Derivative Financial Instruments

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedges, Assets [Abstract]

Derivative Financial Instruments Text Block

Derivative Financial Instruments:

Commodity Derivative Instruments

We utilize derivative strategies that consist of either a single derivative instrument or a combination of instruments to manage the variability in cash flows associated with the forecasted sale of our future domestic oil and natural gas production. While the use of derivative instruments limits the downside risk of adverse commodity price movements, their use also may limit future income from favorable commodity price movements.

In addition to the derivative strategies outlined in our annual Report on Form 10-K for the year ended December 31, 2013, we also utilize swaptions from time to time. A swaption is an option to exercise a swap where the buyer (counterparty) of the swaption purchases the right from the seller (Newfield), but not the obligation, to enter into a fixed-price swap with the seller on a predetermined date (expiration date). The swap price is a fixed price determined at the time of the swaption contract. If the swaption is exercised, the contract will become a swap treated consistent with our other fixed-price swaps.     

Our oil and gas derivative contracts are settled based upon reported prices on the NYMEX. The estimated fair value of these contracts is based upon various factors, including closing exchange prices on the NYMEX, over-the-counter quotations, estimated volatility, non-performance risk adjustments using credit default swaps and time to maturity. The calculation of the fair value of options requires the use of an option-pricing model. See Note 8, “Fair Value Measurements.”

At September 30, 2014, we had outstanding derivative positions as set forth in the tables below.

Natural Gas

		NYMEX Contract Price Per MMBtu
						Collars				Estimated Fair Value Asset (Liability)
Period and Type of Instrument	Volume in MMMBtus	Swaps (Weighted Average)		Sold Puts (Weighted Average)		Floors (Weighted Average)		Ceilings (Weighted Average)
										(In millions)
2014:
Fixed-price swaps	20,400	$	3.97	$	—	$	—	$	—	$	(2	)
Collars	5,980	—		—		3.75		4.62		—
2015:
Fixed-price swaps	49,275	4.28		—		—		—		14
Collars	38,325	—		—		3.93		4.74		7
Total										$	19

Crude Oil

		NYMEX Contract Price Per Bbl
						Collars				Estimated Fair Value Asset (Liability)
Period and Type of Instrument	Volume in MBbls	Swaps (Weighted Average)		Sold Puts (Weighted Average)		Floors (Weighted Average)		Ceilings (Weighted Average)
										(In millions)
2014:
Fixed-price swaps	2,116	$	89.94	$	—	$	—	$	—	$	(1	)
Fixed-price swaps with sold puts	1,472	95.16		75.00		—		—		7
Collars with sold puts	552	—		75.83		90.83		102.93		1
2015:
Fixed-price swaps	8,845	90.42		—		—		—		23
Fixed-price swaps with sold puts	7,354	90.22		69.75		—		—		11
Collars with sold puts	730	—		75.00		90.00		104.00		3
2016:
Fixed-price swaps with sold puts	7,864	90.89		74.59		—		—		14
Collars with sold puts	6,220	—		75.00		90.00		96.15		19
Swaptions (1)	—	91.00		—		—		—		(1		)
2017:
Fixed-price swaps with sold puts	1,180	90.63		75.00		—		—		2
Collars with sold puts	2,080	—		75.00		90.00		95.59		6
Total										$	84

________

(1) During the third quarter of 2014, we sold crude oil swaption contracts that, if exercised on their expiration date in the first quarter of 2015, would hedge 732 MBbls of calendar-year 2016 production. These contracts give the counterparties the option to enter into swap contracts with us at $91.00/Bbl for calendar-year 2016.

Additional Disclosures about Derivative Financial Instruments

We had derivative financial instruments recorded in our consolidated balance sheet as assets (liabilities) at their respective estimated fair value, as set forth below.

	Derivative Assets									Derivative Liabilities
	Gross Fair Value		Offset in Balance Sheet			Balance Sheet Location				Gross Fair Value			Offset in Balance Sheet		Balance Sheet Location
						Current		Noncurrent							Current			Noncurrent
	(In millions)									(In millions)
September 30, 2014
Natural gas positions	$	23	$	(3	)	$	15	$	5	$	(4	)	$	3	$	(1	)	$	—
Oil positions	141		(57		)	33		51		(57		)	57		—			—
Total	$	164	$	(60	)	$	48	$	56	$	(61	)	$	60	$	(1	)	$	—
December 31, 2013
Natural gas positions	$	11	$	(2	)	$	—	$	9	$	(22	)	$	2	$	(20	)	$	—
Oil positions	26		(9		)	—		17		(51		)	9		(42		)	—
Total	$	37	$	(11	)	$	—	$	26	$	(73	)	$	11	$	(62	)	$	—

The amount of gain (loss) recognized in “Commodity derivative income (expense)” in our consolidated statement of operations related to our derivative financial instruments follows:

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2014			2013			2014			2013
	(In millions)
Derivatives not designated as hedging instruments:
Realized gain (loss) on natural gas positions	$	(2	)	$	19		$	(36	)	$	51
Realized gain (loss) on oil positions	(18		)	(12		)	(70		)	(9		)
Total realized gain (loss)	(20		)	7			(106		)	42
Unrealized gain (loss) on natural gas positions	38			(6		)	30			(24		)
Unrealized gain (loss) on oil positions	285			(100		)	109			(84		)
Total unrealized gain (loss)	323			(106		)	139			(108		)
Total	$	303		$	(99	)	$	33		$	(66	)

The use of derivative transactions involves the risk that the counterparties will be unable to meet the financial terms of such transactions. Our derivative contracts are with multiple counterparties to minimize our exposure to any individual counterparty, and we have netting arrangements with all of our counterparties that provide for offsetting payables against receivables from separate derivative instruments with that counterparty. At September 30, 2014, 10 of our 16 counterparties accounted for approximately 85% of our contracted volumes, with no single counterparty accounting for more than 15%.

A portion of our derivative instruments are with lenders under our credit facility. Our credit facility, senior notes, senior subordinated notes and substantially all of our derivative instruments contain provisions that provide for cross defaults and acceleration of those debt and derivative instruments in certain situations.