Fair Value Measurements
 12 Months Ended
Dec. 31, 2015
Fair Value Disclosures [Abstract]  
Fair Value Measurements

6. Fair Value Measurements

The Company’s financial assets and liabilities are measured at fair value on a recurring basis. The Company discloses its recognized non-financial assets and liabilities, such as asset retirement obligations, unproved properties and other property and equipment, at fair value on a non-recurring basis. For non-financial assets and liabilities, the Company is required to disclose information that enables users of its financial statements to assess the inputs used to develop these measurements. The Company assesses its unproved properties for impairment whenever events or circumstances indicate the carrying value of those properties may not be recoverable. The fair value of the unproved properties is measured using an income approach based upon internal estimates of future production levels, current and future prices, drilling and operating costs, discount rates, current drilling plans and favorable and unfavorable drilling activity on the properties being evaluated and/or adjacent properties, which are Level 3 inputs. For the years ended December 31, 2015 and 2014, management's evaluation of unproved properties resulted in an impairment. Due to continued lower natural gas prices for dry gas and no current plans to drill or extend leases in the Appalachian Basin, the Company reclassified $14.4 million of unproved properties to proved properties for the year ended December 31, 2015. For the year ended December 31, 2014, the Company reclassified $3.3 million of Marcellus East unproved properties to proved properties.  As no other fair value measurements are required to be recognized on a non-recurring basis at December 31, 2015, no additional disclosures are provided at December 31, 2015.

As defined in the guidance, fair value is the amount 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 (an exit price). To estimate fair value, the Company utilizes 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. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (“Level 1”) and the lowest priority to unobservable inputs (“Level 3”). The three levels of the fair value hierarchy are as follows:

 

·

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. The Company’s cash equivalents consist of short-term, highly liquid investments, which have maturities of 90 days or less, including sweep investments and money market funds.

 

·

Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

 

·

Level 3 inputs are measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources. These inputs may be used with internally developed methodologies or third party broker quotes that result in management’s best estimate of fair value. The Company’s valuation models consider various inputs including (a) quoted forward prices for commodities, (b) time value, (c) volatility factors and (d) current market and contractual prices for the underlying instruments. Significant increases or decreases in any of these inputs in isolation would result in a significantly higher or lower fair value measurement. Level 3 instruments are commodity costless collars, index swaps, basis and fixed price swaps and put and call options to hedge oil, natural gas and NGLs price risk. At each balance sheet date, the Company performs an analysis of all applicable instruments and includes in Level 3 all of those whose fair value is based on significant unobservable inputs. The fair values derived from counterparties and third-party brokers are verified by the Company using publicly available values for relevant NYMEX futures contracts and exchange traded contracts for each derivative settlement location. Although such counterparty and third-party broker quotes are used to assess the fair value of its commodity derivative instruments, 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 and the Company does not currently have sufficient corroborating market evidence to support classifying these contracts as Level 2 instruments.

As required, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values below incorporates various factors, including the impact of the counterparty’s non-performance risk with respect to the Company’s financial assets and the Company’s non-performance risk with respect to the Company’s financial liabilities. The Company has not elected to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty, but reports them gross on its consolidated balance sheets.

Transfers between levels are recognized at the end of the reporting period. There were no transfers between levels during the 2015 and 2014 periods.

The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2015 and 2014:

 

 

 

Fair value as of December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

50,074

 

 

$

—

 

 

$

—

 

 

$

50,074

 

Commodity derivative contracts

 

 

—

 

 

 

—

 

 

 

24,869

 

 

 

24,869

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

 

—

 

 

 

—

 

 

 

(451

)

 

 

(451

)

Total

 

$

50,074

 

 

$

—

 

 

$

24,418

 

 

$

74,492

 

 

 

 

Fair value as of December 31, 2014

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,008

 

 

$

—

 

 

$

—

 

 

$

11,008

 

Commodity derivative contracts

 

 

—

 

 

 

—

 

 

 

27,502

 

 

 

27,502

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

11,008

 

 

$

—

 

 

$

27,502

 

 

$

38,510

 

 

The table below presents a reconciliation of the assets and liabilities classified as Level 3 in the fair value hierarchy for the years ended December 31, 2015 and 2014. Level 3 instruments presented in the table consist of net derivatives that, in management’s opinion, reflect the assumptions a marketplace participant would have used at December 31, 2015 and 2014.

 

 

 

For the years ended December 31,

 

 

 

2015

 

 

2014

 

 

 

(in thousands)

 

Balance at beginning of period

 

$

27,502

 

 

$

3,764

 

Total gains included in earnings

 

 

24,589

 

 

 

19,569

 

Purchases

 

 

1,326

 

 

 

369

 

Issuances

 

 

(1,313

)

 

 

—

 

Settlements(1)

 

 

(27,686

)

 

 

3,800

 

Balance at end of period

 

$

24,418

 

 

$

27,502

 

The amount of total (losses) gains for the period included in

   earnings attributable to the change in the mark to market of

   commodity derivatives contracts still held at December 31,

   2015 and 2014

 

$

(1,890

)

 

$

23,902

 

 

(1)

Included in gain (loss) on commodity derivatives contracts on the consolidated statement of operations.

At December 31, 2015, the estimated fair value of accounts receivable, prepaid expenses, accounts and revenue payables and accrued liabilities approximates their carrying value due to their short-term nature. The estimated fair value of the Company’s long-term debt at December 31, 2015 was $377.5 million based on quoted market prices of the Notes (Level 1) and the respective carrying value of the Revolving Credit Facility because the interest rate approximated the current market rate (Level 2). The estimated fair value of the Company’s long-term debt at December 31, 2014 was $330.6 million based on quoted market prices of the Notes (Level 1).

The Company has consistently applied the valuation techniques discussed above in all periods presented.

The fair value guidance, as amended, establishes that every derivative instrument is to be recorded on the balance sheet as either an asset or liability measured at fair value. See Note 7, “Derivative Instruments and Hedging Activity.”