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, 2017.

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 Risk Derivative 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, 2017, 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
2018	Three-Way Collars	NYMEX WTI	10,000	$	—		$	45.50	$	52.50	$	69.09
2018	Swaps	NYMEX WTI	24,000	57.09			—		—		—
2018	Two-Way Collars	NYMEX WTI	18,000	—			—		50.42		58.82
2018	Three-Way Collars	Dated Brent	3,000	—			40.00		50.00		70.41
2018	Swaps	ICE Brent	2,000	59.00			—		—		—
2018	Two-Way Collars	ICE Brent	2,000	—			—		50.00		55.25
2018	Three-Way Collars	ICE Brent	5,000	—			43.00		50.00		59.50
2018	Basis Swaps	⁽¹⁾	12,000	(0.60		)	—		—		—
2019	Swaps	NYMEX WTI	3,000	55.07			—		—		—
2019	Swaps	ICE Brent	5,000	57.00			—		—		—
2019	Three-Way Collars	ICE Brent	3,000	—			43.00		50.00		64.07
2019	Basis Swaps	⁽¹⁾	12,000	(1.01		)	—		—		—


⁽¹⁾	We have entered into crude oil basis swap contracts in order to fix the differential between pricing in Midland, Texas, and Cushing, Oklahoma. The weighted average differential represents the amount of reduction to Cushing, Oklahoma, prices for the notional volumes covered by the basis swap contracts.

As of December 31, 2017, we had entered into the following natural gas derivative instruments:



				Collars
Settlement Period	Type of Contract	Index	MMBtu Per Day	Weighted Average Short Put Price		Weighted Average Floor Price		Weighted Average Ceiling Price
2018	Three-Way Collars	NYMEX HH	120,000	$	2.50	$	2.88	$	3.65

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



Fair Value of Derivative Instruments ⁽¹⁾
	Asset Derivative Instruments						Liability Derivative Instruments
	December 31, 2017			December 31, 2016			December 31, 2017			December 31, 2016
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
(millions)
Commodity Derivative Instruments	Current Assets	$	2	Current Assets	$	—	Current Liabilities	$	58	Current Liabilities	$	102
	Noncurrent Assets	—		Noncurrent Assets	—		Noncurrent Liabilities	15		Noncurrent Liabilities	14
Total		$	2		$	—		$	73		$	116

⁽¹⁾ See Note 1. Summary of Significant Accounting Policies – Derivative Instruments and Hedging Activities for a discussion of our netting policy.

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



	Year Ended December 31,
(millions)	2017			2016			2015
Cash (Received) Paid in Settlement of Commodity Derivative Instruments
Crude Oil	$	(14	)	$	(499	)	$	(844	)
Natural Gas	1			(70		)	(147		)
NGLs ⁽¹⁾	—			—			(18		)
Total Cash Received in Settlement of Commodity Derivative Instruments	(13		)	(569		)	(1,009		)
Non-cash Portion of (Gain) Loss on Commodity Derivative Instruments
Crude Oil	18			582			423
Natural Gas	(68		)	126			65
NGLs ⁽¹⁾	—			—			20
Total Non-cash Portion of (Gain) Loss on Commodity Derivative Instruments	(50		)	708			508
(Gain) Loss on Commodity Derivative Instruments
Crude Oil	4			83			(421		)
Natural Gas	(67		)	56			(82		)
NGLs ⁽¹⁾	—			—			2
Total (Gain) Loss on Commodity Derivative Instruments	$	(63	)	$	139		$	(501	)


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