Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2013

Derivative Instruments And Hedging Activities Disclosure [Abstract]

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 March 31, 2013, Apache had derivative positions with 16 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 March 31, 2013, Apache had the following open crude oil derivative positions:

	Fixed-Price Swaps				Collars
Production Period	Mbbls		Weighted Average Fixed Price(1)		Mbbls		Weighted Average Floor Price (1)		Weighted Average Ceiling Price(1)
2013		1,212		74.90		4,216		82.99		111.81
2013 (2)		34,370		98.97		—		—		—
2014 (3)		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, these fixed-price swaps 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.

⁽³⁾  Subsequent to March 31, 2013, Apache entered into additional crude oil derivatives not designated as cash flow hedges totaling 9,673 thousand of barrels (Mbbls) for 2014 with a weighted average fixed price of $94.76.

As of March 31, 2013, 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 (2)		7,575	$	6.73		4,575	$	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.

⁽²⁾  Subsequent to March 31, 2013, Apache entered into additional natural gas derivatives not designated as cash flow hedges totaling 12,840 thousand MMBtu for 2013 with a weighted average fixed price of $4.34.

In the first quarter of 2013 Apache Canada Ltd entered into physical sales contracts to deliver 50,000 gigajoule per day of natural gas from April 2013 through October 2013 and an additional 50,000 gigajoule per day from May 2013 through December 2013. Fixed prices over the term of the sales contracts averaged C$3.42. These sales contracts were entered in the normal course of business and will be recognized in oil and gas revenues on an accrual basis.

Fair Value Measurements

Apache’s commodity derivative instruments consist of variable-to-fixed price commodity swaps and options. The fair values of the Company’s derivatives 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.

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)
March 31, 2013
Assets:
Derivatives designated as cash flow hedges	$	—	$	29	$	—	$	29	$	(12	)	$	17
Liabilities:
Derivatives designated as cash flow hedges		—		36		—		36
Derivatives not designated as cash flow hedges		—		127		—		127
Total Derivative liabilities	$	—	$	163	$	—	$	163	$	(12	)	$	151
December 31, 2012
Assets:
Derivatives designated as cash flow hedges	$	—	$	48	$	—	$	48	$	(15	)	$	33
Liabilities:
Derivatives designated as cash flow hedges		—		51		—		51
Derivatives not designated as cash flow hedges		—		80		—		80
Total Derivative liabilities	$	—	$	131	$	—	$	131	$	(15	)	$	116

⁽¹⁾  The derivative fair values are based on analysis of each contract on a gross basis, excluding the impact of netting agreements with counterparties.

Derivative Assets and Liabilities Recorded in the Consolidated Balance Sheet

The Company accounts for derivative instruments and hedging activity in accordance with Accounting Standards Codification (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 carrying value of the Company’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:

	March 31, 2013		December 31, 2012
	(In millions)
Current Assets: Derivative instruments	$	16	$	31
Other Assets: Deferred charges and other		1		2
Total Assets	$	17	$	33
Current Liabilities: Derivative instruments	$	151	$	116
Total Liabilities	$	151	$	116

Derivative Activity Recorded in the 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 Quarter Ended March 31,
		2013			2012
		(In millions)
Gain (loss) on cash flow hedges reclassified from accumulated other comprehensive loss	Oil and Gas Production Revenues	$	(9	)	$	41
Gain (loss) for ineffectiveness on cash flow hedges	Revenues and Other: Other	$	—		$	(1	)
Gain (loss) on derivatives not designated as cash flow hedges	Revenues and Other: Other	$	(100	)	$	—

Derivative Activity in Accumulated Other Comprehensive Income (Loss)

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. Derivative activity represents all of the reclassifications out of accumulated other comprehensive income (loss) to income for the periods presented.

	For the Quarter Ended March 31,
	2013						2012
	Before tax			After tax			Before tax			After tax
	(In millions)
Unrealized gain (loss) on derivatives at beginning of period	$	(10	)	$	(6	)	$	145		$	114
Realized amounts reclassified into earnings		9			6			(41	)		(34	)
Net change in derivative fair value		(11	)		(8	)		(29	)		1
Ineffectiveness reclassified into earnings		—			—			1			—
Unrealized gain (loss) on derivatives at end of period	$	(12	)	$	(8	)	$	76		$	81

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 occur. Included in accumulated other comprehensive loss as of March 31, 2013, is a net loss of approximately $13 million ($8 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.