DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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 also 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. 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 December 31, 2019, Apache had no open commodity derivative positions.

Foreign Currency Derivative Instruments

Apache has open foreign currency costless collar contracts in GBP/USD for £13.5 million per each calendar month for 2020 with a weighted average floor and ceiling price of $1.26 and $1.38, respectively.

Embedded Derivatives

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 13—Redeemable Noncontrolling Interest - Altus.

Pipeline Capacity Embedded Derivative

During the fourth quarter of 2019, Apache entered into an agreement to assign a portion of its contracted capacity under an existing transportation agreement to a third party. Embedded in this agreement is an arrangement under which Apache has the potential to receive payments calculated based on pricing differentials between Houston Ship Channel and Waha during calendar years 2020 and 2021. This feature requires bifurcation and measurement of the change in market value for each period. Unrealized gains or losses in the fair value of this feature are recorded as “Other” under “Revenues and Other” in the statement of consolidated operations. Any proceeds received during the two-year period will be recorded as a deferred gain and reflected in income over the tenure of the host contract.

Fair Value Measurements

The fair values of the Company’s derivative instruments and pipeline capacity embedded derivative are not actively quoted in the open market. The Company primarily uses a market approach to estimate the fair values of these derivatives 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, the imputed interest rate of Altus, the timing of periodic cash distributions, and dividend yields of the Preferred Units. Increases or decreases in interest rates would result in a higher/lower 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, 2019
Assets:
Pipeline Capacity Embedded Derivative	$	—	$	8	$	—	$	8	$	—		$	8
Foreign Currency Derivative Instruments	—		1		—		1		—			1
Liabilities:
Preferred Units Embedded Derivative	—		—		103		103		—			103
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:

	December 31, 2019		December 31, 2018
	(In millions)
Current Assets: Other current assets	$	2	$	55
Noncurrent Assets: Deferred charges and other	7		—
Total Assets	$	9	$	55
Current Liabilities: Other current liabilities	$	—	$	11
Deferred Credits and Other Noncurrent Liabilities: Other	103		—
Total Liabilities	$	103	$	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 Year Ended December 31,
	2019			2018			2017
	(In millions)
Realized gain (loss):
Derivative settlements, realized gain (loss)	$	9		$	(81	)	$	24
Amortization of put premium, realized loss	—			(39		)	(100		)
Unrealized gain (loss)	(44		)	103			(59		)
Derivative instrument losses, net	$	(35	)	$	(17	)	$	(135	)

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 are reflected in the statement of consolidated cash flows as a component of “Other” in “Adjustments to reconcile net income (loss) to net cash provided by operating activities.”