Fair Value Measurements:

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The authoritative guidance requires disclosure of the framework for measuring fair value and requires that fair value measurements be classified and disclosed in one of the following categories:


Level 1:	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2:

Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that we value using observable market data. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange traded derivatives such as over-the-counter commodity fixed-price swaps and certain investments.


Level 3:	Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). Level 3 instruments primarily include derivative instruments, such as commodity options (i.e., price collars, sold puts or swaptions) and other financial investments.


•	Our valuation models for derivative contracts are primarily industry-standard models (i.e., Black-Scholes) that consider various inputs including: (a) quoted forward prices for commodities, (b) time value, (c) volatility factors, (d) counterparty credit risk and (e) current market and contractual prices for the underlying instruments.


•	Our valuation model for the Stockholder Value Appreciation Program (SVAP) is a Monte Carlo simulation that is based on a probability model and considers various inputs including: (a) the measurement date stock price, (b) time value and (c) historical and implied volatility. See Note 11, “Stock-Based Compensation,” for a description of the SVAP.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy.

Recurring Fair Value Measurements

The following table summarizes the valuation of our assets and liabilities that are measured at fair value on a recurring basis.



	Fair Value Measurement Classification
	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total
	(In millions)
As of December 31, 2013:
Money market fund investments	$	2		$	—		$	—		$	2
Deferred compensation plan assets	8			—			—			8
Investments available-for-sale:
Equity securities	8			—			—			8
Auction rate securities	—			—			39			39
Oil and gas derivative swap contracts	—			(28		)	—			(28		)
Oil and gas derivative option contracts	—			—			(8		)	(8		)
Stock-based compensation liability awards	(11		)	—			(5		)	(16		)
Total	$	7		$	(28	)	$	26		$	5

As of September 30, 2014:
Money market fund investments	$	365		$	—		$	—		$	365
Deferred compensation plan assets	9			—			—			9
Equity securities available-for-sale	9			—			—			9
Oil and gas derivative swap contracts	—			104			—			104
Oil and gas derivative option contracts	—			—			(1		)	(1		)
Stock-based compensation liability awards	(13		)	—			(7		)	(20		)
Total	$	370		$	104		$	(8	)	$	466

The determination of the fair values above incorporates various factors, which include not only the impact of our non-performance risk on our derivative liabilities but also the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests), if any. We utilize credit default swap values to assess the impact of non-performance risk when evaluating both our liabilities to and receivables from counterparties.

As of December 31, 2013, we held $39 million of auction rate securities, which were classified as a Level 3 fair value measurement. During the first quarter of 2014, all auction rate securities were sold for $39 million.

Level 3 Fair Value Measurements

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy for the indicated periods.



	Investments			Derivatives			Stock-Based Compensation			Total
	(In millions)
Balance at January 1, 2013	$	36		$	115		$	—		$	151
Realized or unrealized gains (losses):
Included in earnings	—			(59		)	(8		)	(67		)
Included in other comprehensive income (loss)	4			—			—			4
Purchases, issuances, sales and settlements:
Settlements	(1		)	(46		)	—			(47		)
Transfers in to Level 3	—			—			—			—
Transfers out of Level 3	—			—			—			—
Balance at September 30, 2013	$	39		$	10		$	(8	)	$	41

Change in unrealized gains or losses included in earnings relating to Level 3 instruments still held at September 30, 2013	$	—		$	(8	)	$	(8	)	$	(16	)

Balance at January 1, 2014	$	39		$	(8	)	$	(5	)	$	26
Realized or unrealized gains (losses) included in earnings	—			—			(42		)	(42		)
Purchases, issuances, sales and settlements:
Sales	(39		)	—			—			(39		)
Settlements	—			4			40			44
Transfers in to Level 3	—			—			—			—
Transfers out of Level 3⁽¹⁾	—			3			—			3
Balance at September 30, 2014	$	—		$	(1	)	$	(7	)	$	(8	)

Change in unrealized gains or losses included in earnings relating to Level 3 instruments still held at September 30, 2014	$	—		$	20		$	(3	)	$	17

________


(1)	During the second quarter of 2014, we transferred $3 million of derivative option contracts out of the Level 3 hierarchy. The transfer was a result of our Level 3 swaptions being exercised by the counterparties as swaps on May 30, 2014.

Qualitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements

Derivatives. Our valuation models for Level 3 derivative contracts are primarily industry-standard models that consider various factors, including certain significant unobservable inputs such as (a) quoted forward prices for commodities, (b) volatility factors and (c) counterparty credit risk. The calculation of the fair value of our option contracts requires the use of an option-pricing model. The estimated future prices are compared to the strike prices fixed by our derivative contracts, and the resulting estimated future cash inflows or outflows over the contractual life are discounted to calculate the fair value. These pricing and discounting variables are sensitive to market volatility as well as changes in future price forecasts, regional price differences and interest rates. Significant increases (decreases) in the quoted forward prices for commodities generally lead to corresponding decreases (increases) in the fair value measurement of our oil and gas derivative contracts. Significant changes in the volatility factors utilized in our option-pricing model can cause significant changes in the fair value measurement of our oil and gas derivative contracts.

The determination of the fair values of derivative instruments incorporates various factors that include not only the impact of our non-performance risk on our liabilities but also the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests). Historically, we have not experienced significant changes in the fair value of our derivative contracts resulting from changes in counterparty credit risk as the counterparties for all of our derivative transactions have an “investment grade” credit rating.

Stock-Based Compensation. The calculation of the fair value of the SVAP liability requires the use of a probability-based Monte Carlo simulation, which includes unobservable inputs. The simulation predicts multiple scenarios of future stock returns over the performance period, which are discounted to calculate the fair value. The fair value is recognized over a service period derived from the simulation. Future stock returns and discounting variables are sensitive to market volatility. Significant increases (decreases) in the volatility factors utilized in our option-pricing model can cause significant increases (decreases) in the fair value measurement of the SVAP liability.

Quantitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements



	Estimated Fair Value Asset (Liability)			Quantitative Information about Level 3 Fair Value Measurements
Instrument Type	Estimated Fair Value Asset (Liability)			Valuation Technique	Unobservable Input	Range
	(In millions)
Oil option contracts	$	(8	)	Black-Scholes	Oil price volatility	14.54	%	—	52.12	%
					Credit risk	0.01	%	—	3.95	%
Natural gas option contracts	$	7		Black-Scholes	Natural gas price volatility	24.78	%	—	50.03	%
					Credit risk	0.01	%	—	0.64	%
SVAP	$	(7	)	Monte Carlo	Implied volatility				37.0	%

Fair Value of Debt

The estimated fair value of our notes, based on quoted prices in active markets (Level 1) as of the indicated dates, was as follows:



	September 30, 2014		December 31, 2013
	(In millions)
5¾% Senior Notes due 2022	$	836	$	767
5⅝% Senior Notes due 2024	1,072		1,025
7⅛% Senior Subordinated Notes due 2018	615		624
6⅞% Senior Subordinated Notes due 2020	730		755

Any amounts outstanding under our credit arrangements as of the indicated dates are stated at cost, which approximates fair value. Please see Note 9, “Debt.”