Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2014

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 September 30, 2014, Apache had derivative positions with 14 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 asset position at September 30, 2014, represents the aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net asset position. The Company has not provided any collateral to any of its counterparties as of September 30, 2014.

Derivative Instruments

As of September 30, 2014, Apache had the following commodity derivative positions:

			Fixed-Price Swaps
Production					MMBtu		Weighted Average
Period	Commodity	Settlement Index	Mbbls		(in 000’s)		Fixed Price
2014	Crude Oil	NYMEX WTI		5,750		—	$	90.83
2014	Crude Oil	Dated Brent		5,750		—		100.05
2014	Natural Gas	Various(1)		—		16,235		4.37

⁽¹⁾  The natural gas price represents a weighted-average of several contracts entered into on a per-million British thermal units (MMBtu) basis. These contracts are settled against NYMEX Henry Hub and various Inside FERC indices.

Apache has currently elected not to designate any of its qualifying natural gas and oil derivatives as cash flow hedges. Changes in the fair value of these derivatives for the current period are recorded in the Company’s statement of consolidated operations.

Fair Value Measurements

Apache’s commodity derivative instruments consist of variable-to-fixed price commodity swaps. 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		Significant		Significant
	Active		Other		Unobservable		Total
	Markets		Inputs		Inputs		Fair					Carrying
	(Level 1)		(Level 2)		(Level 3)		Value		Netting(1)			Amount
	(In millions)
September 30, 2014
Assets:
Commodity Derivative Instruments	$	—	$	41	$	—	$	41	$	—		$	41
Liabilities:
Commodity Derivative Instruments		—		—		—		—		—			—
December 31, 2013
Assets:
Commodity Derivative Instruments	$	—	$	3	$	—	$	3	$	(2	)	$	1
Liabilities:
Commodity Derivative Instruments		—		301		—		301		(2	)		299

⁽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

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:

	September 30,		December 31,
	2014		2013
	(In millions)
Current Assets: Prepaid assets and other	$	41	$	1
Current Liabilities: Derivative instruments	$	—	$	299

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:

		For the Quarter Ended						For the Nine Months Ended
	Gain (Loss) on Derivatives	September 30,						September 30,
	Recognized in Income	2014			2013			2014			2013
		(In millions)
Gain (loss) on cash flow hedges reclassified from accumulated other comprehensive loss	Oil and Gas Production Revenues	$	—		$	2		$	—		$	(18	)
Loss for ineffectiveness on cash flow hedges	Revenues and other: Other	$	—		$	(1	)	$	—		$	(1	)
Derivatives not designated as cash flow hedges:
Realized loss		$	(41	)	$	(91	)	$	(262	)	$	(138	)
Unrealized gain (loss)			314			(331	)		341			(137	)
Gain (loss) on derivatives not designated as cash flow hedges	Derivative instrument gains (losses), net	$	273		$	(422	)	$	79		$	(275	)

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 changes in equity related to Apache’s cash flow hedges is presented in the table below. The Company has no derivatives designated as cash flow hedges as of September 30, 2014.

	For the Nine Months Ended September 30,
	2014						2013
	Before			After			Before			After
	tax			tax			tax			tax
	(In millions)
Unrealized gain (loss) on derivatives at beginning of period	$	1		$	1		$	(10	)	$	(6	)
Realized amounts reclassified into earnings		—			—			18			13
Net change in derivative fair value		(1	)		(1	)		(7	)		(6	)
Ineffectiveness reclassified into earnings		—			—			1			1
Unrealized gain on derivatives at end of period	$	—		$	—		$	2		$	2