The Company 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, including forward contracts, futures contracts, swaps, and options, to manage fluctuations in cash flows resulting from changes in commodity prices or foreign currency values.

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, the Company utilizes a diversified group of investment-grade rated counterparties, primarily financial institutions, for its derivative transactions. As of March 31, 2021, the Company had derivative positions with 10 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, the Company may not realize the benefit of some of its derivative instruments resulting from changes in commodity prices, currency exchange rates, or interest rates.


		Fixed-Price Swaps
Production Period	Settlement Index	Mbbls	Weighted Average Fixed Price(1)(2)
April—June 2021	NYMEX WTI	5,642	$61.20
July—September 2021	NYMEX WTI	1,472	$60.18
October—December 2021	NYMEX WTI	1,012	$58.59
April—June 2021	Dated Brent	2,366	$64.20
July—September 2021	Dated Brent	414	$63.14
October—December 2021	Dated Brent	828	$61.44

(1)Subsequent to March 31, 2021, the Company entered into fixed-price crude oil contracts settling against NYMEX WTI totaling 6,000 Bbls/d at a weighted average price of $60.10 for the third quarter of 2021.

(2)Subsequent to March 31, 2021, the Company entered into fixed-price crude oil contracts settling against Platts Dated Brent totaling 19,714 Bbls/d at a weighted average price of $64.07 for the second quarter of 2021 and 13,500 Bbls/d at a weighted average price of $63.06 for the third quarter of 2021.

Production Period

Settlement Index

Mbbls

Weighted Average Price Differential

May—June 2021

Midland-WTI/Cushing-WTI

3,782

$0.56

July—September 2021

Midland-WTI/Cushing-WTI

2,024

$0.61

October—December 2021

Midland-WTI/Cushing-WTI

1,012

$0.70


		Basis Swap Purchased		Basis Swap Sold
Production Period	Settlement Index	MMBtu (in 000’s)	Weighted Average Price Differential	MMBtu (in 000’s)	Weighted Average Price Differential
April—December 2021	NYMEX Henry Hub/IF Waha	37,580	$(0.43)	—	—
April—December 2021	NYMEX Henry Hub/IF HSC	—	—	37,580	$(0.07)
January—December 2022	NYMEX Henry Hub/IF Waha	43,800	$(0.45)	—	—
January—December 2022	NYMEX Henry Hub/IF HSC	—	—	43,800	$(0.08)

During the second quarter of 2019, Altus Midstream LP issued and sold Series A Cumulative redeemable Preferred Units (Preferred Units). Certain redemption features embedded within the Preferred Units require bifurcation and measurement at fair value. For further discussion of this derivative, refer to “Fair Value Measurements” below and Note 13—Redeemable Noncontrolling Interest - Altus.

During the fourth quarter of 2019 and first quarter of 2020, the Company entered into separate agreements to assign a portion of its contracted capacity under an existing transportation agreement to third parties. Embedded in these agreements are arrangements under which the Company has the potential to receive payments calculated based on pricing differentials between Houston Ship Channel and Waha during calendar years 2020 and 2021. These features require bifurcation and measurement of the change in market values for each period. Unrealized gains or losses in the fair value of these features are recorded as “Derivative instrument losses, net” under “Revenues and Other” in the statement of consolidated operations. Any proceeds received will be deferred and reflected in income over the original tenure of the transportation agreement.


	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)
March 31, 2021
Assets:
Commodity derivative instruments	$	—	$	39	$	—	$	39	$	(1)	$	38
Liabilities:
Commodity derivative instruments	—		2		—		2		(1)		1
Pipeline capacity embedded derivatives	—		52		—		52		—		52
Preferred Units embedded derivative	—		—		156		156		—		156

December 31, 2020
Assets:
Commodity derivative instruments	$	—	$	11	$	—	$	11	$	—	$	11
Liabilities:
Pipeline capacity embedded derivative	—		53		—		53		—		53
Preferred Units embedded derivative	—		—		139		139		—		139

The fair values of the Company’s derivative instruments and pipeline capacity embedded derivatives 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 Preferred Units embedded derivative is calculated using an income approach, a Level 3 fair value measurement. The fair value determination is based on a range of factors, including expected future interest rates using the Black-Karasinski model, Altus’ imputed interest rate, interest rate volatility, the expected timing of periodic cash distributions, the estimated timing for the potential exercise of the exchange option, and anticipated dividend yields of the Preferred Units. As of the March 31, 2021 valuation date, the Company used the forward B-rated Energy Bond Yield curve to develop the following key unobservable inputs used to value this embedded derivative:

Quantitative Information About Level 3 Fair Value Measurements

Fair Value at March 31, 2021

Valuation Technique

Significant Unobservable Inputs

Range/Value

(In millions)

Preferred Units embedded derivative

156

Option Model

Altus’ Imputed
Interest Rate

7.15-12.51%

Interest Rate
Volatility

38.75%

A one percent increase in the imputed interest rate assumption would significantly increase the value of the embedded derivative as of March 31, 2021, while a one percent decrease would lead to a similar decrease in value as of March 31, 2021. The assumed expected timing until exercise of the exchange option at March 31, 2021 was 5.20 years.

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:


	March 31, 2021		December 31, 2020
	(In millions)
Current Assets: Other current assets	$	34	$	6
Other Assets: Deferred charges and other	4		5
Total derivative assets	$	38	$	11

Current Liabilities: Other current liabilities	$	1	$	—
Deferred Credits and Other Noncurrent Liabilities: Other	208		192
Total derivative liabilities	$	209	$	192


	For the Quarter Ended March 31,
	2021		2020
	(In millions)
Realized:
Commodity derivative instruments	$	148	$	1
Foreign currency derivative instruments	—		(1)
Realized gain, net	148		—
Unrealized:
Commodity derivative instruments	26		17
Pipeline capacity embedded derivatives	1		(53)
Foreign currency derivative instruments	—		(5)
Preferred units embedded derivative	(17)		(62)
Unrealized gain (loss), net	10		(103)
Derivative instrument gains (losses), net	$	158	$	(103)

Derivative instrument gains and losses are recorded in “Derivative instrument gains (losses), net” under “Revenues and Other” in the Company’s statement of consolidated operations. Unrealized gains (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 loss to net cash provided by operating activities.”

As part of the Company’s ordinary course of business, the Company seeks to maintain a balance between “first of month” and “gas daily pricing” for its U.S. natural gas portfolio and sales activities in a given month. This is typically implemented through a combination of physical and financial contracts that settle monthly. In January 2021, the Company entered into financial contracts that increased its exposure to “gas daily pricing” and reduced its exposure to “first of month” pricing for February 2021. The Company realized a gain of $147 million in connection with these contracts in the first quarter of 2021 as a result of extreme daily gas price volatility across Texas in February resulting from Winter Storm Uri.