Fair Value Measurements

9 Months Ended

Sep. 30, 2015

9. Fair Value Measurements

Occidental has categorized its assets and liabilities that are measured at fair value in a three-level fair value hierarchy, based on the inputs to the valuation techniques: Level 1 — using quoted prices in active markets for the assets or liabilities; Level 2 — using observable inputs other than quoted prices for the assets or liabilities; and Level 3 — using unobservable inputs. Transfers between levels, if any, are recognized at the end of each reporting period.

Fair Values — Recurring

Occidental primarily applies the market approach for recurring fair value measurements, maximizes its use of observable inputs and minimizes its use of unobservable inputs. Occidental utilizes the mid-point between bid and ask prices for valuing the majority of its assets and liabilities measured and reported at fair value. In addition to using market data, Occidental makes assumptions in valuing its assets and liabilities, including assumptions about the risks inherent in the inputs to the valuation technique. For assets and liabilities carried at fair value, Occidental measures fair value using the following methods:

Occidental values exchange-cleared commodity derivatives using closing prices provided by the exchange as of the balance sheet date. Those derivatives are classified as Level 1. Over-the-Counter (OTC) bilateral financial commodity contracts, foreign exchange contracts, options and physical commodity forward purchase and sale contracts are generally classified as Level 2 and are generally valued using quotations provided by brokers or industry-standard models that consider various inputs, including quoted forward prices for commodities, time value, volatility factors, credit risk and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument, and can be derived from observable data or are supported by observable prices at which transactions are executed in the marketplace.

Occidental values commodity derivatives based on a market approach that considers various assumptions, including quoted forward commodity prices and market yield curves. The assumptions used include inputs that are generally unobservable in the marketplace, or are observable but have been adjusted based upon various assumptions and the fair value is designated as Level 3 within the valuation hierarchy.

Occidental values its available for sale investment in California Resources based on the closing share price of California Resources’ common stock as of the balance sheet date. This investment is classified as Level 1. At September 30, 2015, Occidental had approximately 71.5 million shares of common stock of California Resources, which are recorded as a $186 million available for sale investment. As a result of a declining trading price in the third quarter of 2015, Occidental has recorded unrealized losses of $208 million in accumulated other comprehensive income for this available for sale investment. Occidental considers available evidence including the results of California Resources, the volatility of oil prices, recent unrealized gains and losses resulting from share price fluctuation, and other factors to determine whether the decline in value is other than temporary. Occidental has concluded the investment is not impaired at September 30, 2015.

Occidental generally uses an income approach to measure fair value when observable inputs are unavailable. This approach utilizes management’s judgments regarding expectations of projected cash flows, and discounts those cash flows using a risk adjusted discount rate.

The following tables provide fair value measurement information for such assets and liabilities that are measured on a recurring basis as of September 30, 2015 and December 31, 2014 (in millions):

Fair Value Measurements at September 30, 2015:
Description	Level 1		Level 2		Level 3		Netting and Collateral			Total Fair Value
Assets:
Commodity derivatives	$	235	$	51	$	—	$	(223	)	$	63
Available for sale investment	$	186	$	—	$	—	$	—		$	186

Liabilities:
Commodity derivatives	$	251	$	293	$	—	$	(240	)	$	304

Fair Value Measurements at December 31, 2014:
Description	Level 1		Level 2		Level 3		Netting and Collateral			Total Fair Value
Assets:
Commodity derivatives	$	712	$	127	$	—	$	(742	)	$	97
Available for sale investment	$	394	$	—	$	—	$	—		$	394

Liabilities:
Commodity derivatives	$	750	$	246	$	—	$	(756	)	$	240

Fair Values — Nonrecurring

The following table provides fair value measurement for such proved domestic and international oil and gas properties that are measured on a nonrecurring basis as of September 30, 2015. Occidental considers the sales agreement to sell its Williston operations as Level 3 in the fair value hierarchy. The following table also includes those proved properties measured for impairment based on an income approach. The impairment tests, including the fair value estimation, incorporated a number of assumptions involving expectations of future cash flows. These assumptions included estimates of future product prices, which Occidental based on forward price curves and, where applicable, contractual prices, estimates of oil and gas reserves, estimates of future expected operating and development costs and a risk adjusted discount rate. These inputs are categorized as Level 3 in the fair value hierarchy. See Note 11, Industry Segments, for additional information.

	Fair Value Measurements at September 30, 2015 Using
Description	Level 1		Level 2		Level 3		Net Book Value		(a)	Total Pre-tax (Non-cash) Impairment Loss
Assets:
Impaired proved oil and gas assets - domestic	$	—	$	—	$	1,071	$	2,654		$	1,583
Impaired proved oil and gas assets - international	$	—	$	—	$	466	$	1,767		$	1,301

(a) Amount represents net book value at date of assessment.

Other Financial Instruments

The carrying amounts of cash and cash equivalents and other on-balance-sheet financial instruments, other than long term fixed-rate debt, approximate fair value. The cost, if any, to terminate Occidental’s off-balance-sheet financial instruments is not significant. Occidental estimates the fair value of fixed-rate debt based on the quoted market prices for those instruments or on quoted market yields for similarly rated debt instruments, taking into account such instruments’ maturities. The estimated fair value of Occidental’s debt as of September 30, 2015 and December 31, 2014 was $8.7 billion and $7.0 billion, respectively, and its carrying value net of unamortized discount as of September 30, 2015 and December 31, 2014 was $8.3 billion and $6.8 billion, respectively. The majority of Occidental’s debt is classified as Level 1, with $68 million classified as Level 2.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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