Fair Value Measurements

3 Months Ended

Mar. 31, 2020


NOTE 7 - 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

In January 2012, Occidental entered into a long-term contract to purchase carbon dioxide (CO₂). This contract contains a price adjustment clause that is linked to changes in NYMEX crude oil prices. Occidental determined that the portion of this contract linked to NYMEX oil prices is not clearly and closely related to the host contract, and Occidental therefore bifurcated this embedded pricing feature from its host contract and accounts for it at fair value in the Consolidated Condensed Financial Statements.

The following tables provide fair-value measurement information for embedded derivatives that are measured on a recurring basis:


millions	Fair-Value Measurements Using
Embedded derivatives	Level 1		Level 2		Level 3		Netting and Collateral		Total Fair Value
As of March 31, 2020

Accrued liabilities	$	—	$	105	$	—	$	—	$	105
Deferred credits and other liabilities - other	—		67		—		—		67

As of December 31, 2019

Accrued liabilities	$	—	$	40	$	—	$	—	$	40
Deferred credits and other liabilities - other	—		49		—		—		49

FAIR-VALUES - NONRECURRING - IMPAIRMENTS

Given (1) the abrupt decline in oil commodity prices beginning in March 2020 caused by a collapse in demand for oil and natural gas due to the slowdown in worldwide economic activity attributable to the COVID-19 pandemic and government-imposed travel restrictions and business closures and the institution of quarantining and other restrictions on movement in many communities worldwide and a dispute among the Organization of the Petroleum Exporting Countries and its broader partners (OPEC+) regarding the level of oil production and (2) changes to management's 2020 exploration and development plans resulting therefrom, Occidental's oil and gas segment recognized pre-tax impairment and related charges of $581 million primarily related to both proved and unproved oil and gas properties and a lower of cost or net realizable value adjustment for crude inventory. Occidental identified certain proved oil and gas assets which would be significantly impacted in the near term due to declines in prices and changes in management's 2020 development plans and assessed those assets for impairment. Occidental recorded proved property impairments of $293 million related to certain assets in Oman, Bolivia and the Gulf of Mexico. The fair value of the proved properties was measured based on the income approach, which incorporated assumptions involving expectations of future cash flows. These assumptions included estimates of future product prices, which Occidental based on a combination of market information and published industry resources, estimates of oil and gas reserves, estimates of future expected operating and capital costs and a risk-adjusted discount rate of 10 percent. These inputs are categorized as Level 3 in the fair value hierarchy. Unproved property impairments, of approximately $241 million, primarily relate to domestic onshore undeveloped leases and offshore Gulf of Mexico where Occidental no longer intends to pursue exploration, appraisal or development activities primarily due to the reduction in near-term capital plans.

Since March 31, 2020, the near-term futures price for oil has continued to decrease as inventory and supply imbalances have magnified as a result of the pandemic related drop in demand for oil. If the macro-economic conditions that exist as of the date of this filing continue or worsen, it is likely that most, if not all, of Occidental’s oil and properties will be tested for impairment during the second quarter of 2020, which could result in additional non-cash asset impairments, and such impairments could be material to Occidental’s consolidated financial statements.

GOODWILL

As of December 31, 2019, Occidental had $1.2 billion of goodwill related to its ownership in WES. Significant declines in the market value of WES’s publicly traded units resulted in management’s determination that more likely than not the fair value of the reporting unit was significantly less than its carrying value and the remaining $1.2 billion in goodwill was fully impaired in the first quarter of 2020. The market value of WES's publicly traded units is considered a Level 1 input.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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