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. Apache has elected not to designate any of its derivative contracts as cash flow hedges.

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 June 30, 2018, 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.

Derivative Instruments

As of June 30, 2018, Apache had the following open crude oil derivative positions:



		Put Options⁽¹⁾
Production Period	Settlement Index	Mbbls	Weighted Average Strike Price
July—December 2018	Dated Brent	7,360	$56.00
July—December 2018	NYMEX WTI	5,520	$53.00


(1)	The remaining unamortized premium paid as of June 30, 2018, was $25 million.

Collars

Call Options⁽²⁾

Production Period

Settlement Index

Mbbls

Weighted Average Floor Price

Weighted Average Ceiling Price

Mbbls

Strike Price

July—December 2018

NYMEX WTI

3,404

$45.00

$57.00

3,404

$60.03


(2)	The remaining unamortized premium paid as of June 30, 2018, was $5 million.

As of June 30, 2018, Apache had the following open crude oil financial basis swap contracts:



Production Period	Settlement Index	Mbbls	Weighted Average Price Differential
October—December 2018	Midland-WTI/Cushing-WTI	1,380	$(9.23)
January—September 2019	Midland-WTI/Cushing-WTI	4,095	$(9.23)
October—December 2019	Midland-WTI/Cushing-WTI	1,380	$(3.72)

As of June 30, 2018, Apache had the following open natural gas derivative positions:



		Fixed-Price Swaps
Production Period	Settlement Index	MMBtu (in 000’s)	Weighted Average Fixed Price
July—December 2018	NYMEX Henry Hub	33,580	$2.96

As of June 30, 2018, Apache had the following open natural gas financial basis swap contracts:



Production Period	Settlement Index	MMBtu (in 000’s)	Weighted Average Price Differential
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)
June 30, 2018
Assets:
Commodity Derivative Instruments	$	—	$	124	$	—	$	124	$	(46	)	$	78
Liabilities:
Commodity Derivative Instruments	—		50		—		50		(46		)	4
December 31, 2017
Assets:
Commodity Derivative Instruments	$	—	$	67	$	—	$	67	$	(43	)	$	24
Liabilities:
Commodity Derivative Instruments	—		107		—		107		(43		)	64


(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:



	June 30, 2018		December 31, 2017
	(In millions)
Current Assets: Prepaid assets and other	$	74	$	8
Other Assets: Deferred charges and other	4		16
Total Assets	$	78	$	24

Current Liabilities: Other current liabilities	$	2	$	64
Noncurrent Liabilities: Other	2		—
Total Liabilities	$	4	$	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 Quarter Ended June 30,					For the Six Months Ended June 30,
	2018			2017		2018			2017
	(In millions)
Realized loss:
Derivative settlements	$	(75	)	$	—	$	(117	)	$	—
Amortization of call and put premium	(5		)	—		(10		)	—
Unrealized gain	55			41		104			41
Derivative instrument gain (losses), net	$	(25	)	$	41	$	(23	)	$	41

Derivative instrument gains and losses are recorded in “Other” under “Revenues and Other” in the Company’s statement of consolidated operations. 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 gain, net” in “Adjustments to reconcile net income to net cash provided by operating activities.”