NOTE 7DERIVATIVES

General

From time to time, we use a variety of derivative instruments intended to establish, as of the date of production, the price we receive, to improve the effective realized prices for oil and gas, and to protect our capital program in case of price deterioration. Derivatives are carried at fair value and on a net basis when a legal right of offset exists with the same counterparty. We apply hedge accounting when transactions meet specified criteria for cash-flow hedge treatment and management elects and documents such treatment. Otherwise, any fair value gains or losses, over the remaining term of the hedge instrument, are recognized in earnings in the current period. We recognized approximately $17 million and $20 million of net derivative losses from marking these contracts to market, which were included in net sales, for the three and six months ended June 30, 2015, respectively.

As of June 30, 2015, our existing hedge positions, the initial values of which were not material, were as follows:

Weighted average Brent-based floors of $52.14 per barrel for 70,000 barrels per day of our third quarter 2015 oil production;

Brent-based ceilings of $72.12 per barrel for 30,000 barrels per day of our third quarter 2015 oil production;

Weighted average Brent-based floors and ceilings of $61.25 per barrel and $73.88 per barrel, respectively, for 40,000 barrels per day of our fourth quarter 2015 oil production;

Brent-based hedge at $72.05 per barrel for 2,000 barrels per day of our total year 2016 oil production;

Index-based hedges at an average price of $3.01 per million British thermal unit (MMBtu) for 40,000 MMBtu per day and weighted average floors and ceilings of $2.80 per MMBtu and $3.17 per MMBtu, respectively, for 20,000 MMBtu per day of our second half 2015 natural gas production.

From January through June 2015 we had purchased options for 100,000 barrels of our crude oil production per day, at $50 per barrel Brent and sold options for 30,000 barrels per day for March through June 2015 at $75 Brent. The initial intrinsic and time values were deferred and subsequent changes were included in the net derivative losses reported in net sales. The initial intrinsic value, which was accounted for as a cash flow hedge, was insignificant.

Going forward, we will continue to be strategic and opportunistic in implementing any hedging program. Our objective is to protect against the cyclical nature of commodity prices to provide a level of certainty around our cash flows and margins necessary to implement our capital investment program.

For the first quarter of 2014 we had hedged 50 MMcf per day of our natural gas production, which qualified as cash-flow hedges. The weighted-average strike price of these swaps was $4.30 per Mcf.

The after-tax gains and losses recognized in, and reclassified to income from, Accumulated Other Comprehensive Income (AOCI) for derivative instruments classified as cash-flow hedges for the three- and six-month periods ended June 30, 2015 and 2014, and the ending AOCI balances at those dates were not material.

There were no fair value hedges as of and during the three- and six-month periods ended June 30, 2015 and 2014.

Fair Value of Derivatives

Our commodity derivatives are measured at fair value using industry-standard models with various inputs, including quoted forward prices. The value of our 100,000 barrel put options was approximately $24 million on a gross and net basis, which approximated the time value of the instruments as of December 31, 2014. The time value of the December 2014 put options as well as the 2015 instruments are marked to market and changes are recognized in the statement of operations.

The following table presents the gross and net fair values of our outstanding derivatives as of June 30, 2015 (in millions):

	Asset Derivatives			Liability Derivatives
June 30, 2015	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Other current assets	$	18	Accrued Liabilities	$	(9	)


Total gross and net fair value		$	18		$	(9	)