Disclosures about fair value measurements

6 Months Ended

Jun. 30, 2017

Disclosure Fair Value Narrative [Abstract]

Disclosures about fair value measurements

Note 6.Disclosures about fair value measurements

The Company uses a valuation framework based upon inputs that market participants use in pricing an asset or liability, which are classified into two categories: observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. These two types of inputs are further prioritized into the following fair value input hierarchy:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that the Company values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace. Level 2 instruments primarily include non-exchange traded derivatives such as over-the-counter commodity price swaps, basis swaps, collars and floors, investments and interest rate swaps. The Company’s valuation models are primarily industry-standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value, (iii) current market and contractual prices for the underlying instruments and (iv) volatility factors, as well as other relevant economic measures.

Level 3:Prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). The Company’s valuation models are primarily industry-standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value, (iii) volatility factors and (iv) current market and contractual prices for the underlying instruments, as well as other relevant economic measures.

Financial Assets and Liabilities Measured at Fair Value

The following table presents the carrying amounts and fair values of the Company’s financial instruments at June 30,2017 and December 31, 2016:

			June 30, 2017				December 31, 2016
			Carrying		Fair		Carrying		Fair
(in millions)			Value		Value		Value		Value
	Assets:
		Derivative instruments	$	225	$	225	$	4	$	4
	Liabilities:
		Derivative instruments	$	-	$	-	$	178	$	178
		$600 million 5.5% senior notes due 2022 (a)	$	594	$	619	$	594	$	620
		$1,550 million 5.5% senior notes due 2023 (a)	$	1,554	$	1,597	$	1,555	$	1,621
		$600 million 4.375% senior notes due 2025 (a)	$	593	$	614	$	592	$	599
(a)	The carrying value includes associated deferred loan costs and any premium.

Cash and cash equivalents, accounts receivable, other current assets, accountspayable, interest payable and other current liabilities. The carrying amounts approximate fair value due to the short maturity of these instruments.

Senior notes. The fair values of the Company’s senior notes are based on quoted market prices.The debt securities are not actively traded and, therefore, are classified as Level 2 in the fair value hierarchy.

Derivative instruments. The fair value of the Company’s derivative instruments is estimated by management considering various factors, including closing exchange and over-the-counter quotations and the time value of the underlying commitments. Financial assets and liabilities 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 and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The following tables summarize (i) the valuation of each of the Company’s financial instruments by required fair value hierarchy levels and (ii) the gross fair value by the appropriate balance sheet classification,even when the derivative instruments are subject to netting arrangements and qualify for net presentation in the Company’s consolidated balance sheets at June 30,2017 and December 31, 2016. The Company nets the fair value of derivative instruments by counterparty in the Company’s consolidated balance sheets.

June 30, 2017
				Fair Value Measurements Using												Net
				Quoted Prices										Gross		Fair Value
				in Active				Significant						Amounts		Presented
				Markets for				Other		Significant				Offset in the		in the
				Identical				Observable		Unobservable				Consolidated		Consolidated
				Assets				Inputs		Inputs		Total		Balance		Balance
(in millions)				(Level 1)				(Level 2)		(Level 3)		Fair Value		Sheet		Sheet
	Assets:
		Current:
			Commodity derivatives		$	-	$	145	$	-	$	145	$	(10)	$	135
		Noncurrent:
			Commodity derivatives			-		94		-		94		(4)		90
	Liabilities:
		Current:
			Commodity derivatives			-		(10)		-		(10)		10		-
		Noncurrent:
			Commodity derivatives			-		(4)		-		(4)		4		-
	Net derivative instruments				$	-	$	225	$	-	$	225	$	-	$	225

December 31, 2016
				Fair Value Measurements Using												Net
				Quoted Prices										Gross		Fair Value
				in Active				Significant						Amounts		Presented
				Markets for				Other		Significant				Offset in the		in the
				Identical				Observable		Unobservable				Consolidated		Consolidated
				Assets				Inputs		Inputs		Total		Balance		Balance
(in millions)				(Level 1)				(Level 2)		(Level 3)		Fair Value		Sheet		Sheet
	Assets:
		Current:
			Commodity derivatives		$	-	$	59	$	-	$	59	$	(55)	$	4
		Noncurrent:
			Commodity derivatives			-		-		-		-		-		-
	Liabilities:
		Current:
			Commodity derivatives			-		(137)		-		(137)		55		(82)
		Noncurrent:
			Commodity derivatives			-		(96)		-		(96)		-		(96)
	Net derivative instruments				$	-	$	(174)	$	-	$	(174)	$	-	$	(174)

Concentrations of credit risk.At June 30,2017, the Company’s primary concentrations of credit risk are the risk of collecting accounts receivable and the risk of counterparties’ failure to perform under derivative obligations.

