PRIMEENERGY RESOURCES CORPPNRG
PRIMEENERGY RESOURCES CORP Fair Value Disclosure
10. Financial Instruments
Fair Value Measurements:
Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, prioritizing and defining the types of inputs used to measure fair value. The fair values of the Company’s interest rate swaps, natural gas and crude oil price collars and swaps are designated as Level 3. The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2022 and December 31, 2021:
December 31, 2022 |
Quoted Prices in Active Markets For Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Balance at December 31, 2022 |
||||||||||||
(Thousands of dollars) |
||||||||||||||||
Assets |
||||||||||||||||
Commodity derivative contracts |
$ | — | $ | — | $ | 210 | $ | 210 | ||||||||
Total assets |
$ | — | $ | — | $ | 210 | $ | 210 | ||||||||
Liabilities |
||||||||||||||||
Commodity derivative contracts |
$ | — | $ | — | $ | (1,190 | ) | $ | (1,190 | ) | ||||||
Total liabilities |
$ | — | $ | — | $ | (1,190 | ) | $ | (1,190 | ) | ||||||
December 31, 2021 |
Quoted Prices in Active Markets For Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Balance at December 31, 2021 |
||||||||||||
(Thousands of dollars) |
||||||||||||||||
Assets |
||||||||||||||||
Commodity derivative contracts |
$ | — | $ | — | $ | — | $ | — | ||||||||
Total assets |
$ | — | $ | — | $ | — | $ | — | ||||||||
Liabilities |
||||||||||||||||
Commodity derivative contract |
$ | — | $ | — | $ | (5,585 | ) | $ | (5,585 | ) | ||||||
Total liabilities |
$ | — | $ | — | $ | (5,585 | ) | $ | (5,585 | ) | ||||||
The derivative contracts were measured based on quotes from the Company’s counterparties. Such quotes have been derived using valuation models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable.
These estimates are verified using comparable NYMEX futures contracts or are compared to multiple quotes obtained from counterparties for reasonableness.
The significant unobservable inputs for Level 3 derivative contracts include basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. 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.
The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy for the year ended December 2022.
(Thousands of dollars) |
||||
Net Liabilities – December 31, 2021 |
$ | (5,585 | ) | |
Total realized and unrealized gains (losses): |
||||
in earnings (a) |
(12,039 | ) | ||
Purchases, sales, issuances and settlements |
16,644 | |||
Net Liabilities – December 31, 2022 |
$ | (980 | ) | |
| (a) | Derivative instruments are reported in revenues as realized gain/loss and on a separately reported line item captioned unrealized gain/loss on derivative instruments. |
Derivative Instruments:
The Company is exposed to commodity price and interest rate risk, and management considers periodically the Company’s exposure to cash flow variability resulting from the commodity price changes and interest rate fluctuations. Futures, swaps and options are used to manage the Company’s exposure to commodity price risk inherent in the Company’s oil and gas production operations. The Company does not apply hedge accounting to any of its commodity-based derivatives. Both realized and unrealized gains and losses associated with commodity derivative instruments are recognized in earnings.
The following table sets forth the effect of derivative instruments on the consolidated balance sheets at December 31, 2022 and 2021:
Fair Value |
||||||||||
(Thousands of dollars) |
Balance Sheet Location |
December 31, 2022 |
December 31, 2021 |
|||||||
Asset Derivatives: |
||||||||||
Derivatives not designated as cash-flow hedging instruments: |
||||||||||
Crude oil commodity contract |
Other current assets | $ | 162 | $ | — | |||||
Natural gas commodity contract |
Other current assets | 48 | — | |||||||
Total |
$ | 210 | $ | — | ||||||
Liability Derivatives: |
||||||||||
Derivatives not designated as cash-flow hedging instruments: |
||||||||||
Crude oil commodity contracts |
Derivative liability short-term |
$ | (931 | ) | $ | (3,992 | ) | |||
Natural gas commodity contracts |
Derivative liability short-term | (259 | ) | (943 | ) | |||||
Crude oil commodity contracts |
Derivative liability long-term | — | (490 | ) | ||||||
Natural gas commodity contracts |
Derivative liability long-term | — | (160 | ) | ||||||
Total |
$ | (1,190 | ) | $ | (5,585 | ) | ||||
Total derivative instruments |
$ | (980 | ) | $ | (5,585 | ) | ||||
The following table sets forth the effect of derivative instruments on the consolidated statements of income for the years ended December 31, 2022 and 2021:
Location of gain/loss recognized in income |
Amount of gain/loss recognized in income |
|||||||||
(Thousands of dollars) |
2022 |
2021 |
||||||||
Derivatives not designated as cash-flow hedge instruments: |
||||||||||
Natural gas commodity contracts |
Unrealized gain (loss) on instruments, net | 892 | (859 | ) | ||||||
Crude oil commodity contracts |
Unrealized (loss) gain on instruments, net | 3,713 | (4,055 | ) | ||||||
Natural gas commodity contracts |
Realized gain (loss) on derivative instruments, net |
(4,543 | ) |
(1,833 | ) | |||||
Crude oil commodity contracts |
Realized (loss) on derivative instruments, net |
(12,101 | ) |
(3,212 | ) | |||||
$ |
(12,039 | ) |
$ |
(9,959 | ) | |||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2022 | Apr 17, 2023 | Showing above |
| 2019 | May 6, 2020 | |
| 2015 | Apr 8, 2016 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.