Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Note 13. 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, collars and three-way collars, basis swaps, swaptions and/or put options.

The fixed price swap and 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 collar contract combined with a put option contract sold by us with a strike price below the floor price of the collar. We receive price protection at the purchased put option floor price of the 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.

A swaption gives counterparties the right, but not the obligation, to enter into swap agreements with us on the option expiration dates.

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 14. 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, especially during periods of falling prices. Our commodity derivative instruments are currently with a diversified group of major banks or market participants. We monitor the creditworthiness of these counterparties and our internal hedge policies provide for exposure limits. 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. 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, 2018, we had entered into the following crude oil derivative instruments:



				Swaps					Collars
Settlement Period	Type of Contract	Index	Bbls per Day	Weighted Average Differential			Weighted Average Fixed Price		Weighted Average Short Put Price		Weighted Average Floor Price		Weighted Average Ceiling Price
2019	Swaps	NYMEX WTI	22,000	$	—		$	56.96	$	—	$	—	$	—
2019	Three-Way Collars	NYMEX WTI	33,000	—			—		49.35		59.35		72.25
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⁾	27,000	(3.23		)	—		—		—		—
2020	Swaption	NYMEX WTI	5,000	—			61.79		—		—		—
2020	Basis Swap	⁽¹⁾	15,000	(5.01		)	—		—		—		—


⁽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, 2018, we had entered into the following natural gas derivative instruments:



				Swaps					Collars
Settlement Period	Type of Contract	Index	MMBtu per Day	Weighted Average Differential			Weighted Average Fixed Price		Weighted Average Short Put Price		Weighted Average Floor Price		Weighted Average Ceiling Price
1Q19⁽¹⁾	Swaps	NYMEX HH	86,500	$	—		$	4.36	$	—	$	—	$	—
1Q19⁽¹⁾	Three-Way Collars	NYMEX HH	21,500	—			—		3.00		3.25		4.08
2019	Three-Way Collars	NYMEX HH	104,000	—			—		2.25		2.65		2.95
2019	Basis Swaps	⁽²⁾	52,000	(0.74		)	—		—		—		—

⁽¹⁾ We have entered into contracts for portions of 2019 resulting in the difference in hedged volumes for the full year.

⁽²⁾ We have entered into natural gas basis swap contracts in order to establish a fixed amount for the differential between index pricing for Colorado Interstate Gas and NYMEX Henry Hub. The weighted average differential represents the amount of reduction to NYMEX Henry Hub prices for the notional volumes covered by the basis swap contracts.

Fair Value Amounts and Gains and Losses on Derivative Instruments The fair values of derivative instruments on our consolidated balance sheets were as follows ⁽¹⁾:



	Asset Derivative Instruments						Liability Derivative Instruments
	December 31, 2018			December 31, 2017			December 31, 2018			December 31, 2017
(millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity Derivative Instruments	Current Assets	$	180	Current Assets	$	2	Current Liabilities	$	1	Current Liabilities	$	58
	Noncurrent Assets	—		Noncurrent Assets	—		Noncurrent Liabilities	26		Noncurrent Liabilities	15
Total		$	180		$	2		$	27		$	73

⁽¹⁾ See Note 1. Summary of Significant Accounting Policies – Derivative Instruments and Hedging Activities.

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



	Year Ended December 31,
(millions)	2018			2017			2016
Cash Paid (Received) in Settlement of Commodity Derivative Instruments
Crude Oil	$	162		$	(14	)	$	(499	)
Natural Gas	(1		)	1			(70		)
Total Cash Paid (Received) in Settlement of Commodity Derivative Instruments	161			(13		)	(569		)
Non-cash Portion of (Gain) Loss on Commodity Derivative Instruments
Crude Oil	(225		)	18			582
Natural Gas	1			(68		)	126
Total Non-cash Portion of (Gain) Loss on Commodity Derivative Instruments	(224		)	(50		)	708
(Gain) Loss on Commodity Derivative Instruments
Crude Oil	(63		)	4			83
Natural Gas	—			(67		)	56
Total (Gain) Loss on Commodity Derivative Instruments	$	(63	)	$	(63	)	$	139