Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 11. Fair Value Measurements

Accounting standards for fair value measurement (ASC 820) establish a framework for measuring fair value and stipulate disclosures about fair value measurements. The standards apply to recurring and nonrecurring fair value measurements of financial and nonfinancial assets and liabilities. Among the required disclosures is the fair value hierarchy of inputs the company uses to value an asset or a liability. The three levels of the fair value hierarchy are described as follows:

Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. For the company, Level 1 inputs include exchange-traded futures contracts for which the parties are willing to transact at the exchange-quoted price and marketable securities that are actively traded.

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly. For the company, Level 2 inputs include quoted prices for similar assets or liabilities, prices obtained through third-party broker quotes and prices that can be corroborated with other observable inputs for substantially the complete term of a contract.

Level 3: Unobservable inputs. The company does not use Level 3 inputs for any of its recurring fair value measurements. Level 3 inputs may be required for the determination of fair value associated with certain nonrecurring measurements of nonfinancial assets and liabilities.

The fair value hierarchy for recurring assets and liabilities measured at fair value at September 30, 2011 and December 31, 2010, is as follows:

Assets and Liabilities Measured at Fair Value on a Recurring Basis

(Millions of dollars)

	At September 30, 2011												At December 31, 2010
	Total			Level 1			Level 2			Level 3			Total			Level 1			Level 2			Level 3
Marketable Securities		$	248		$	248		$	—		$	—		$	155		$	155		$	—		$	—
Derivatives			165			55			110			—			122			11			111			—
Total Assets at Fair Value		$	413		$	303		$	110		$	—		$	277		$	166		$	111		$	—
Derivatives		$	71		$	64		$	7		$	—		$	171		$	75		$	96		$	—
Total Liabilities at Fair Value		$	71		$	64		$	7		$	—		$	171		$	75		$	96		$	—

Marketable Securities The company calculates fair value for its marketable securities based on quoted market prices for identical assets and liabilities. The fair values reflect the cash that would have been received if the instruments were sold at September 30, 2011.

Derivatives The company records its derivative instruments — other than any commodity derivative contracts that are designated as normal purchase and normal sale — on the Consolidated Balance Sheet at fair value, with virtually all the offsetting amount to the Consolidated Statement of Income. For derivatives with identical or similar provisions as contracts that are publicly traded on a regular basis, the company uses the market values of the publicly traded instruments as an input for fair value calculations.

The company’s derivative instruments principally include futures, swaps, options and forward contracts for crude oil, natural gas and refined products. Derivatives classified as Level 1 include futures, swaps and options contracts traded in active markets such as the New York Mercantile Exchange.

Derivatives classified as Level 2 include swaps, options, and forward contracts principally with financial institutions and other oil and gas companies, the fair values of which are obtained from third-party broker quotes, industry pricing services and exchanges. The company obtains multiple sources of pricing information for the Level 2 instruments. Since this pricing information is generated from observable market data, it has historically been very consistent. The company does not materially adjust this information. The company incorporates internal review, evaluation and assessment procedures, including a comparison of Level 2 fair values derived from the company’s internally developed forward curves (on a sample basis) with the pricing information to document reasonable, logical and supportable fair value determinations and proper level of classification.

The fair value hierarchy for nonrecurring assets and liabilities measured at fair value at September 30, 2011, is as follows:

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

(Millions of dollars)

	At September 30, 2011
													Before-Tax Loss
	Total			Level 1			Level 2			Level 3			Three Months Ended			Nine Months Ended
Properties, plant and equipment, net (held and used)		$	22		$	—		$	—		$	22		$	36		$	86
Properties, plant and equipment, net (held for sale)			—			—			—			—			39			49
Investments and advances			—			—			—			—			11			14
Total Assets at Fair Value		$	22		$	—		$	—		$	22		$	86		$	149

Impairments of “Properties, plant and equipment” The company did not have any material long-lived assets measured at fair value on a nonrecurring basis to report in 2011. The fair values were determined from internal cash flow models, using discount rates consistent with those used by the company to evaluate cash flows of other assets of a similar nature. The losses on assets held for sale during third quarter 2011 were the result of an offer tendered to a prospective buyer.

Impairments of “Investments and advances” The company did not have any material investments and advances measured at fair value on a nonrecurring basis to report in the third quarters 2011 and 2010. The fair values were determined from internal cash flow models, using discount rates consistent with those used by the company to evaluate cash flows of other investments of a similar nature.

Assets and Liabilities not Required to be Measured at Fair Value The company holds cash equivalents and bank time deposits in U.S. and non-U.S. portfolios. The instruments classified as cash equivalents are primarily bank time deposits with maturities of 90 days or less and money market funds. “Cash and cash equivalents” had carrying/fair values of $14.2 billion and $14.1 billion at September 30, 2011, and December 31, 2010, respectively. The instruments held in “Time deposits” are bank time deposits with maturities greater than 90 days, and had carrying/fair values of $5.9 billion and $2.9 billion at September 30, 2011, and December 31, 2010, respectively. The fair values of cash, cash equivalents and bank time deposits reflect the cash that would have been received if the instruments were settled at September 30, 2011.

“Cash and cash equivalents” do not include investments with a carrying/fair value of $505 million and $855 million at September 30, 2011, and December 31, 2010, respectively. At September 30, 2011, these investments include restricted funds related to various U.S. refinery projects, which are reported in “Deferred charges and other assets” on the Consolidated Balance Sheet. Long-term debt of $4.1 billion and $5.6 billion at September 30, 2011, and December 31, 2010 had estimated fair values of $4.9 billion and $6.3 billion, respectively.

The carrying values of short-term financial assets and liabilities on the consolidated balance sheet approximate their fair values. Fair value remeasurements of other financial instruments at September 30, 2011 and 2010 were not material.