Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Note 9 – Fair Value Measurements

The Company measures and reports certain assets and liabilities on a fair value basis and has classified and disclosed its fair value measurements using the following levels of the fair value hierarchy:

Level 1— Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.

Level 2— Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable as of the reporting date.

Level 3— Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.

Assets and liabilities that are measured at fair value are classified 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, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values, stated below, considers the market for the Company’s financial assets and liabilities, the associated credit risk and other factors. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

The Company recognizes transfers between fair value hierarchy levels as of the end of the reporting period in which the event or change in circumstances causing the transfer occurred. During the three and nine months ended September 30, 2019 and 2018, the Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company’s recurring fair value measurements are performed for its commodity derivatives. Please refer to Note 8 – Derivative Instruments for additional discussion.

Commodity Derivative Instruments

Commodity derivative contracts are stated at fair value in the accompanying condensed consolidated balance sheets. The Company adjusts the valuations from the valuation model for nonperformance risk and for counterparty risk. The fair values of the Company’s commodity derivative instruments are classified as Level 2 measurements as they are calculated using industry standard models using assumptions and inputs which are substantially observable in active markets throughout the full term of the instruments. These include market price curves, contract terms and prices, credit risk adjustments, implied market volatility and discount factors.

The following table presents the amounts and classifications of the Company’s derivative assets and liabilities as of September 30, 2019 and December 31, 2018, as well as the potential effect of netting arrangements on contracts with the same counterparty (in thousands):



	September 30, 2019
	Level 1		Level 2			Level 3		Gross Fair Value			Netting			Carrying Value
Assets
Current commodity derivatives	$	—	$	48,521		$	—	$	48,521		$	(681	)	$	47,840
Noncurrent commodity derivatives	—		19,189			—		19,189			(395		)	18,794
Total assets	$	—	$	67,710		$	—	$	67,710		$	(1,076	)	$	66,634
Liabilities
Current commodity derivatives	$	—	$	(681	)	$	—	$	(681	)	$	681		$	—
Noncurrent commodity derivatives	—		(395		)	—		(395		)	395			—
Total liabilities	$	—	$	(1,076	)	$	—	$	(1,076	)	$	1,076		$	—


	December 31, 2018
	Level 1		Level 2			Level 3		Gross Fair Value			Netting			Carrying Value
Assets
Current commodity derivatives	$	—	$	85,728		$	—	$	85,728		$	(3,548	)	$	82,180
Noncurrent commodity derivatives	—		21,565			—		21,565			(927		)	20,638
Total assets	$	—	$	107,293		$	—	$	107,293		$	(4,475	)	$	102,818
Liabilities
Current commodity derivatives	$	—	$	(4,393	)	$	—	$	(4,393	)	$	3,548		$	(845	)
Noncurrent commodity derivatives	—		(1,068		)	—		(1,068		)	927			(141		)
Total liabilities	$	—	$	(5,461	)	$	—	$	(5,461	)	$	4,475		$	(986	)

Non-Recurring Fair Value Measurements

The Company’s non‑recurring fair value measurements include the determination of the grant date fair value of the Company’s performance share units. The grant date fair value of the Company’s performance share units is determined using a Monte Carlo simulation model and is classified as a Level 3 measurement. Please refer to Note 11 – Equity Compensation for additional discussion.

Other Financial Instruments

The Company’s financial instruments, not otherwise recorded at fair value, consist primarily of cash, trade receivables, trade payables, and long-term debt. The carrying values of cash and cash equivalents, accounts payable, revenue payable, and accounts receivable approximate fair values due to the short-term maturities of these instruments and the carrying value of long-term debt approximates fair value as the applicable interest rates are variable and reflective of market rates.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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ROAN RESOURCES, INC. 10-Q