Derivative Financial Instruments

9 Months Ended

Sep. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company primarily utilizes commodity swap 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 capital budgeting and expenditure plans and (iii) support the payment of contractual obligations and dividends.

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 correlated with, New York Mercantile Exchange ("NYMEX") WTI oil prices. The Company also enters into (i) pipeline capacity commitments in order to secure available oil, NGL and gas transportation capacity from its areas of production and (ii) purchase transactions with third parties and separate sale transactions with third parties to diversify a portion of the Company's oil pricing to Gulf Coast refineries or international export markets at prices that are highly correlated to Brent oil prices. As a result, the Company uses a combination of Brent, Magellan East Houston

("MEH") and WTI derivative contracts to manage future oil price volatility.

The Company's outstanding oil derivative contracts as of September 30, 2021 and the weighted average oil prices per barrel for those contracts are as follows:


	2021		Year Ending December 31, 2022 (a)
	Fourth Quarter
Brent swap contracts:
Volume per day (Bbl)	17,000		—
Price per Bbl	$	44.45	$	—
MEH swap contracts:
Volume per day (Bbl)	43,000		2,055
Price per Bbl	$	40.52	$	42.80
Midland WTI swap contracts:
Volume per day (Bbl)	5,000		—
Price per Bbl	$	40.50	$	—
NYMEX WTI swap contracts:
Volume per day (Bbl)	15,000		—
Price per Bbl	$	52.85	$	—
NYMEX rollfactor swap contracts:
Volume per day (Bbl)	35,000		—
Price per Bbl	$	0.17	$	—
Midland WTI basis swap contracts:
Volume per day (Bbl)	37,000		26,000
Price per Bbl	$	0.89	$	0.50
Brent call contracts sold:
Volume per day (Bbl) (b)	20,000		—
Price per Bbl	$	69.74	$	—
Brent collar contracts:
Volume per day (Bbl)	—		10,000
Price per Bbl:
Ceiling	$	—	$	60.32
Floor	$	—	$	50.00
NYMEX WTI collar contracts:
Volume per day (Bbl)	6,000		—
Price per Bbl:
Ceiling	$	55.54	$	—
Floor	$	50.00	$	—
Brent collar contracts with short puts:
Volume per day (Bbl)	90,000		67,000
Price per Bbl:
Ceiling	$	50.74	$	66.02
Floor	$	45.11	$	52.39
Short put	$	35.07	$	39.25


MEH collar contracts with short puts:
Volume per day (Bbl)	9,446		—
Price per Bbl:
Ceiling	$	51.29	$	—
Floor	$	41.55	$	—
Short put	$	31.55	$	—
NYMEX WTI collar contracts with short puts:
Volume per day (Bbl)	—		12,000
Price per Bbl:
Ceiling	$	—	$	65.86
Floor	$	—	$	52.50
Short put	$	—	$	40.00

______________________

(a)Between October 1, 2021 and November 1, 2021, the Company liquidated certain derivative contracts as follows (i) 8,152 Bbls per day of MEH swap contracts for January 2022 through March 2022 production with a weighted average swap price of $42.80, (ii) 10,000 Bbls per day of Brent collar contracts for January 2022 through December 2022 production with a weighted average call price of $60.32 and a put price of $50.00 and (iii) 20,000 Bbls per day of Brent collar contracts with short puts for January 2022 through December 2022 production with a weighted average call price of $57.88, put price of $45.50 and short put price of $35.00.

(b)The referenced call contracts were sold in exchange for higher ceiling prices on certain 2020 collar contracts with short puts.

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 volatility of NGL component product prices. As of September 30, 2021, 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 (e.g. WAHA, SoCal and Houston Ship Channel) where the gas is sold. To diversify the gas prices it receives to international market prices, the Company sells a portion of its gas production at Dutch Title Transfer Facility ("Dutch TTF") prices. 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.