The Company has entered into International Swap Dealers Association Master Agreements (“ISDA Agreements”) with each of its derivative counterparties. The terms of the ISDA Agreements provide the Company and the counterparties with rights of set-off upon the occurrence of defined acts of default by either the Company or a counterparty to a derivative, whereby the party not in default may set off all derivative liabilities owed to the defaulting party against all derivative asset receivables from the defaulting party. See Note 7 for additional information regarding the Company’s derivative activities and counterparties.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are reported at fair value on a nonrecurring basis in the Company’s consolidated balance sheets. The following methods and assumptions were used to estimate the fair values:

Impairments of long-lived assets – The Company periodically reviews its long-lived assets to be held and used, including proved oil and natural gas properties and their integrated assets, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable, for instance when there are declines in commodity prices or well performance. The Company reviews its oil and natural gas properties by depletion base. An impairment loss is indicated if the sum of the expected undiscounted future net cash flows is less than the carrying amount of the assets. If the estimated undiscounted future net cash flows are less than the carrying amount of the Company’s assets, it recognizes an impairment loss for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

The Company calculates the expected undiscounted future net cash flows of its long-lived assets and their integrated assets using management’s assumptions and expectations of (i) commodity prices, which are based on the New York Mercantile Exchange (“NYMEX”) strip, (ii) pricing adjustments for differentials, (iii) production costs, (iv) capital expenditures, (v) production volumes, (vi) estimated proved reserves and risk-adjusted probable and possible reserves, and (vii) prevailing market rates of income and expenses from integrated assets. At June 30,2017, the Company’s estimates of commodity prices for purposes of determining undiscounted future cash flows, which are based on the NYMEX strip, ranged from a 2017 price of $45.26 per barrel of oil to a 2024 price of $53.68 per barrel of oil. Similarly, natural gas prices ranged from a 2017 price of $3.16 per Mcf of natural gas decreasing to a 2020 price of $2.83 per Mcf partially recovering to a 2024 price of $3.03 per Mcf of natural gas. Commodity prices for this purpose were held flat after 2024.

The Company calculates the estimated fair values of its long-lived assets and their integrated assets using a discounted future cash flow model. Fair value assumptions associated with the calculation of discounted future net cash flows include (i) market estimates of commodity prices, (ii) pricing adjustments for differentials, (iii) production costs, (iv) capital expenditures, (v) production volumes, (vi) estimated proved reserves and risk-adjusted probable and possible reserves, (vii) prevailing market rates of income and expenses from integrated assets and (viii) a discount rate. The expected future net cash flows were discounted using an annual rate of 10 percent to determine fair value. These are classified as Level 3 fair value assumptions.

During the three months ended March 31, 2016, NYMEX strip prices declined as compared to December 31, 2015, and as a result the carrying amount of the Company’s Yeso field of approximately $3.4 billion exceeded the expected undiscounted future net cash flows resulting in a non-cash charge against earnings of approximately $1.5 billion. The non-cash charge represented the amount by which the carrying amount exceeded the estimated fair value of the assets.

The following table reports the carrying amount, estimated fair value and impairment expense of long-lived assets for the indicated period:

				Estimated
		Carrying		Fair Value		Impairment
(in millions)		Amount		(Level 3)		Expense
March 2016	$	3,438	$	1,913	$	1,525

It is reasonably possible that the estimate of undiscounted future net cash flows of the Company’s long-lived assets may change in the future resulting in the need to impair carrying values. The primary factors that may affect estimates of future cash flows are (i) commodity prices including differentials, (ii) increases or decreases in production and capital costs, (iii) future reserve volume adjustments, both positive and negative, to proved reserves and appropriate risk-adjusted probable and possible reserves,(iv) results of future drilling activities and (v) changes in income and expenses from integrated assets.