Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Note 8. Derivative Instruments and Hedging Activities

Objective and Strategies for Using Derivative Instruments   In order to mitigate the effect of commodity price volatility and enhance the predictability of cash flows relating to the marketing of our crude oil and natural gas, we enter into crude oil and natural gas price hedging arrangements. The derivative instruments we use may include variable to fixed price commodity swaps, enhanced swaps, two-way and three-way collars, basis swaps and/or put options.

The fixed price swap and two-way collar contracts entitle us (floating price payor) to receive settlement from the counterparty (fixed price payor) for each calculation period in amounts, if any, by which the settlement price for the scheduled trading days applicable for each calculation period is less than the fixed strike price or floor price. We would pay the counterparty if the settlement price for the scheduled trading days applicable for each calculation period is more than the fixed strike price or ceiling price. The amount payable by us, if the floating price is above the fixed or ceiling price, is the product of the notional quantity per calculation period and the excess of the floating price over the fixed or ceiling price in respect of each calculation period. The amount payable by the counterparty, if the floating price is below the fixed or floor price, is the product of the notional quantity per calculation period and the excess of the fixed or floor price over the floating price in respect of each calculation period.

A three-way collar consists of a two-way collar contract combined with a put option contract sold by us with a strike price below the floor price of the two-way collar.  We receive price protection at the purchased put option floor price of the two-way collar if commodity prices are above the sold put option strike price. If commodity prices fall below the sold put option strike price, we receive the cash market price plus the delta between the two put option strike prices. This type of instrument allows us to capture more value in a rising commodity price environment, but limits our benefits in a downward commodity price environment.

For put options, we typically pay a premium to the counterparty in exchange for the sale of the instrument. If the index price is below the floor price of the put option, we receive the difference between the floor price and the index price multiplied by the contract volumes less the option premium at the time of settlement. If the index price settles at or above the floor price of the put option, we pay only the put option premium at the time of settlement. We had no outstanding put options as of December 31, 2015.

We also may enter into forward contracts to hedge anticipated exposure to interest rate risk associated with public debt financing. As of December 31, 2015 we did not have any interest rate derivatives outstanding.

While these instruments mitigate the cash flow risk of future reductions in commodity prices or increases in interest rates, they may also curtail benefits from future increases in commodity prices or decreases in interest rates.

See Note 13. Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of our derivative instruments.

Counterparty Credit Risk   Derivative instruments expose us to counterparty credit risk. Our commodity derivative instruments are currently with a diversified group of major banks or market participants, and we monitor and manage our level of financial exposure. Our commodity derivative contracts are executed under master agreements which allow us, in the event of default, to elect early termination of all contracts with the defaulting counterparty. If we choose to elect early termination, all asset and liability positions with the defaulting counterparty would be net settled at the time of election.

We monitor the creditworthiness of our commodity derivatives counterparties. However, we are not able to predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, we may be limited in our ability to mitigate an increase in counterparty credit risk.

Possible actions would be to transfer our position to another counterparty or request a voluntary termination of the derivative contracts resulting in a cash settlement. Should one of these financial counterparties not perform, we may not realize the benefit of some of our derivative instruments under lower commodity prices or higher interest rates, and could incur a loss. 

Unsettled Derivative Instruments   As of December 31, 2015, we had entered into the following crude oil derivative instruments:

				Swaps			Collars
Settlement Period	Type of Contract	Index	Bbls Per Day	Weighted Average Fixed Price			Weighted Average  Short Put  Price		Weighted Average Floor Price		Weighted Average  Ceiling Price
1H16 (1)	Swaps	NYMEX WTI	17,000	$	68.50		$	—	$	—	$	—
2H16 (1)	Swaps	NYMEX WTI	12,000	74.47			—		—		—
2H16 (1)	Call Option (2)	NYMEX WTI	5,000	—			—		—		54.16
2016	Swaps	Dated Brent	9,000	97.96			—		—		—
2016	Swaps (3)	(4)	6,000	90.28		—	—		—		—
2016	Two -Way Collars	NYMEX WTI	1,000	—			—		60.00		70.00
2016	Three-Way Collars	NYMEX WTI	6,000	—			61.00		72.50		86.37
2016	Three-Way Collars	Dated Brent	8,000	—			72.50		86.25		101.79
1H17 (1)	Swaps	NYMEX WTI	3,000	60.12			—		—		—
1H17 (1)	Swaps (5)	Dated Brent	3,000	62.80			—		—		—
2H17 (1)	Call Option (2)	NYMEX WTI	3,000	—			—		—		60.12
2017	Call Option (2)	NYMEX WTI	3,000	—			—		—		57.00
2017	Two-Way Collars	NYMEX WTI	5,000	—			—		40.00		54.00

⁽¹⁾  We traditionally enter into a hedge contract term of one year. For 2016 and 2017 we have entered into various derivative hedging arrangements with a contract term of six months resulting in non-uniform annual volumes and weighted average prices.