The Company's outstanding gas derivative contracts as of September 30, 2021 and the weighted average gas prices per MMBtu for those contracts are as follows:


	2021		Year Ending December 31, 2022
	Fourth Quarter
NYMEX swap contracts:
Volume per day (MMBtu)	160,000		—
Price per MMBtu	$	3.63	$	—
Dutch TTF swap contracts:
Volume per day (MMBtu)	30,000		30,000
Price per MMBtu	$	5.07	$	8.87
WAHA swap contracts:
Volume per day (MMBtu)	116,304		4,932
Price per MMBtu	$	2.36	$	2.46
NYMEX collar contracts:
Volume per day (MMBtu)	247,000		1,726
Price per MMBtu:
Ceiling	$	3.20	$	3.45
Floor	$	2.60	$	2.75
NYMEX collar contracts with short puts:
Volume per day (MMBtu)	—		100,000
Price per MMBtu:
Ceiling	$	—	$	4.00
Floor	$	—	$	3.20
Short put	$	—	$	2.50
Basis swap contracts:
Permian Basin index swap volume per day (MMBtu) (a)	7,000		1,726
Price differential ($/MMBtu)	$	(0.39)	$	(0.39)

____________________

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

Marketing derivatives. The Company uses marketing derivatives to diversify its oil pricing to Gulf Coast and international markets. The Company's marketing derivatives reflect two long-term marketing contracts that were entered in October 2019 whereby the Company agreed to purchase and simultaneously sell 50 thousand barrels of oil per day at an oil terminal in Midland, Texas for a six-year term that began on January 1, 2021 and ends on December 31, 2026. The price the Company pays to purchase the oil volumes under the purchase contract is based on a Midland WTI price and the price the Company receives for the oil volumes sold is a WASP that a non-affiliated counterparty receives for selling oil through their Gulf Coast storage and export facility at prices that are highly correlated with Brent oil prices during the same month of the purchase. Based on the form of the marketing contracts, the Company determined that the marketing contracts should be accounted for as derivative instruments. For the three and nine months ended September 30, 2021, the Company recorded noncash marketing derivative gains of $6 million and $3 million, respectively, and cash payments of $11 million and $31 million, respectively, as compared to noncash marketing derivative losses of $85 million and $100 million, respectively, and no cash payments or receipts for the same respective periods in 2020.

Derivative accounting. 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 commodity price derivatives under master netting arrangements, which, in an event of default, allows the Company to offset payables to and receivables from the defaulting counterparty.

Contingent consideration. The Company's right to receive contingent consideration in conjunction with the South Texas Divestiture was determined to be a derivative financial instrument that is not designated as a hedging instrument. Prior to its settlement in July 2020, the contingent consideration was revalued using an option pricing model each reporting period based on forecasted oil and NGL prices during each of the five years from 2020 to 2024. See Note 13 for additional information.

Noncash gains and losses associated with the Company's (i) commodity price derivatives and marketing derivatives and (ii) contingent consideration are separately presented in operating activities within the consolidated statements of cash flows.

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


As of September 30, 2021
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)
Assets:
Commodity price derivatives	Derivatives - current	$	4	$	—	$	4
Commodity price derivatives	Derivatives - noncurrent	$	1	$	—	$	1
Liabilities:
Commodity price derivatives	Derivatives - current	$	1,129	$	—	$	1,129
Marketing derivatives	Derivatives - current	$	47	$	—	$	47
Commodity price derivatives	Derivatives - noncurrent	$	110	$	—	$	110
Marketing derivatives	Derivatives - noncurrent	$	41	$	—	$	41


As of December 31, 2020
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)
Assets:
Commodity price derivatives	Derivatives - current	$	5	$	—	$	5
Commodity price derivatives	Derivatives - noncurrent	$	3	$	—	$	3
Liabilities:
Commodity price derivatives	Derivatives - current	$	198	$	—	$	198
Marketing derivatives	Derivatives - current	$	36	$	—	$	36
Commodity price derivatives	Derivatives - noncurrent	$	11	$	—	$	11
Marketing derivatives	Derivatives - noncurrent	$	55	$	—	$	55

Fair value. Gains and losses recorded on derivative financial instruments not designated as hedging instruments are as follows:


Derivatives Not Designated as Hedging Instruments	Location of Gain/(Loss) Recognized in Earnings on Derivatives	Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020

		(in millions)
Commodity price derivatives	Derivative loss, net	$	(496)	$	(56)	$	(1,996)	$	81
Marketing derivatives	Derivative loss, net	$	(5)	$	(85)	$	(28)	$	(100)
Interest rate derivatives	Derivative loss, net	$	—	$	—	$	—	$	(22)
Contingent consideration	Interest and other income (loss), net	$	—	$	22	$	—	$	(42)

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.