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Fair Value Measurements
3 Months Ended
Mar. 31, 2015
Fair Value Measurements  
Fair Value Measurements

 

10. Fair Value Measurements

 

Occidental has categorized its assets and liabilities that are measured at fair value in a three-level fair value hierarchy, based on the inputs to the valuation techniques: Level 1 — using quoted prices in active markets for the assets or liabilities; Level 2 — using observable inputs other than quoted prices for the assets or liabilities; and Level 3 — using unobservable inputs.  Transfers between levels, if any, are recognized at the end of each reporting period.

 

Fair Values — Recurring

 

Occidental primarily applies the market approach for recurring fair value measurements, maximizes its use of observable inputs and minimizes its use of unobservable inputs. Occidental utilizes the mid-point between bid and ask prices for valuing the majority of its assets and liabilities measured and reported at fair value. In addition to using market data, Occidental makes assumptions in valuing its assets and liabilities, including assumptions about the risks inherent in the inputs to the valuation technique.  For assets and liabilities carried at fair value, Occidental measures fair value using the following methods:

 

·

Occidental values exchange-cleared commodity derivatives using closing prices provided by the exchange as of the balance sheet date.  These derivatives are classified as Level 1.  Over-the-Counter (OTC) bilateral financial commodity contracts, foreign exchange contracts, options and physical commodity forward purchase and sale contracts are generally classified as Level 2 and are generally valued using quotations provided by brokers or industry-standard models that consider various inputs, including quoted forward prices for commodities, time value, volatility factors, credit risk and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument, and can be derived from observable data or are supported by observable prices at which transactions are executed in the marketplace.

 

·

Occidental values commodity derivatives based on a market approach that considers various assumptions, including quoted forward commodity prices and market yield curves.  The assumptions used include inputs that are generally unobservable in the marketplace, or are observable but have been adjusted based upon various assumptions and the fair value is designated as Level 3 within the valuation hierarchy.

 

·

Occidental values the available for sale investment based on the closing share price of California Resources as of the balance sheet date.  This investment is classified as Level 1.  At March 31, 2015, Occidental has approximately 71.5 million shares of California Resources, which are recorded as a $544 million available for sale investment.

 

Occidental generally uses an income approach to measure fair value when observable inputs are unavailable. This approach utilizes management’s judgments regarding expectations of projected cash flows, and discounts those cash flows using a risk-adjusted discount rate.

 

The following tables provide fair value measurement information for such assets and liabilities that are measured on a recurring basis as of March 31, 2015 and December 31, 2014 (in millions):

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

 

March 31, 2015 Using

 

Netting and

 

Total Fair

 

Description

 

Level 1

 

Level 2

 

Level 3

 

Collateral

 

Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

360

 

$

54

 

$

 

$

(331

)

$

83

 

Available for sale investment

 

$

544

 

$

 

$

 

$

 

$

544

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

350

 

$

233

 

$

 

$

(349

)

$

234

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

 

December 31, 2014 Using

 

Netting and

 

Total Fair

 

Description

 

Level 1

 

Level 2

 

Level 3

 

Collateral

 

Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

712

 

$

127

 

$

 

$

(742

)

$

97

 

Available for sale investment

 

$

394

 

$

 

$

 

$

 

$

394

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

750

 

$

246

 

$

 

$

(756

)

$

240

 

 

Fair Values — Nonrecurring

 

As a result of lower commodity prices during the first quarter of 2015, Occidental recognized approximately $160 million in pre-tax impairment charges related to proved domestic oil and gas properties.

 

 

 

Fair Value Measurements at

 

 

 

Total Pre-tax

 

 

 

March 31, 2015 Using

 

Net Book

 

(Non-cash)

 

Description

 

Level 1

 

Level 2

 

Level 3

 

Value (a)

 

Impairment Loss

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Impaired proved oil and gas assets - domestic

 

$

 

$

 

$

41 

 

$

201 

 

$

160 

 

 

 

 

Fair Value Measurements at

 

 

 

Total Pre-tax

 

 

 

December 31, 2014 Using

 

Net Book

 

(Non-cash)

 

Description

 

Level 1

 

Level 2

 

Level 3

 

Value (a)

 

Impairment Loss

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Impaired proved oil and gas assets - domestic

 

$

 

$

 

$

2,249 

 

$

5,008 

 

$

2,759 

 

Impaired proved oil and gas assets - international

 

$

 

$

 

$

45 

 

$

1,084 

 

$

1,039 

 

Impaired Chemical property, plant, and equipment

 

$

 

$

 

$

18 

 

$

129 

 

$

111 

 

 

(a)

Amount represents net book value at date of assessment.

 

Other Financial Instruments

 

The carrying amounts of cash and cash equivalents and other on-balance-sheet financial instruments, other than long term fixed-rate debt, approximate fair value.  The cost, if any, to terminate Occidental’s off-balance-sheet financial instruments is not significant.  Occidental estimates the fair value of fixed-rate debt based on the quoted market prices for those instruments or on quoted market yields for similarly rated debt instruments, taking into account such instruments’ maturities.  The estimated fair values of Occidental’s debt as of March 31, 2015 and December 31, 2014 was $7.2 billion and $7.0 billion, respectively, and its carrying value as of March 31, 2015 and December 31, 2014 was $6.9 billion in each period. The majority of Occidental’s debt is classified as Level 1, with $90 million classified as Level 2.