Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Note 8. Derivative Instruments and Hedging Activities

Objective and Strategies for Using Derivative Instruments  We may enter into crude oil and natural gas price hedging arrangements in an effort to mitigate the effects of commodity price volatility and enhance the predictability of cash flows relating to the marketing of a portion of our crude oil and natural gas production. The derivative instruments we use may include variable to fixed price commodity swaps, enhanced swaps, two-way and three-way collars, basis swaps and/or put options.

The fixed price swap and two-way collar contracts entitle us (floating price payor) to receive settlement from the counterparty (fixed price payor) for each calculation period in amounts, if any, by which the settlement price for the scheduled trading days applicable for each calculation period is less than the fixed strike price or floor price. We would pay the counterparty if the settlement price for the scheduled trading days applicable for each calculation period is more than the fixed strike price or ceiling price. The amount payable by us, if the floating price is above the fixed or ceiling price, is the product of the notional quantity per calculation period and the excess of the floating price over the fixed or ceiling price in respect of each calculation period. The amount payable by the counterparty, if the floating price is below the fixed or floor price, is the product of the notional quantity per calculation period and the excess of the fixed or floor price over the floating price in respect of each calculation period.

A three-way collar consists of a two-way collar contract combined with a put option contract sold by us with a strike price below the floor price of the two-way collar.  We receive price protection at the purchased put option floor price of the two-way collar if commodity prices are above the sold put option strike price. If commodity prices fall below the sold put option strike price, we receive the cash market price plus the delta between the two put option strike prices. This type of instrument allows us to capture more value in a rising commodity price environment, but limits our benefits in a downward commodity price environment.

For put options, we typically pay a premium to the counterparty in exchange for the sale of the instrument. If the index price is below the floor price of the put option, we receive the difference between the floor price and the index price multiplied by the contract volumes less the option premium at the time of settlement. If the index price settles at or above the floor price of the put option, we pay only the put option premium at the time of settlement. We had no outstanding put options as of December 31, 2016.

While these instruments mitigate the cash flow risk of future reductions in commodity prices, they may also curtail benefits during periods of increasing commodity prices.

See Note 13. Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of our derivative instruments.

Counterparty Credit RiskDerivative instruments expose us to counterparty credit risk. Our commodity derivative instruments are currently with a diversified group of major banks or market participants, and we monitor and manage our level of financial exposure. Our commodity derivative contracts are executed under master agreements which allow us, in the event of default, to elect early termination of all contracts with the defaulting counterparty. If we choose to elect early termination, all asset and liability positions with the defaulting counterparty would be net settled at the time of election.

We monitor the creditworthiness of our commodity derivatives counterparties. However, we are not able to predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, we may be limited in our ability to mitigate an increase in counterparty credit risk.

Possible actions would be to transfer our position to another counterparty or request a voluntary termination of the derivative contracts resulting in a cash settlement. Should one of these financial counterparties not perform, we may not realize the benefit of some of our derivative instruments under lower commodity prices and could incur a loss. 

Unsettled Derivative Instruments  As of December 31, 2016, we had entered into the following crude oil derivative instruments:

				Swaps		Collars
Settlement Period	Type of Contract	Index	Bbls Per Day	Weighted Average Fixed Price		Weighted Average  Short Put  Price		Weighted Average Floor Price		Weighted Average  Ceiling Price
1H17 (1)	Swaps	NYMEX WTI	6,000	$	55.08	$	—	$	—	$	—
1H17 (1)	Two-Way Collars	NYMEX WTI	2,000	—		—		40.00		50.44
1H17 (1)	Swaps	Dated Brent	3,000	62.80		—		—		—
2H17 (1)	Call Option (2)	NYMEX WTI	3,000	—		—		—		60.12
2H17 (1)	Swaptions (3)	NYMEX WTI	3,000	50.05		—		—		—
2H17 (1)	Swaptions (3)	Dated Brent	3,000	62.80		—		—		—
2017	Three-Way Collars	NYMEX WTI	24,000	—		39.08		47.71		61.20
2017	Two-Way Collars	NYMEX WTI	7,000	—		—		40.00		53.29
2017	Swaps	NYMEX WTI	4,000	50.90		—		—		—
2017	Call Option (2)	NYMEX WTI	3,000	—		—		—		57.00
2017	Three-Way Collars	ICE Brent	2,000	—		43.00		50.00		63.15
2017	Three-Way Collars	Dated Brent	2,000	—		35.00		45.00		66.33
2018	Three-Way Collars	NYMEX WTI	5,000	—		43.00		50.00		68.50
2018	Swaps	NYMEX WTI	5,000	54.03		—		—		—
2018	Swaptions (3)	NYMEX WTI	3,000	56.10		—		—		—
2018	Three-Way Collars	Dated Brent	3,000	—		40.00		50.00		70.41

