Financial Risk Management Activities

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

12. Financial Risk Management Activities

In the normal course of our business, we are exposed to commodity risks related to changes in the prices of crude oil and natural gas as well as changes in interest rates and foreign currency values. Financial risk management activities include transactions designed to reduce risk in the selling prices of crude oil or natural gas we produce or by reducing our exposure to foreign currency or interest rate movements. Generally, futures, swaps or option strategies may be used to fix the forward selling price of a portion of our crude oil or natural gas production. Forward contracts may also be used to purchase certain currencies in which we conduct business with the intent of reducing exposure to foreign currency fluctuations. At June 30, 2020, these forward contracts relate to the British Pound and the Danish Krone. Interest rate swaps may be used to convert interest payments on certain long-term debt from fixed to floating rates.

The notional amounts of outstanding financial risk management derivative contracts were as follows:


	June 30, 2020		December 31, 2019

	(In millions)
Commodity - crude oil put options (millions of barrels)	27.6		54.9

Foreign exchange forwards	$	74	$	90
Interest rate swaps	$	100	$	100

For calendar year 2020 we have West Texas Intermediate (WTI) put options with an average monthly floor price of $55 per barrel for 130,000 barrels of oil per day (bopd), and Brent put options with an average monthly floor price of $60 per barrel for 20,000 bopd.

The table below reflects the gross and net fair values of risk management derivative instruments and their respective financial statement caption in the Consolidated Balance Sheet:


	Assets		Liabilities

	(In millions)
June 30, 2020
Derivative Contracts Designated as Hedging Instruments:
Crude oil derivative contracts	$	450	$	—
Interest rate swaps - Other assets (noncurrent)	6		—
Total derivative contracts designated as hedging instruments	456		—
Derivative Contracts Not Designated as Hedging Instruments:
Foreign exchange forwards - Accounts receivable - Joint venture and other	2		—
Total derivative contracts not designated as hedging instruments	2		—
Gross fair value of derivative contracts	458		—
Master netting arrangements	—		—
Net Fair Value of Derivative Contracts	$	458	$	—
December 31, 2019
Derivative Contracts Designated as Hedging Instruments:
Crude oil derivative contracts	$	125	$	—
Interest rate swaps - Other assets (noncurrent)	1		—
Total derivative contracts designated as hedging instruments	126		—
Derivative Contracts Not Designated as Hedging Instruments:
Foreign exchange forwards - Accounts payable	—		(1)
Total derivative contracts not designated as hedging instruments	—		(1)
Gross fair value of derivative contracts	126		(1)
Master netting arrangements	—		—
Net Fair Value of Derivative Contracts	$	126	$	(1)

All fair values in the table above are based on Level 2 inputs.

Derivative contracts designated as hedging instruments:

Crude oil derivatives: Crude oil hedging contracts increased Sales and other operating revenues by $228 million and $292 million in the three and six months ended June 30, 2020, respectively. In the three and six months ended June 30, 2019, the impact from crude oil hedging contracts on Sales and other operating revenues was a decrease of $14 million and an increase of $1 million, respectively. At June 30, 2020, pre-tax deferred gains in Accumulated other comprehensive income (loss) related to outstanding crude

oil price hedging contracts were $386 million which will be reclassified into earnings during the remainder of 2020 as the originally hedged crude oil sales are recognized in earnings.

Interest rate swaps designated as fair value hedges: At June 30, 2020 and December 31, 2019, we had interest rate swaps with gross notional amounts totaling $100 million, which were designated as fair value hedges and relate to debt where we have converted interest payments from fixed to floating rates. Changes in the fair value of interest rate swaps and the hedged fixed-rate debt are recorded in Interest expense in the Statement of Consolidated Income. In the three and six months ended June 30, 2020, the change in fair value of interest rate swaps was an increase in the asset of $1 million and $6 million, respectively, compared with a decrease in the liability of $2 million and $3 million in the three and six months ended June 30, 2019, respectively, with a corresponding adjustment in the carrying value of the hedged fixed-rate debt.

Derivative contracts not designated as hedging instruments:

Foreign exchange: Foreign exchange gains and losses which are reported in Other, net in Revenues and non-operating income in the Statement of Consolidated Income were losses of $2 million and $3 million in the three and six months ended June 30, 2020, respectively, compared with losses of $2 million and gains of $3 million in the three and six months ended June 30, 2019, respectively. A component of foreign exchange gains and losses is the result of foreign exchange derivative contracts that are not designated as hedges which amounted to net gains of $1 million and $3 million in the three and six months ended June 30, 2020, respectively, compared with net gains of $1 million and $1 million in the three and six months ended June 30, 2019, respectively.

Fair Value Measurement:

We have other short-term financial instruments, primarily cash equivalents, accounts receivable and accounts payable, for which the carrying value approximated fair value at June 30, 2020. At June 30, 2020, total long-term debt, which was primarily comprised of fixed-rate debt instruments, had a carrying value of $8,210 million and a fair value of $8,736 million based on Level 2 inputs.