Derivative Financial Instruments

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company's derivatives are accounted for as non-hedge derivatives and 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 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.

Commodity derivatives. As of March 31, 2023, the Company has outstanding oil derivative contracts for three thousand Bbls per day of Brent/WTI basis swaps for January 2024 through December 2024. The basis swap contracts fix the basis differential between the WTI index price (the price at which the Company buys Midland Basin oil for transport to the Gulf Coast) and the Brent index price (the price at which a portion of the Midland Basin purchased oil is sold in the Gulf Coast market) at a weighted average differential of $4.33 in order to reduce the Company's basis risk.

Marketing derivatives. The Company uses marketing derivatives to diversify its oil pricing to Gulf Coast and international markets. As of March 31, 2023, the Company's marketing derivatives reflect long-term marketing contracts with Occidental Energy Marketing, Inc. ("Oxy") whereby the Company agreed to purchase and simultaneously sell, at an oil terminal in Midland, Texas, (i) 50 thousand barrels of oil per day beginning January 1, 2021 and ending December 31, 2026, (ii) 40 thousand barrels of oil per day beginning May 1, 2022 and ending April 30, 2027 and (iii) 30 thousand barrels of oil per day beginning August 1, 2022 and ending July 31, 2027. Based on the form of the long-term marketing contracts, the Company accounts for the contracts as derivative instruments not designated as hedges. See Note 4 for additional information.

Conversion option derivatives. The Company's conversion option derivatives represent the change in the cash settlement obligation that occurs during the Settlement Period related to conversion options exercised by certain holders of the Convertible Notes. As of March 31, 2023 and December 31, 2022, $65 million and $29 million, respectively, of the principal amount of the Convertible Notes remained in the Settlement Period. See Note 4 and Note 7 for additional information.

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


As of March 31, 2023
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:

Conversion option derivatives	Other - current	$	1	$	—	$	1



Liabilities:

Marketing derivatives	Derivatives - current	$	78	$	—	$	78



Marketing derivatives	Derivatives - noncurrent	$	98	$	—	$	98


As of December 31, 2022
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:


Conversion option derivatives	Other - current	$	1	$	—	$	1
Liabilities:

Marketing derivatives	Derivatives - current	$	44	$	—	$	44

Marketing derivatives	Derivatives - noncurrent	$	96	$	—	$	96

Gains and losses recorded to net derivative loss in the consolidated statements of operations related to derivative financial instruments not designated as hedging instruments are as follows:


	Three Months Ended March 31,
		2023		2022
		(in millions)
Commodity price derivatives:
Noncash derivative loss, net		$	—	$	(111)
Cash payments on settled derivatives, net		—		(57)
Total commodity derivative loss, net		—		(168)
Marketing derivatives:
Noncash derivative gain (loss), net		(36)		44
Cash payments on settled derivatives, net		(15)		(11)
Total marketing derivative gain (loss), net		(51)		33
Conversion option derivatives:

Cash receipts on settled derivatives, net		7		—

Derivative loss, net		$	(44)	$	(135)