Derivative Financial Instruments

The Company utilizes commodity swap contracts, option contracts, collar contracts, collar contracts with short puts and basis swap contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company's indebtedness.

Oil production derivatives. The Company sells its oil production at the lease and the sales contracts governing such oil production are tied directly to, or are highly correlated with, New York Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI") oil prices. The Company also enters into pipeline capacity commitments in order to secure available oil transportation capacity from its areas of production to the Gulf Coast. In order to diversify the oil price it receives, the Company (i) enters into oil purchase transactions with third parties in its areas of production that are consistent with the oil prices that the Company receives at the lease, adjusted for transportation costs to the point of purchase, (ii) transports the purchased oil using its pipeline capacity to the Gulf Coast and (iii) enters into third party sale transactions to sell the oil into the Gulf Coast refinery or international export markets at prices that are highly correlated with Brent oil prices. As a result, the Company will generally use Brent derivative contracts to manage future oil price volatility.

Volumes per day associated with the Company's outstanding oil derivative contracts as of March 31, 2019 and the weighted average oil prices for those contracts are as follows:



	2019
	Second Quarter		Third Quarter		Fourth Quarter
Brent collar contracts with short puts:
Volume per day (Bbl) (a)	15,000		15,000		15,000
Price per Bbl:
Ceiling	$	89.90	$	89.90	$	89.90
Floor	$	75.00	$	75.00	$	75.00
Short put	$	65.00	$	65.00	$	65.00

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(a)

Subsequent to March 31, 2019, the Company entered into additional Brent collar contracts with short puts for (i) 30,000 Bbls per day of May through December 2019 production with an average ceiling price of $75.13 per Bbl, a floor price of $65.00 per Bbl and a short put price of $55.00 per Bbl and (ii) 9,000 Bbls per day of 2020 production with a ceiling price of $75.57, a floor price of $65.00 and a short put price of $55.00.

NGL production derivatives. All material physical sales contracts governing the Company's NGL production are tied directly or indirectly to Mont Belvieu, Texas NGL component product prices. The Company uses derivative contracts to manage the NGL component product price volatility. As of March 31, 2019, the Company did not have any NGL derivative contracts outstanding.

Gas production derivatives. All material physical sales contracts governing the Company's gas production are tied directly or indirectly to NYMEX Henry Hub ("HH") gas prices or regional index prices where the gas is sold. The Company uses derivative contracts to manage gas price volatility and basis swap contracts to reduce basis risk between HH prices and actual index prices at which the gas is sold.

Volumes per day associated with outstanding gas derivative contracts as of March 31, 2019 and the weighted average gas prices for those contracts are as follows:



	2019
	Second Quarter			Third Quarter			Fourth Quarter
Swap contracts:
Volume per day (MMBtu)	50,000			50,000			16,848
Price per MMBtu	$	2.94		$	2.94		$	2.94
Basis swap contracts:
Permian Basin index swap volume per day(MMBtu) (a)	60,000			60,000			—
Price differential ($/MMBtu)	$	(1.46	)	$	(1.46	)	$	—
Southern California index swap volume per day (MMBtu) (b)	80,000			80,000			80,000
Price differential ($/MMBtu)	$	0.31		$	0.31		$	0.31

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(a)	The referenced basis swap contracts fix the basis differentials between the index price at which the Company sells its Permian Basin gas and the HH price used in swap contracts.


(b)	The referenced basis swap contracts fix the basis differentials between Permian Basin index prices and southern California index prices for Permian Basin gas forecasted for sale in Arizona and southern California.

The Company's derivatives are accounted for as non-hedge derivatives and therefore all changes in the fair values of its derivative contracts are recognized as gains or losses in the earnings of the periods in which they occur. The Company enters into derivatives under master netting arrangements, which, in an event of default, allows the Company to offset payables to and receivables from the defaulting counterparty.

Fair value. The fair value of derivative financial instruments not designated as hedging instruments is as follows:



Fair Value of Derivative Instruments as of March 31, 2019
Type	Consolidated Balance Sheet Location	Fair Value		Gross Amounts Offset in the Consolidated Balance Sheet			Net Fair Value Presented in the Consolidated Balance Sheet
		(in millions)
Asset Derivatives:
Commodity price derivatives	Derivatives - current	$	36	$	(6	)	$	30
Liability Derivatives:
Commodity price derivatives	Derivatives - current	$	28	$	(6	)	$	22



Fair Value of Derivative Instruments as of December 31, 2018
Type	Consolidated Balance Sheet Location	Fair Value		Gross Amounts Offset in the Consolidated Balance Sheet			Net Fair Value Presented in the Consolidated Balance Sheet
		(in millions)
Asset Derivatives:
Commodity price derivatives	Derivatives - current	$	59	$	(7	)	$	52
Liability Derivatives:
Commodity price derivatives	Derivatives - current	$	34	$	(7	)	$	27

Gains and losses recorded on derivative contracts are as follows:



Derivatives Not Designated as Hedging Instruments	Location of Loss Recognized in Earnings on Derivatives	Three Months Ended March 31,
Derivatives Not Designated as Hedging Instruments	Location of Loss Recognized in Earnings on Derivatives	2019		2018
		(in millions)
Commodity price derivatives	Derivative loss, net	$	13	$	208

The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company's credit risk policies and procedures.