⁽²⁾  We have entered into crude oil derivative enhanced swaps with strike prices that are above the market value as of trade commencement. To effect the enhanced non-cash swap structure, we sold call options to the applicable counterparty to receive the above market terms.

⁽³⁾ Includes derivative instruments assumed by our subsidiary, NBL Texas, LLC, in connection with the Rosetta Merger.

⁽⁴⁾ The index for these derivative instruments is NYMEX WTI and Argus LLS indices.

⁽⁵⁾ We have entered into certain Dated Brent derivative contracts (swaptions), which give counterparties the option to extend for an additional 6-month period. Options covering a notional volume of 3,000 Bbls/d are exercisable on June 30, 2017. If the counterparties exercise all such options, the notional volume of our existing Dated Brent derivative contracts will increase by 3,000 Bbls/d at an average price of $62.80 per Bbl for each month during the period July 1, 2017 through December 31, 2017.

As of December 31, 2015, we had entered into the following natural gas derivative instruments:

				Swaps		Collars
Settlement Period	Type of Contract	Index	MMBtu Per Day	Weighted Average Fixed Price		Weighted Average Short Put  Price		Weighted Average Floor Price		Weighted Average Ceiling Price
2016	Swaps (1)	NYMEX HH	40,000	$	3.60	$	—	$	—	$	—
2016	Swaps (2)	Houston Ship Channel	30,000	4.04		—		—		—
2016	Two-Way Collars	NYMEX HH	30,000	—		—		3.00		3.50
2016	Two-Way Collars (2)	Houston Ship Channel	30,000	—		—		3.50		5.60
2016	Three-Way Collars	NYMEX HH	90,000	—		2.83		3.42		3.90

⁽¹⁾  We have entered into certain natural gas derivative contracts (swaptions), which give counterparties the option to extend for an additional 12-month period. Options covering a notional volume of 30,000 MMBtu/d are exercisable on December 22 and 23, 2016. If the counterparties exercise all such options, the notional volume of our existing natural gas derivative contracts will increase by 30,000 MMBtu/d at an average price of $3.50 per MMBtu for each month during the period January 1, 2017 through December 31, 2017.

⁽²⁾  Includes derivative instruments assumed by our subsidiary, NBL Texas, LLC, in connection with the Rosetta Merger.

Fair Value Amounts and Gains and Losses on Derivative Instruments   The fair values of derivative instruments in our consolidated balance sheets were as follows: 

Fair Value of Derivative Instruments
	Asset Derivative Instruments						Liability Derivative Instruments
	December 31, 2015			December 31, 2014			December 31, 2015			December 31, 2014
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair  Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
(millions)
Commodity DerivativeInstruments	Current Assets	$	582	Current Assets	$	710	Current Liabilities	$	—	Current Liabilities	$	—
	Noncurrent Assets	10		Noncurrent Assets	180		Noncurrent Liabilities	—		Noncurrent Liabilities	—
Total		$	592		$	890		$	—		$	—

The effect of derivative instruments on our consolidated statements of operations was as follows: 

	Year Ended December 31,
(millions)	2015			2014			2013
Cash (Received) Paid in Settlement of Commodity Derivative Instruments
Crude Oil	$	(844	)	$	(34	)	$	52
Natural Gas	(147		)	5			(50		)
NGLs (1)	(18		)	—			—
Total Cash (Received) Paid in Settlement of Commodity Derivative Instruments	(1,009		)	(29		)	2
Non-cash Portion of (Gain) Loss on Commodity Derivative Instruments
Crude Oil	423			(863		)	87
Natural Gas	65			(84		)	44
NGLs (1)	20			—			—
Total Non-cash Portion of (Gain) Loss on Commodity Derivative Instruments	508			(947		)	131
(Gain) Loss on Commodity Derivative Instruments
Crude Oil	(421		)	(897		)	139
Natural Gas	(82		)	(79		)	(6		)
NGLs (1)	2			—			—
Total (Gain) Loss on Commodity Derivative Instruments	$	(501	)	$	(976	)	$	133

⁽¹⁾ Amounts for NGLs relate to commodity derivative instruments, acquired in the Rosetta Merger, which expired as of December 31, 2015.