Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our commodity derivative instruments and investment are recorded at fair value on a recurring
basis in our balance sheet with the changes in fair value recorded in our income statement. The
following table presents, for each fair value hierarchy level, our commodity derivative assets and
liabilities and our investment measured at fair value on a recurring basis as of December 31, 2011 and
2010 (in thousands):
Fair Value Measurements at Reporting Date Using
Fair Value
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
2011
Commodity derivative
contracts
(1)
Crude oil puts . . . . . . . . . $
48,306 $
- $
- $
48,306
Crude oil collars . . . . . . .
10,623
-
(669)
11,292
Natural gas puts . . . . . . .
41,335
-
-
41,335
Natural gas collars . . . . .
13,163
-
-
13,163
Natural gas swaps . . . . .
12,951
-
12,951
-
Investment
(2)
. . . . . . . . . . .
611,671
-
-
611,671
$ 738,049 $
- $
12,282 $ 725,767
2010
Commodity derivative
contracts
(1)
Crude oil puts . . . . . . . . . $
88,176 $
- $
88,176 $
-
Crude oil collars . . . . . . .
(317)
-
(317)
-
Natural gas puts . . . . . . .
15,254
-
-
15,254
Natural gas collars . . . . .
(10,469)
-
-
(10,469)
Investment
(2)
. . . . . . . . . . .
664,346
-
-
664,346
$ 756,990 $
- $
87,859 $ 669,131
(1) Option premium and accrued interest of $62.4 million and $164.2 million at December 31, 2011 and 2010, respectively,
settlement payable of $5.1 million and $6.2 million at December 31, 2011 and 2010, respectively, and settlement receivable
of $0.2 million at December 31, 2011 are not included in the fair value of derivatives.
(2) Represents our equity investment in McMoRan which would otherwise be reported under the equity method of accounting.
The fair value amounts of our put and collar derivative instruments are estimated using an option-
pricing model, which uses various inputs including NYMEX and ICE price quotations, volatilities,
interest rates and contract terms. The fair value of our swap derivative instruments are estimated using
a pricing model which has various inputs including NYMEX price quotations, interest rates and contract
terms. We adjust the valuations from the model for credit quality, using the counterparties’ credit quality
for asset balances and our credit quality for liability balances. For asset balances, we use the credit
default swap value for counterparties when available or the spread between the risk-free interest rate
and the yield on the counterparties’ publicly traded debt for similar maturities. We consider the impact
of netting agreements on counterparty credit risk, including whether the position with the counterparty
is a net asset or net liability.
We classify derivatives that have identical assets or liabilities with quoted, unadjusted prices in
active markets as Level 1. We classify derivatives as Level 2 if the inputs used in the valuation model
are directly or indirectly observable for substantially the full term of the instrument; however, if the
significant inputs are not observable for substantially the full term of the instrument, we classify those
derivatives as Level 3. We determine whether the market for our derivative instruments is active or
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