DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

6 Months Ended

Jun. 30, 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 June 30, 2013, Apache had derivative positions with 17 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. The Company’s net derivative liability position at June 30, 2013 represents the aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position. The Company has not provided any collateral to any of its counterparties as of June 30, 2013.

Derivative Instruments

As of June 30, 2013, Apache had the following open crude oil derivative positions:

		Fixed-Price Swaps				Collars
Production Period	Settlement Index	Mbbls		Weighted Average Fixed Price		Mbbls		Weighted Average Floor Price		Weighted Average Ceiling Price
2013 (1)	NYMEX WTI		444	$	77.66		1,058	$	78.48	$	103.20
2013 (1)	Dated Brent		—		—		1,656		86.39		117.93
2013	NYMEX WTI		11,040		90.85		—		—		—
2013	Dated Brent		11,956		106.47		—		—		—
2014 (1)	NYMEX WTI		76		74.50		—		—		—
2014	NYMEX WTI		22,813		90.83		—		—		—
2014	Dated Brent		22,812		100.05		—		—		—

⁽¹⁾  For 2013 and 2014, these fixed-price swaps and collars have been designated as cash flow hedges with unrealized gains and losses deferred in accumulated other comprehensive loss.

Subsequent to June 30, 2013, Apache entered into additional crude oil derivatives not designated as cash flow hedges totaling 4 million barrels for the fourth quarter of 2013, 8.4 million barrels for 2014, and 1.5 million barrels for 2015 at ICE Brent pricing. These derivatives were entered in connection with the Gulf of Mexico Shelf divestiture and the total position (including any potential gain or loss at that time) will be novated to Fieldwood upon close. In the event the transaction does not close, the positions will be cash settled with Fieldwood and a separate guarantee with Riverstone Holdings is in place to protect Apache from potential liability.

As of June 30, 2013, Apache had the following open natural gas derivative positions:

	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		5,034	$	6.71		2,300	$	5.35	$	6.67
2013 (2)		44,160		4.20		—		—		—
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 primarily against NYMEX Henry Hub.

⁽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.

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)
June 30, 2013
Assets:
Derivatives designated as cash flow hedges	$	—	$	24	$	—	$	24
Derivatives not designated as cash flow hedges		—		148		—		148
Total Derivative assets	$	—	$	172	$	—	$	172	$	(21	)	$	151
Liabilities:
Derivatives designated as cash flow hedges	$	—	$	9	$	—	$	9
Derivatives not designated as cash flow hedges		—		34		—		34
Total Derivative liabilities	$	—	$	43	$	—	$	43	$	(21	)	$	22
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:

	June 30, 2013		December 31, 2012
	(In millions)
Current Assets: Derivative instruments	$	87	$	31
Other Assets: Deferred charges and other		64		2
Total Assets	$	151	$	33
Current Liabilities: Derivative instruments	$	22	$	116
Total Liabilities	$	22	$	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 June 30,					For the Six  Months Ended June 30,
		2013			2012		2013			2012
		(In millions)
Gain (loss) on cash flow hedges reclassified from accumulated other comprehensive loss	Oil and Gas Production Revenues	$	(11	)	$	78	$	(20	)	$	119
Gain (loss) for ineffectiveness on cash flow hedges	Derivative instrument gains (losses), net	$	—		$	—	$	—		$	—
Gain (loss) on derivatives not designated as cash flow hedges	Derivative instrument gains (losses), net	$	247		$	—	$	147		$	—

Unrealized gains and losses for derivative activity recorded in the statement of consolidated operations is reflected in the statement of consolidated cash flows as a component of “Other” in “Adjustments to reconcile net income to net cash provided by operating activities.”

Derivative Activity in Accumulated Other Comprehensive Loss

A reconciliation of the components of accumulated other comprehensive 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 loss to income for the periods presented.

	For the Six Months Ended June 30,
	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		20			14			(119	)		(92	)
Net change in derivative fair value		—			(1	)		171			112
Ineffectiveness reclassified into earnings		—			—			—			—
Unrealized gain on derivatives at end of period	$	10		$	7		$	197		$	134

Gains and losses on existing hedges will be realized in future earnings through 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 June 30, 2013, is a net gain of approximately $10 million ($6 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.