Fair Value Measurements

6 Months Ended

Jun. 30, 2016

Fair Value Measurements

Fair Values - Recurring

The following tables present assets and liabilities accounted for at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 by fair value hierarchy level.



	June 30, 2016
(In millions)	Level 1		Level 2		Level 3		Total
Derivative instruments, assets
Commodity^(a)	$	—	$	6	$	—	$	6
Interest rate	—		12		—		12
Derivative instruments, assets	$	—	$	18	$	—	$	18
Derivative instruments, liabilities
Commodity^(a)	$	—	$	70	$	—	$	70
Derivative instruments, liabilities	$	—	$	70	$	—	$	70


^(a)	Derivative instruments are recorded on a net basis in the company's balance sheet (see Note 14).



	December 31, 2015
(In millions)	Level 1		Level 2		Level 3		Total
Derivative instruments, assets
Commodity^(a)	$	—	$	51	$	—	$	51
Interest rate	—		8		—		8
Derivative instruments, assets	$	—	$	59	$	—	$	59
Derivative instruments, liabilities
Commodity^(a)	$	—	$	1	$	—	$	1
Derivative instruments, liabilities	$	—	$	1	$	—	$	1


^(a)	Derivative instruments are recorded on a net basis in the company's balance sheet (see Note 14).

Commodity derivatives include three-way collars, two-way collars, call options and swaptions. These instruments are measured at fair value using either the Black-Scholes Model or the Black Model. Inputs to both models include commodity prices, interest rates, and implied volatility. The inputs to these models are categorized as Level 2 because predominantly all assumptions and inputs are observable in active markets throughout the term of the instruments.

Interest rate swaps are measured at fair value with a market approach using actionable broker quotes, which are Level 2 inputs. See Note 14 for additional discussion of the types of derivative instruments we use.

Fair Values – Goodwill

Unlike long-lived assets, goodwill must be tested for impairment at least annually, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment at the reporting unit level. We estimate the fair value of our International E&P reporting unit using a combination of market and income approaches. The market approach referenced observable inputs specific to us and our industry, such as the price of our common equity, our enterprise value, and valuation multiples of us and our peers from the investor analyst community. The income approach utilized discounted cash flows, which were based on forecasted assumptions. Key assumptions to the income approach include future liquid hydrocarbon and natural gas pricing, estimated quantities of liquid hydrocarbons and natural gas proved and probable reserves, estimated timing of production, discount rates, future capital requirements and operating expenses and tax rates. The assumptions used in the income approach are consistent with those that management uses to make business decisions. These valuations methodologies represent Level 3 fair value measurements. We performed our annual impairment test in April 2016 and concluded no impairment was required. While the fair value of our International E&P reporting unit exceeded the book value, subsequent commodity price and/or common stock declines may cause us to reassess our goodwill for impairment, and could result in non-cash impairment charges in the future.

Fair Values- Nonrecurring

The following table shows the values of assets, by major category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition.



	Three Months Ended June 30,
	2016				2015
(In millions)	Fair Value		Impairment		Fair Value		Impairment
Long-lived assets held for use	$	—	$	—	$	17	$	44



	Six Months Ended June 30,
	2016				2015
(In millions)	Fair Value		Impairment		Fair Value		Impairment
Long-lived assets held for use	$	—	$	1	$	17	$	44

Long-lived assets held for use that were impaired are discussed below. The fair values of each were measured using an income approach based upon internal estimates of future production levels, prices and discount rate, all of which are Level 3 inputs. Inputs to the fair value measurement include reserve and production estimates made by our reservoir engineers, estimated future commodity prices adjusted for quality and location differentials and forecasted operating expenses for the remaining estimated life of the reservoir.

During the second quarter of 2015, we recorded a non-cash impairment charge of $44 million related to East Texas, North Louisiana and Wilburton, Oklahoma natural gas assets as a result of the anticipated sale (See Note 6). The fair values were measured using a probability weighted income approach based on both the anticipated sales price and a held-for-use model.

Fair Values – Financial Instruments

Our current assets and liabilities include financial instruments, the most significant of which are receivables, long-term debt and payables. We believe the carrying values of our receivables and payables approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments, (2) our credit rating, and (3) our historical incurrence of and expected future insignificant bad debt expense, which includes an evaluation of counterparty credit risk.

The following table summarizes financial instruments, excluding receivables, payables and derivative financial instruments, and their reported fair values by individual balance sheet line item at June 30, 2016 and December 31, 2015.



	June 30, 2016				December 31, 2015
	Fair		Carrying		Fair		Carrying
(In millions)	Value		Amount		Value		Amount
Financial assets
Other noncurrent assets	$	198	$	206	$	104	$	118
Total financial assets	$	198	$	206	$	104	$	118
Financial liabilities
Other current liabilities	$	25	$	24	$	34	$	33
Long-term debt, including current portion^(a)	7,186		7,291		6,723		7,291
Deferred credits and other liabilities	121		117		97		95
Total financial liabilities	$	7,332	$	7,432	$	6,854	$	7,419

^(a) Excludes capital leases, debt issuance costs and interest rate swap adjustments.

Fair values of our financial assets included in other noncurrent assets, and of our financial liabilities included in other current liabilities and deferred credits and other liabilities, are measured using an income approach and most inputs are internally generated, which results in a Level 3 classification. Estimated future cash flows are discounted using a rate deemed appropriate to obtain the fair value.

Most of our long-term debt instruments are publicly-traded. A market approach, based upon quotes from major financial institutions, which are Level 2 inputs, is used to measure the fair value of such debt. The fair value of our debt that is not publicly-traded is measured using an income approach. The future debt service payments are discounted using the rate at which we currently expect to borrow. All inputs to this calculation are Level 3.

- 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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