⁽¹⁾  We traditionally enter into a hedge contract term of one year. For 2017 we have entered into various derivative hedging arrangements with a contract term of six months resulting in non-uniform annual volumes and weighted average prices.

⁽²⁾  We have entered into crude oil derivative enhanced swaps with strike prices that are above the market value as of trade commencement. To effect the enhanced non-cash swap structure, we sold call options to the applicable counterparty to receive the above market terms.

⁽³⁾   We have entered into certain derivative contracts (swaptions), which give counterparties the option to extend with similar terms for an additional 6-month or 12-month period.

As of December 31, 2016, we had entered into the following natural gas derivative instruments:

				Swaps		Collars
Settlement Period	Type of Contract	Index	MMBtu Per Day	Weighted Average Fixed Price		Weighted Average Short Put  Price		Weighted Average Floor Price		Weighted Average Ceiling Price
1H17 (1)	Swaps	NYMEX HH	30,000	$	2.92	$	—	$	—	$	—
2H17 (1)	Swaps	NYMEX HH	30,000	3.45		—		—		—
2H17 (1)	Swaptions (2)	NYMEX HH	30,000	2.92		—		—		—
2017	Three-Way Collars	NYMEX HH	210,000	—		2.54		2.96		3.62
2017	Swaps	NYMEX HH	110,000	3.16		—		—		—
2017	Two-Way Collars	NYMEX HH	70,000	—		—		2.93		3.32
2018	Three-Way Collars	NYMEX HH	70,000	—		2.50		2.80		3.76

⁽¹⁾  We traditionally enter into a hedge contract term of one year. For 2017 we have entered into various derivative hedging arrangements with a contract term of six months resulting in non-uniform annual volumes and weighted average prices.

⁽²⁾  We have entered into certain derivative contracts (swaptions), which give counterparties the option to extend with similar terms for an additional 6-month or 12-month period.

Fair Value Amounts and Gains and Losses on Derivative InstrumentsThe fair values of derivative instruments in our consolidated balance sheets were as follows: 

Fair Value of Derivative Instruments
	Asset Derivative Instruments						Liability Derivative Instruments
	December 31, 2016			December 31, 2015			December 31, 2016			December 31, 2015
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair  Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
(millions)
Commodity DerivativeInstruments	Current Assets	$	—	Current Assets	$	582	Current Liabilities	$	102	Current Liabilities	$	—
	Noncurrent Assets	—		Noncurrent Assets	10		Noncurrent Liabilities	14		Noncurrent Liabilities	—
Total		$	—		$	592		$	116		$	—

The effect of derivative instruments on our consolidated statements of operations was as follows: 

	Year Ended December 31,
(millions)	2016			2015			2014
Cash (Received) Paid in Settlement of Commodity Derivative Instruments
Crude Oil	$	(499	)	$	(844	)	$	(34	)
Natural Gas	(70		)	(147		)	5
NGLs (1)	—			(18		)	—
Total Cash Received in Settlement of Commodity Derivative Instruments	(569		)	(1,009		)	(29		)
Non-cash Portion of Loss (Gain) on Commodity Derivative Instruments
Crude Oil	582			423			(863		)
Natural Gas	126			65			(84		)
NGLs (1)	—			20			—
Total Non-cash Portion of Loss (Gain) on Commodity Derivative Instruments	708			508			(947		)
Loss (Gain) on Commodity Derivative Instruments
Crude Oil	83			(421		)	(897		)
Natural Gas	56			(82		)	(79		)
NGLs (1)	—			2			—
Total Loss (Gain) on Commodity Derivative Instruments	$	139		$	(501	)	$	(976	)

⁽¹⁾  Amounts for NGLs relate to commodity derivative instruments, acquired in the Rosetta Merger, which expired as of December 31, 2015.