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 to manage fluctuations in cash flows resulting from changes in commodity prices.

Counterparty Risk

The use of derivative instruments exposes the Company to credit loss in the event of nonperformance by the counterparty. 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, 2017, 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.

Derivative Instruments

As of December 31, 2017, Apache had the following open crude oil derivative positions:



		Put Options⁽¹⁾⁽²⁾
Production Period	Settlement Index	Mbbls	Weighted Average Strike Price
January—December 2018	Dated Brent	3,650	$50.00


(1)	The remaining unamortized premium paid as of December 31, 2017, was $9 million.

(2)

Subsequent to December 31, 2017, the Company entered into put option contracts settling against NYMEX WTI totaling 5,520 Mbbls with a strike price of $53.00 for the second half of 2018 and Dated Brent totaling 5,520 Mbbls with a strike price of $58.00 for the second half of 2018. Apache paid total premiums of $9 million and $11 million for the NYMEX WTI and Dated Brent put contracts, respectively.



		Fixed-Price Swaps		Collars			Call Options⁽³⁾
Production Period	Settlement Index	Mbbls	Weighted Average Fixed Price	Mbbls	Weighted Average Floor Price	Weighted Average Ceiling Price	Mbbls	Strike Price
January—June 2018	NYMEX WTI	2,715	$51.23	2,715	$45.00	$56.45	—	—
January—June 2018	Dated Brent	2,172	$54.57	2,172	$50.00	$58.77	—	—
January—December 2018	NYMEX WTI	—	—	6,753	$45.00	$57.00	6,753	$60.03


(3)	The remaining unamortized premium paid as of December 31, 2017, was $10 million.

As of December 31, 2017, Apache had the following open natural gas derivative positions:



		Fixed-Price Swaps
Production Period	Settlement Index	MMBtu (in 000’s)	Weighted Average Fixed Price
January—March 2018	NYMEX Henry Hub	13,500	$3.39
January—June 2018	NYMEX Henry Hub	22,625	$3.17
April—June 2018	NYMEX Henry Hub	16,835	$2.92
July—December 2018	NYMEX Henry Hub	33,580	$2.96

As of December 31, 2017, Apache had the following open natural gas financial basis swap contracts:



Production Period	Settlement Index	MMBtu (in 000’s)	Weighted Average Price Differential
January—March 2018	NYMEX Henry Hub/Waha	9,450	$(0.43)
July—December 2018	NYMEX Henry Hub/Waha	33,120	$(0.53)
October—December 2018	NYMEX Henry Hub/Waha	1,380	$(0.51)
January—March 2019	NYMEX Henry Hub/Waha	1,350	$(0.54)
January—June 2019	NYMEX Henry Hub/Waha	32,580	$(0.53)
January—December 2019	NYMEX Henry Hub/Waha	14,600	$(0.45)

Fair Value Measurements

Apache’s commodity derivative instruments consist of variable-to-fixed price commodity swaps, options, and collars. 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 on a recurring basis, utilizing commodity futures pricing for the underlying commodities provided by a reputable third party, a Level 2 fair value measurement.

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, 2017
Assets:
Commodity Derivative Instruments	$	—	$	67	$	—	$	67	$	(43	)	$	24
Liabilities:
Commodity Derivative Instruments	—		107		—		107		(43		)	64
December 31, 2016
Assets:
Commodity Derivative Instruments	$	—	$	—	$	—	$	—	$	—		$	—
Liabilities:
Commodity Derivative Instruments	—		—		—		—		—			—


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

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:



	December 31, 2017		December 31, 2016
	(In millions)
Current Assets: Prepaid assets and other	$	8	$	—
Other Assets: Deferred charges and other	16		—
Total Assets	$	24	$	—

Current Liabilities: Other current liabilities	$	64	$	—
Total Liabilities	$	64	$	—

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 Year Ended December 31,
	2017			2016		2015
	(In millions)
Realized gain (loss):
Derivative settlements, realized gain	$	24		$	—	$	—
Amortization of put premium, realized loss	(100		)	—		—
Unrealized loss	(59		)	—		—
Derivative instrument gain (losses), net	$	(135	)	$	—	$	—

Unrealized gains and losses for derivative activity recorded in the statement of consolidated operations is reflected in the statement of consolidated cash flows separately as “Unrealized derivative instrument losses, net” in “Adjustments to reconcile net income (loss) to net cash provided by operating activities.”