Derivatives

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

NOTE 6 - DERIVATIVES

Occidental uses a variety of derivative financial instruments and physical contracts to manage its exposure to commodity-price fluctuations, interest rate risks and transportation commitments and to fix margins on the future sale of stored commodity volumes. Occidental also enters into derivative financial instruments for trading purposes.

Occidental may elect normal purchases and normal sales exclusions when physically delivered commodities are purchased or sold to a customer. Occidental occasionally 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, such as to lock rates on forecasted debt issuances. Derivatives are carried at fair value and on a net basis when a legal right of offset exists with the same counterparty.

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS

As of March 31, 2020, Occidental’s derivatives not designated as hedges consist of three-way oil collars and call options, interest rate swaps, marketing derivatives and warrants for 80 million shares of Occidental common stock (the Warrants).

Derivative instruments that are derivatives not designated as hedging instruments are required to be recorded on the balance sheet at fair value. Changes in fair value will impact Occidental’s earnings through mark-to-market adjustments until the physical commodity is delivered or the financial instrument is settled. The fair value does not reflect the realized or cash value of the instrument.

THREE-WAY OIL COLLARS AND CALL OPTIONS

In 2019, Occidental entered into three-way costless collar derivative instruments for 2020 along with 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 ceiling price that Occidental will receive for the contracted commodity volume for a defined period of time. The purchased put establishes the floor price that Occidental will receive for the contracted volumes unless the market price for the commodity falls below the sold put strike price, at which point the floor 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 terms for the ceiling price that Occidental will receive for the contracted commodity volumes in 2020. Net gains and losses associated with collars and calls are recognized currently in net sales. In April 2020, Occidental received cash of $108 million associated with these collars.

Occidental had the following collars and calls outstanding at March 31, 2020:

Collars and Calls, not designated as hedges
2020 Settlement
Three-way collars (Oil MMBBL)			96.25
	Average price per barrel (Brent oil pricing)
		Ceiling sold price (call)	$	74.16
		Floor purchased price (put)	$	55.00
		Floor sold price (put)	$	45.00
2021 Settlement
Call options sold (Oil MMBBL)			127.8
	Average price per barrel (Brent oil pricing)
		Ceiling sold price (call)	$	74.16

INTEREST RATE SWAPS

Occidental acquired interest rate swap contracts in the Acquisition. The contracts lock in a fixed interest rate in exchange for a floating interest rate indexed to three-month London Inter-Bank Offered Rate (LIBOR) throughout the reference period. Net gains and losses associated with interest rate derivative instruments not designated as hedging instruments are recognized currently in gains (losses) on interest rate swaps and warrants, net.

Occidental had the following outstanding interest rate swaps at March 31, 2020:

millions except percentages			Mandatory	Weighted-Average
Notional Principal Amount		Reference Period	Termination Date	Interest Rate
$	400	September 2016 - 2046	September 2021	6.348	%
$	350	September 2017 - 2047	September 2021	6.662	%
$	275	September 2016 - 2046	September 2022	6.709	%
$	450	September 2017 - 2047	September 2023	6.445	%

Depending on market conditions, liability management actions or other factors, Occidental may enter into offsetting interest rate swap positions or settle or amend certain or all of the currently outstanding interest rate swaps. In the first quarter of 2020, Occidental extended all 2020 mandatory termination dates to 2021 or thereafter.

Derivative settlements and collateralization are classified as cash flow from operating activities unless the derivatives contain an other-than-insignificant financing element, in which case the settlements and collateralization are classified as cash flows from financing activities. Due to the liability position of the interest rate derivatives at the date of the Acquisition, the interest rate derivatives in Occidental’s portfolio contain an other-than-insignificant financing element, and therefore, any settlements, collateralization or cash payments related to interest rate derivatives are classified as cash flow from financing activities. Net cash payments related to settlements, and collateralization of interest rate swap agreements were $50 million and $99 million in the first quarter of 2020, respectively.

MARKETING DERIVATIVES

Occidental's marketing derivative instruments not designated as hedges are physical and financial forward contracts which typically settle within three months. A substantial majority of Occidental's physically settled derivative contracts are index-based and carry no mark-to-market valuation in earnings. These instruments settled at a weighted average contract price of $41.58 per barrel and $1.25 per thousand cubic feet (Mcf) for crude oil and natural gas, respectively, at March 31, 2020. The weighted-average contract price was $60.60 per barrel and $2.17 per Mcf for crude oil and natural gas, respectively, at December 31, 2019. Net gains and losses associated with marketing derivative instruments not designated as hedging instruments are recognized currently in net sales.

