DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2012

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

3.    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Objectives and Strategies

The Company is exposed to fluctuations in crude oil and natural gas prices on the majority of its worldwide production. Apache manages the variability in its cash flows by occasionally entering into derivative transactions on a portion of its crude oil and natural gas production. The Company utilizes various types of derivative financial instruments, including swaps and options, to manage fluctuations in cash flows resulting from changes in commodity prices.

Counterparty Risk

The use of derivative instruments exposes the Company to counterparty credit risk, or the risk that a counterparty will be unable to meet its commitments. To reduce the concentration of exposure to any individual counterparty, Apache utilizes a diversified group of investment-grade rated counterparties, primarily financial institutions, for its derivative transactions. As of December 31, 2012, Apache had derivative positions with 15 counterparties. The Company monitors counterparty creditworthiness on an ongoing basis; however, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, Apache may not realize the benefit of some of its derivative instruments resulting from lower commodity prices.

The Company executes commodity derivative transactions under master agreements that have netting provisions that provide for offsetting payables against receivables. In general, if a party to a derivative transaction incurs a material deterioration in its credit ratings, as defined in the applicable agreement, the other party has the right to demand the posting of collateral, demand a transfer, or terminate the arrangement.

Derivative Instruments

As of December 31, 2012, Apache had the following open crude oil derivative positions:

	Fixed-Price Swaps				Collars
Production Period	Mbbls(2)		Weighted Average Fixed Price(1)		Mbbls(2)		Weighted Average Floor Price(1)		Weighted Average Ceiling Price(1)
2013		40,292	$	97.31		5,701	$	82.84	$	111.63
2014		76		74.50		—		—		—

(1) Crude oil prices represent a weighted average of several contracts entered into on a per-barrel basis. Crude oil contracts are primarily settled against NYMEX WTI Cushing Index and Platts Dated Brent. Approximately 50 percent of 2013 contracts are settled against Dated Brent.

(2) For 2013, fixed-price swaps of 38,320 Mbbls have not been designated as cash flow hedges, and changes in fair value are reflected directly in earnings. All other derivative positions have been designated as cash flow hedges.

As of December 31, 2012, Apache had the following open natural gas derivative positions which have all been designated as cash flow hedges:

	Fixed-Price Swaps				Collars
Production Period	MMBtu (in 000’s)		Weighted Average Fixed Price(1)		MMBtu (in 000’s)		Weighted Average Floor Price(1)		Weighted Average Ceiling Price(1)
2013		10,095	$	6.74		6,825	$	5.35	$	6.67
2014		1,295	$	6.72		—	$	—	$	—

(1) U.S. natural gas prices represent a weighted average of several contracts entered into on a per-million British thermal units (MMBtu) basis and are settled against NYMEX Henry Hub.

Fair Value Measurements

Commodity Derivative Instruments

Apache’s commodity derivative instruments consist of variable-to-fixed price commodity swaps and options. The fair values of the Company’s derivative instruments are not actively quoted in the open market. The Company uses a market approach to estimate the fair values of its derivative instruments, utilizing commodity futures price strips for the underlying commodities provided by a reputable third party. These valuations are Level 2 inputs.

The following table presents the Company’s derivative assets and liabilities measured at fair value on a recurring basis:

	Fair Value Measurements Using
	Quoted Price in Active Markets (Level 1)		Significant Other Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value		Netting(1)			Carrying Amount
	(In millions)
December 31, 2012
Assets:
Commodity Derivative Instruments		$—	$	48		$—	$	48	$	(15	)	$	33
Liabilities:
Commodity Derivative Instruments		—		131		—		131		(15	)		116
December 31, 2011
Assets:
Commodity Derivative Instruments		$—	$	428		$—	$	428	$	(96	)	$	332
Liabilities:
Commodity Derivative Instruments		—		250		—		250		(96	)		154

(1) The derivative fair values are based on analysis of each contract on a gross basis, even where the legal right of offset exists.

The Company accounts for derivative instruments and hedging activity in accordance with ASC Topic 815, “Derivatives and Hedging,” and all derivative instruments are reflected as either assets or liabilities at fair value in the consolidated balance sheet. These fair values are recorded by netting asset and liability positions where counterparty master netting arrangements contain provisions for net settlement. The fair market value of the Company’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:

	December 31, 2012		December 31, 2011
	(In millions)
Current Assets: Derivative instruments	$	31	$	304
Other Assets: Deferred charges and other		2		28
Total Assets	$	33	$	332
Current Liabilities: Derivative instruments	$	116	$	113
Noncurrent Liabilities: Other		—		41
Total Liabilities	$	116	$	154

Derivative Activity Recorded in Statement of Consolidated Operations

The following table summarizes the effect of derivative instruments on the Company’s statement of consolidated operations:

	Gain (Loss) on Derivatives Recognized in Income	For the Year Ended December 31,
		2012			2011			2010
		(In millions)
Gain (loss) on cash flow hedges reclassified from accumulated other comprehensive loss	Oil and Gas Production Revenues	$	268		$	(13	)	$	165
Gain (loss) for ineffectiveness on cash flow hedges	Revenues and Other: Other	$	—		$	2		$	(2	)
Loss on derivatives not designated as cash flow hedges	Revenues and Other: Other	$	(79	)	$	—		$	—

Derivative Activity in Accumulated Other Comprehensive Income (Loss)

As of December 31, 2012, a portion of the Company’s derivative instruments were designated as cash flow hedges in accordance with ASC Topic 815. A reconciliation of the components of accumulated other comprehensive income (loss) in the statement of consolidated shareholders’ equity related to Apache’s cash flow hedges is presented in the table below:

	For the Year Ended December 31,
	2012						2011						2010
	Before tax			After tax			Before tax			After tax			Before tax			After tax
	(In millions)
Unrealized gain (loss) on derivatives at beginning of year	$	145		$	114		$	(54	)	$	(19	)	$	(267	)	$	(170	)
Realized amounts reclassified into earnings		(268	)		(199	)		13			19			(165	)		(106	)
Net change in derivative fair value		113			79			188			115			376			256
Ineffectiveness reclassified into earnings		—			—			(2	)		(1	)		2			1
Unrealized gain (loss) on derivatives at end of period	$	(10	)	$	(6	)	$	145		$	114		$	(54	)	$	(19	)

Gains and losses on existing hedges will be realized in future earnings through mid-2014, in the same period as the related sales of natural gas and crude oil production. Included in accumulated other comprehensive loss as of December 31, 2012, is a net loss of approximately $12 million ($7 million after tax) that applies to the next 12 months; however, estimated and actual amounts are likely to vary materially as a result of changes in market conditions.