 13 and 15(d)

Note 3 - Fair Value Measurements

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Note 3 - Fair Value Measurements
 12 Months Ended
Dec. 31, 2019
Notes to Financial Statements  
Fair Value Disclosures [Text Block]
3.
Fair Value Measurements
 
Under GAAP, fair value is defined as 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. The fair value of an asset should reflect its highest and best use by market participants, whether using an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of nonperformance, which includes, among other things, the Company’s credit risk.
 
Valuation techniques are generally classified into
three
categories: the market approach; the income approach; and the cost approach. The selection and application of
one
or more of these techniques requires significant judgment and is primarily dependent upon the characteristics of the asset or liability, the principal (or most advantageous) market in which participants would transact for the asset or liability and the quality and availability of inputs. Inputs to valuation techniques are classified as either observable or unobservable within the following hierarchy:
 
 
●
Level
1
– quoted prices in active markets for identical assets or liabilities.
 
 
●
Level
2
– inputs other than quoted prices that are observable for an asset or liability. These include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are
not
active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).
 
 
●
Level
3
– unobservable inputs that reflect our expectations about the assumptions that market participants would use in measuring the fair value of an asset or liability.
 
The following tables present the fair value of our derivatives and long-term debt (in thousands):
 
   
December 31,
  
   
2019
    
2018
  
Assets:
      
 
      
 
Derivatives instruments - open contracts, current
   $
6,921
     $
74,580
  
Derivatives instruments - open contracts, long-term
    
2,653
      
—
  
                 
Liabilities:
      
 
      
 
Derivatives instruments - open contracts, current
    
1,785
      
—
  
 
 
   
December 31, 2019
    
December 31, 2018
  
   
Carrying Value
    
Fair Value
    
Carrying Value
    
Fair Value
  
Liabilities:
      
 
      
 
      
 
      
 
Credit Agreement
   $
105,000
     $
105,000
     $
21,000
     $
21,000
  
Senior Second Lien Notes
    
614,533
      
597,188
      
612,535
      
546,875
  
 
As of
December 31, 2019
and
2018,
the carrying value of our open derivative contracts equaled the estimated fair value.  We measure the fair value of our derivative contracts by applying the income approach using models with inputs that are classified within Level
2
of the valuation hierarchy.  The inputs used to measure the fair value of our derivative contracts are the exercise price, the expiration date, the settlement date, notional quantities, the implied volatility, the discount curve with spreads and published commodity future prices.
 
The fair value of our Senior Second Lien Notes is based on quoted prices, although the market is
not
an active market; therefore, the fair value is classified within Level
2.
  The carrying amount of debt under our Credit Agreement approximates fair value because the interest rates are variable and reflective of current market rates.