DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Objectives and Strategies

The Company is exposed to fluctuations in crude oil and natural gas prices on the majority of its worldwide production. Apache manages the variability in its cash flows by occasionally entering into derivative transactions on a portion of its crude oil and natural gas production. The Company utilizes various types of derivative financial instruments to manage fluctuations in cash flows resulting from changes in commodity prices.

Counterparty Risk

The use of derivative instruments exposes the Company to credit loss in the event of nonperformance by the counterparty. To reduce the concentration of exposure to any individual counterparty, Apache utilizes a diversified group of investment-grade rated counterparties, primarily financial institutions, for its derivative transactions. As of June 30, 2017, Apache had derivative positions with 12 counterparties. The Company monitors counterparty creditworthiness on an ongoing basis; however, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, Apache may not realize the benefit of some of its derivative instruments resulting from lower commodity prices.

Derivative Instruments

As of June 30, 2017, Apache had the following open crude oil derivative positions:



		Put Options ⁽¹⁾
Production Period	Settlement Index	Mbbls	Weighted Average Strike Price
July - December 2017	NYMEX WTI	16,928	$50.00
July - December 2017	Dated Brent	15,272	$51.00

(1) Apache paid a total premium of $100 million for these put option contracts, averaging $3.09 per barrel.

As of June 30, 2017, Apache had the following open natural gas derivative positions:



	Fixed-Price Swaps
Production Period	MMBtu (in 000’s)	Weighted Average Fixed Price⁽¹⁾⁽²⁾
July - December 2017	4,370	$3.46
January - March 2018	2,700	$3.60


(1)	U.S. natural gas prices represent a weighted-average of several contracts entered into on a per-million British thermal units (MMBtu) basis and are settled primarily against NYMEX Henry Hub.


(2)	Subsequent to June 30, 2017, Apache entered into fixed-price natural gas contracts settling against Nymex Henry Hub totaling 20,000 MMBtu/d at a weighted average price of $3.13 for the fourth quarter of 2017 and 120,000 MMBtu/d at a weighted average price of $3.33 for the first quarter of 2018.

Apache elected not to designate any of these derivatives as cash flow hedges. Changes in the fair value of these derivatives are recorded in “Other” under “Revenues and Other” in the Company’s statement of consolidated operations. Total unrealized gain in the second quarter and first six months of 2017 was $41 million.

Unrealized gains and losses for derivative activity recorded in the statement of consolidated operations is reflected in the statement of consolidated cash flows as a component of “Other” in “Adjustments to reconcile net income to net cash provided by operating activities.”

Fair Value Measurements

Apache’s commodity derivative instruments consist of put options and fixed-price swaps. The fair values of the Company’s derivatives are not actively quoted in the open market. The Company uses a market approach to estimate the fair values of its derivative instruments on a recurring basis, utilizing commodity futures pricing for the underlying commodities provided by a reputable third party, a Level 2 fair value measurement. The fair value of the Company’s derivative assets at June 30, 2017, was $141 million and is reflected in “Prepaid assets and other” in the Company’s consolidated balance sheet.