Derivatives

6 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

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, to fix margins on the future sale of stored volumes of oil and natural gas and interest-rate risks.

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 consolidated condensed balance sheets. 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 June 30, 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 June 30, 2019, Occidental had approximately 4 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 associated with stored natural gas, including the ineffective portion, was immaterial for the six months ended June 30, 2019 and the year ended December 31, 2018.

In June 2019, in anticipation of issuing long-term debt in the third quarter of 2019 to partially finance the cash portion of the merger consideration with Anadarko, Occidental entered into a series of U.S. Treasury rate locks, designated as cash flow hedges, to hedge fluctuations in U.S. Treasury rates on the debt issuance date. The fair value of the U.S. Treasury rate locks is subject to changes in interest rates.

The following U.S. Treasury rate locks were outstanding as of June 30, 2019 (in millions):

Treasury tenor	Notional value		Weighted Average Fixed Rate		Expiration Date	Unrealized loss included in other comprehensive income		Liability (a)
10-year	$	750	2.11	%	September 30, 2019	$	7	$	7
30-year	$	750	2.59	%	September 30, 2019	$	11	$	11

(a) The total $18 million liability is considered a Level 2 fair value measurement and is included in current liabilities - accrued liabilities as of June 30, 2019.

Derivatives Not Designated as Hedging Instruments

Forward unrealized instruments that are derivatives not designated as hedging instruments are required to be recorded on the consolidated condensed statements of operations and balance sheets 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 $61.46 per barrel and $2.11 per thousand cubic feet (Mcf) for crude oil and natural gas, respectively, at June 30, 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 June 30, 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	$	(24	)	$	184
Natural Gas Commodity Contracts	$	5		$	5
Outstanding net volumes on derivatives not designated as hedges
Crude Oil Commodity Contracts
Volume (MMBL)	54			61
Natural Gas Commodity Contracts
Volume (Bcf)	(155		)	(142		)

Fair Value of Derivatives

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

As of June 30, 2019		Fair Value Measurements Using						Netting (b)			Total Fair Value
(in millions)	Balance Sheet Location	Level 1		Level 2		Level 3
Assets:
Derivatives not designated as hedges (a)
Commodity Contracts	Other current assets	$	1,053	$	85	$	—	$	(1,105	)	$	33
	Long-term receivables and other assets, net	$	24	$	10	$	—	$	(24	)	$	10
Liabilities:
Derivatives not designated as hedges (a)
Commodity Contracts	Accrued liabilities	$	1,076	$	89	$	—	$	(1,105	)	$	60
	Deferred credits and other liabilities - other	$	25	$	1	$	—	$	(24	)	$	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 June 30, 2019, no collateral received has been netted against derivative assets and collateral paid of $19 million has been netted against derivative liabilities. Occidental had $43 million of initial margin deposited with brokers as of June 30, 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
Assets:
Derivatives not designated as hedges (a)
Commodity Contracts	Other current assets	$	2,531	$	110	$	—	$	(2,392	)	$	249
	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
	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.

In July 2019, Occidental entered into three-way costless collar derivative instruments for 2020 and additional call options in 2021 to manage its near-term exposure to cash-flow variability from commodity-price risks. A three-way collar is a combination of three options: a sold call, a purchased put, and a sold put. The sold call establishes the maximum price that the Company will receive for the contracted commodity volume for a defined period of time. The purchased put establishes the minimum price that the Company will receive for the contracted volumes unless the market price for the commodity falls below the sold put strike price, at which point the minimum price equals the reference price plus the difference between the purchased put strike price and the sold put strike price for a defined period of time. Occidental entered into the 2021 call options to substantially improve the ceiling price that the Company will receive for the contracted commodity volumes in 2020.

Summary July 2019 derivative instruments
2020 Settlement
Three-way collars (Oil MBBL/day)			300
	Average price per barrel (Brent oil pricing)
		Ceiling sold price (call)	$	74.09
		Floor purchased price (put)	$	55.00
		Floor sold price (put)	$	45.00
2021 Settlement
Call Options sold (Oil MBBL/day)			300
	Average price per barrel (Brent oil pricing)
		Ceiling sold price (call)	$	74.09