DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Objectives and Strategies

Apache is exposed to fluctuations in crude oil and natural gas prices on the majority of its worldwide production, as well as transactions denominated in foreign currencies. The Company manages the variability in its cash flows by occasionally entering into derivative transactions on a portion of its crude oil and natural gas production and foreign currency transactions. The Company utilizes various types of derivative financial instruments to manage fluctuations in cash flows resulting from changes in commodity prices or foreign currency values.

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, 2018, Apache had derivative positions with 12 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, 2018, Apache had the following open crude oil financial basis swap contracts:



Production Period	Settlement Index	Mbbls	Weighted Average Price Differential
January—September 2019	Midland-WTI/Cushing-WTI	7,371	$(8.60)
October—December 2019	Midland-WTI/Cushing-WTI	1,380	$(3.72)

As of December 31, 2018, Apache had the following open natural gas derivative positions:



		Collars
Production Period	Settlement Index	MMBtu (in 000’s)	Weighted Average Floor Price	Weighted Average Ceiling Price
January—June 2019	NYMEX Henry Hub	18,100	$3.00	$3.92

As of December 31, 2018, 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 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)

Apache has open foreign currency costless collar contracts in GBP/USD for £150 million per month for the calendar year 2019 with a weighted average floor and ceiling price of $1.20 and $1.35, respectively.

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, 2018
Assets:
Commodity Derivative Instruments	$	—	$	69	$	—	$	69	$	(14	)	$	55
Liabilities:
Commodity Derivative Instruments	—		25		—		25		(14		)	11
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:



	December 31, 2018		December 31, 2017
	(In millions)
Current Assets: Prepaid assets and other	$	55	$	8
Other Assets: Deferred charges and other	—		16
Total Assets	$	55	$	24

Current Liabilities: Other current liabilities	$	11	$	64
Total Liabilities	$	11	$	64

The fair values and carrying values of the Company’s foreign currency swaps were nil as of December 31, 2018.

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,
	2018			2017			2016
	(In millions)
Realized gain (loss):
Derivative settlements, realized gain (loss)	$	(81	)	$	24		$	—
Amortization of put premium, realized loss	(39		)	(100		)	—
Unrealized gain (loss)	103			(59		)	—
Derivative instrument gains (losses), net	$	(17	)	$	(135	)	$	—

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