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.


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, purchased calls or swaptions).

We use a modified Black-Scholes option pricing valuation model for option and swaption derivative contracts that considers various inputs including: (a) 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.

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.

The determination of the fair values of our derivative contracts incorporates various factors, which include not only the impact of our non-performance risk on our liabilities but also the credit standing of the counterparties involved. We utilize counterparty rate of default values to assess the impact of non-performance risk when evaluating both our liabilities to, and receivables from, counterparties.

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, 2016:
Money market fund investments	$	320		$	—	$	—		$	320
Deferred compensation plan assets	6			—		—			6
Equity securities available-for-sale	9			—		—			9
Oil and gas derivative swap contracts	—			50		—			50
Oil and gas derivative option contracts	—			—		(75		)	(75		)
Stock-based compensation liability awards	(11		)	—		—			(11		)
Total	$	324		$	50	$	(75	)	$	299

As of March 31, 2017:
Money market fund investments	$	236		$	—	$	—		$	236
Deferred compensation plan assets	6			—		—			6
Equity securities available-for-sale	11			—		—			11
Oil and gas derivative swap contracts	—			71		—			71
Oil and gas derivative option contracts	—			—		(63		)	(63		)
Stock-based compensation liability awards	(12		)	—		—			(12		)
Total	$	241		$	71	$	(63	)	$	249

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.



	Derivatives
	(In millions)
Balance at January 1, 2016	$	(308	)
Unrealized gains (losses) included in earnings	(46		)
Purchases, issuances, sales and settlements:
Settlements	92
Transfers into Level 3	—
Transfers out of Level 3	—
Balance at March 31, 2016	$	(262	)
Change in unrealized gains or losses included in earnings relating to Level 3 instruments still held at March 31, 2016	$	(32	)

Balance at January 1, 2017	$	(75	)
Unrealized gains (losses) included in earnings	(6		)
Purchases, issuances, sales and settlements:
Settlements	18
Transfers into Level 3	—
Transfers out of Level 3	—
Balance at March 31, 2017	$	(63	)
Change in unrealized gains or losses included in earnings relating to Level 3 instruments still held at March 31, 2017	$	(4	)

Qualitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements

Derivatives. 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 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. 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. See Note 4, "Derivative Financial Instruments."

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	$	(53	)	Modified Black-Scholes	Oil price volatility	22.57	%	—	118.40%
					Credit risk	0.01	%	—	1.25%
Natural gas option contracts	$	(10	)	Modified Black-Scholes	Natural gas price volatility	24.33	%	—	41.31%
					Credit risk	0.01	%	—	1.25%

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:



	March 31, 2017		December 31, 2016
	(In millions)
5¾% Senior Notes due 2022	$	796	$	789
5⅝% Senior Notes due 2024	1,054		1,044
5⅜% Senior Notes due 2026	731		714

Any amounts outstanding under our revolving credit facility and money market lines of credit as of the indicated dates are stated at cost, which approximates fair value. See Note 10, "Debt."