The following table summarizes net long/(short) volumes associated with the outstanding marketing commodity derivatives not designated as hedging instruments.

	March 31, 2020	December 31, 2019
Crude Oil Commodity Contracts
Volume (MMBBL)	29	55
Natural Gas Commodity Contracts
Volume (Bcf)	(122)	(128)

THE WARRANTS

The Warrants issued with the Preferred Stock in connection with the financing of the Acquisition are exercisable at the holder's option, in whole or in part, until the first anniversary of the date on which no shares of Preferred Stock remain outstanding at which time the Warrants expire. The holders of the Warrants may require net cash settlement if certain shareholder and regulatory approvals to issue shares of Occidental's common stock underlying the Warrants are not obtained on a timely basis. The fair value of the Warrants is remeasured at each reporting date using the Black Scholes option model. The following inputs are used in the Black Scholes option model: the expected life is based on the estimated term of the Warrants, the volatility factor is based on historical volatilities of Occidental common stock, and the call option price for Occidental common stock at $62.50.

DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS

Net gains and losses attributable to derivative instruments subject to cash flow 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.

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, 2020 and December 31, 2019, cash flow hedges were immaterial.

FAIR VALUE OF DERIVATIVES

The following tables present the fair values of Occidental’s outstanding derivatives. Fair values are presented at gross amounts below, including when the derivatives are subject to master netting arrangements, and are presented on a net basis in the Consolidated Condensed Balance Sheets.

millions	Fair-Value Measurements Using						Netting (a)		Total Fair Value
Balance Sheet Classifications	Level 1		Level 2		Level 3
March 31, 2020
Oil Collars and Calls
Other current assets	$	—	$	834	$	—	$	—	$	834
Deferred credits and other liabilities - other	—		(58)		—		—		(58)
Marketing Derivatives
Other current assets	6,438		392		—		(6,445)		385
Long-term receivables and other assets, net	91		19		—		(91)		19
Accrued liabilities	(6,170)		(367)		—		6,445		(92)
Deferred credits and other liabilities - other	(91)		(1)		—		91		(1)
Interest Rate Swaps
Other current assets	—		1		—		—		1
Long-term receivables and other assets, net	—		1		—		—		1
Accrued liabilities	—		(90)		—		—		(90)
Deferred credits and other liabilities - other	—		(1,954)		—		—		(1,954)
Warrants
Deferred credits and other liabilities - other	—		(23)		—		—		(23)
December 31, 2019
Oil Collars and Calls
Other current assets	$	—	$	92	$	—	$	—	$	92
Deferred credits and other liabilities - other	—		(160)		—		—		(160)
Marketing Derivatives
Other current assets	945		79		—		(973)		51
Long-term receivables and other assets, net	4		12		—		(4)		12
Accrued liabilities	(1,008)		(44)		—		973		(79)
Deferred credits and other liabilities - other	(4)		(1)		—		4		(1)
Interest Rate Swaps
Other current assets	—		5		—		—		5
Long-term receivables and other assets, net	—		5		—		—		5
Accrued liabilities	—		(657)		—		—		(657)
Deferred credits and other liabilities - other	—		(776)		—		—		(776)
Warrants
Deferred credits and other liabilities - other	—		(107)		—		—		(107)

^(a)These amounts do not include collateral.

As of March 31, 2020, and December 31, 2019, $204 million and $104 million of collateral had been netted against derivative liabilities related to interest rate swaps, respectively. Subsequent to March 31, 2020, Occidental was required to post an additional $225 million in cash collateral related to the interest rate swaps. As of March 31, 2020, Occidental had received $212 million of collateral from brokers, which is netted with derivative assets. Initial margin of $65 million was deposited with brokers as of December 31, 2019 related to marketing derivatives.

GAINS AND LOSSES ON DERIVATIVES

The following table presents the effect of Occidental's derivative instruments on the Consolidated Condensed Statements of Operations:

millions	Three months ended March 31,
Income Statement Classification	2020		2019
Oil Collars and Calls
Net sales	$	952	$	—
Marketing Derivatives
Net sales (a)	410		564
Interest Rate Swaps
Losses on interest rate swaps and warrants, net	(669)		—
Warrants
Gains on interest rate swaps and warrants, net	84		—

^(a) Includes derivative and non-derivative marketing activity.

CREDIT RISK

Occidental's counterparty credit risk related to the physical delivery of energy commodities results from its customers' potential 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 party would need to post. The aggregate fair value of derivative instruments with credit-risk-related contingent features for which a net liability position existed at March 31, 2020, was $244 million (net of $204 million collateral), primarily related to acquired interest-rate swaps, and $787 million (net of $169 million of collateral) at December 31, 2019.