Derivatives

Occidental uses a variety of derivative financial instruments and physical contracts, including those designated as cash flow hedges, to manage its exposure to commodity price fluctuations, transportation commitments and to fix margins on the future sale of stored volumes of oil and natural gas. Where Occidental buys product for its own consumption or sells its production to a defined customer, Occidental may elect normal purchases and normal sales exclusions. Occidental usually applies cash flow hedge accounting treatment to derivative financial instruments to lock in margins on the forecasted sales of its natural gas storage volumes, and at times for other strategies to lock in margins. Occidental also enters into derivative financial instruments for speculative or trading purposes; however, the results of any transactions are immaterial to the marketing portfolio.

The financial instruments not designated as hedges will impact Occidental's earnings through mark-to-market until the offsetting future physical commodity is delivered. Physical inventory is carried at lower of cost or market on the balance sheet. A substantial majority of Occidental's physical derivative contracts are index-based and carry no mark-to-market value in earnings. Net gains and losses associated with derivative instruments not designated as hedging instruments are recognized currently in net sales. Net gains and losses attributable to derivative instruments subject to hedge accounting reside in accumulated other comprehensive loss and are reclassified to earnings as the transactions to which the derivatives relate are recognized in earnings.

Credit Risk

The majority of Occidental's counterparty credit risk is related to the physical delivery of energy commodities to its customers and their inability to meet their settlement commitments. Occidental manages credit risk by selecting counterparties that it believes to be financially strong, by entering into netting arrangements with counterparties and by requiring collateral or other credit risk mitigants, as appropriate. Occidental actively evaluates the creditworthiness of its counterparties, assigns appropriate credit limits and monitors credit exposures against those assigned limits. Occidental also enters into future contracts through regulated exchanges with select clearinghouses and brokers, which are subject to minimal credit risk as a significant portion of these transactions settle on a daily margin basis.

Certain of Occidental's over-the-counter derivative instruments contain credit-risk-contingent features, primarily tied to credit ratings for Occidental or its counterparties, which may affect the amount of collateral that each would need to post. Occidental believes that if it had received a one-notch reduction in its credit ratings, it would not have resulted in a material change in its collateral-posting requirements as of March 31, 2019, and December 31, 2018.

Cash Flow Hedges

Occidental’s marketing operations store natural gas purchased from third parties at Occidental’s leased storage facilities. Derivative instruments are used to fix margins on the future sales of the stored volumes. As of March 31, 2019, Occidental had approximately 1 billion cubic feet (Bcf) of natural gas held in storage with no cash flow hedges currently associated with the stored volumes. As of December 31, 2018, Occidental had approximately 5 Bcf of natural gas held in storage, and had cash flow hedges for the forecast sales, to be settled by physical delivery, of approximately 4 Bcf of stored natural gas. The amount of cash flow hedges, including the ineffective portion, was immaterial for the three months ended March 31, 2019, and the year ended December 31, 2018.

Derivatives Not Designated as Hedging Instruments

Forward unrealized instruments that are derivatives not designated as hedging instruments are required to be recorded on the income statement and balance sheet at fair value. The fair value represents an unrealized gain or loss between executed sales prices and market prices at the end of the period. The fair value does not reflect the realized or cash value of the instrument. Substantially all of the fair value of Occidental's derivative instruments not designated as hedges are used to manage its exposure to commodity price fluctuations and settle within three months at a weighted average contract price of $60.04 per barrel and $2.36 per thousand cubic feet (Mcf) for crude oil and natural gas, respectively, at March 31, 2019. The remaining fair value of derivative instruments not designated as hedges was immaterial. The weighted average contract price was $58.81 per barrel and $3.18 per Mcf for crude oil and natural gas, respectively, at December 31, 2018.

The following table summarizes the amounts reported in net sales related to the outstanding commodity derivatives not designated as hedging instruments as of March 31, 2019, and December 31, 2018.



(in millions, except Long/(Short) volumes)	2019			2018

Unrealized gain (loss) on derivatives not designated as hedges
Crude Oil Commodity Contracts	$	(63	)	$	184
Natural Gas Commodity Contracts	$	3		$	5
Outstanding net volumes on derivatives not designated as hedges
Crude Oil Commodity Contracts
Volume (MMBL)	56			61
Natural Gas Commodity Contracts
Volume (Bcf)	(162		)	(142		)

Fair Value of Derivatives

The following tables present the gross and net fair values of Occidental’s outstanding derivatives:



As of March 31, 2019		Fair Value Measurements Using			Netting ^(b)		Total Fair Value
(in millions)	Balance Sheet Location	Level 1	Level 2	Level 3	Netting ^(b)		Total Fair Value
Assets:
Derivatives not designated as hedges ^(a)
Commodity Contracts	Other current assets	1,077	48	—	(1,099	)	26
Commodity Contracts	Long-term receivables and other assets, net	19	8	—	(19	)	8
Liabilities:
Derivatives not designated as hedges ^(a)
Commodity Contracts	Accrued liabilities	1,136	54	—	(1,099	)	91
Commodity Contracts	Deferred credits and other liabilities - other	20	2	—	(19	)	3


(a)	Fair values are presented at gross amounts, including when the derivatives are subject to master netting arrangements, and presented on a net basis in the consolidated condensed balance sheets.

(b)

These amounts do not include collateral. As of March 31, 2019, no collateral received has been netted against derivative assets and collateral paid of $66 million has been netted against derivative liabilities. Occidental had $94 million of initial margin deposited with brokers as of March 31, 2019. Initial margin is included in other current assets in the consolidated condensed balance sheets and has not been reflected in these derivative fair-value tables.



As of December 31, 2018		Fair Value Measurements Using			Netting ^(b)		Total Fair Value
(in millions)	Balance Sheet Location	Level 1	Level 2	Level 3	Netting ^(b)		Total Fair Value
Assets:
Derivatives not designated as hedges ^(a)
Commodity Contracts	Other current assets	2,531	110	—	(2,392	)	249
Commodity Contracts	Long-term receivables and other assets, net	5	9	—	(6	)	8
Liabilities:
Cash-flow hedges^(a)
Commodity contracts	Accrued liabilities	—	2	—	—		2

Derivatives not designated as hedges ^(a)
Commodity contracts	Accrued liabilities	2,357	101	—	(2,392	)	66
Commodity contracts	Deferred credits and other liabilities - other	6	2	—	(6	)	2


(a)	Fair values are presented at gross amounts, including when the derivatives are subject to master netting arrangements and presented on a net basis in the consolidated condensed balance sheets.

(b)

These amounts do not include collateral. As of December 31, 2018, $45 million collateral received has been netted against derivative assets and collateral paid of $1 million has been netted against derivative liabilities. Occidental had $178 million of initial margin deposited with brokers as of December 31, 2018. Initial margin is included in other current assets in the consolidated condensed balance sheets and has not been reflected in these derivative fair-value tables.