DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Objectives and Strategies

The Company is exposed to fluctuations in crude oil and natural gas prices, foreign currency exchange rates, and interest rates. The Company utilizes various types of derivative financial instruments to manage fluctuations in cash flows resulting from these fluctuations. 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 September 30, 2019, Apache had derivative positions with 5 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 changes in commodity prices, currency exchange rates, or interest rates.

Derivative Instruments

Commodity Derivative Instruments

As of September 30, 2019, Apache had the following open crude oil financial basis swap contracts:

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

As of September 30, 2019, Apache had the following open natural gas financial basis swap contracts:

Production Period	Settlement Index	MMBtu (in 000’s)	Weighted Average Price Differential
October—December 2019	NYMEX Henry Hub/Waha	3,680	$(0.45)

Foreign Currency Derivative Instruments

Apache has open foreign currency costless collar contracts in GBP/USD for £12.5 million per each calendar month for 2019 with a weighted average floor and ceiling price of $1.20 and $1.35, respectively.

Altus Preferred Units Embedded Derivative

During the second quarter of 2019, Altus Midstream LP issued and sold Series A Cumulative Redeemable Preferred Units. Certain redemption features (the Redemption Option) embedded within the terms of the Preferred Units require bifurcation and measurement at fair value. For further discussion of this derivative, see “Fair Value Measurements” below and Note 12—Redeemable Noncontrolling Interest - Altus.

Fair Value Measurements

The fair values of the Company’s derivative contracts are not actively quoted in the open market. The Company primarily uses a market approach to estimate the fair values of its derivative instruments on a recurring basis, utilizing futures pricing for the underlying positions provided by a reputable third party, a Level 2 fair value measurement.

The fair value of the Redemption Option, a Level 3 fair value measurement, was based on numerous factors including expected future interest rates using the Black-Karasinski model, imputed interest rate of Altus, the timing of periodic cash distributions, and dividend yields of the Preferred Units.

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)
September 30, 2019
Assets:
Commodity Derivative Instruments	$	—	$	2	$	—	$	2	$	—		$	2
Liabilities:
Commodity Derivative Instruments	—		6		—		6		—			6
Foreign Currency Derivative Instruments	—		1		—		1		—			1
Preferred Units Embedded Derivative	—		—		98		98		—			98
December 31, 2018
Assets:
Commodity Derivative Instruments	$	—	$	69	$	—	$	69	$	(14	)	$	55
Liabilities:
Commodity Derivative Instruments	—		25		—		25		(14		)	11

(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:

	September 30, 2019		December 31, 2018
	(In millions)
Current Assets: Other current assets	$	2	$	55
Total Assets	$	2	$	55
Current Liabilities: Other current liabilities	$	7	$	11
Deferred Credits and Other Noncurrent Liabilities: Other	98		—
Total Liabilities	$	105	$	11

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 September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
	(In millions)
Realized gain (loss):
Derivative settlements, realized gain (loss)	$	(16	)	$	7		$	12		$	(110	)
Amortization of put premium, realized loss	—			(14		)	—			(24		)
Unrealized gain (loss)	14			(16		)	(52		)	88
Derivative instrument losses, net	$	(2	)	$	(23	)	$	(40	)	$	(46	)

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.”