Derivatives and Concentration of Credit Risk

9 Months Ended

Sep. 30, 2020

Derivatives and Concentration of Credit Risk

Energy Commodity Derivatives

Risk Management Activities

We are exposed to market risk from changes in energy commodity prices within our operations. We utilize derivatives to manage exposure to the variability in expected future cash flows from forecasted sales of crude oil, natural gas and natural gas liquids attributable to commodity price risk.

We produce, buy and sell crude oil, natural gas and natural gas liquids at different locations throughout the United States. To reduce exposure to a decrease in revenues from fluctuations in commodity market prices, we enter into futures contracts, swap agreements and financial option contracts to mitigate the price risk on forecasted sales of crude oil, natural gas and natural gas liquids. We have also entered into basis swap agreements to reduce the locational price risk associated with our producing basins. Our financial option contracts are either purchased or sold options, or a combination of options that comprise a net purchased option, zero-cost collar or swaption.

Derivatives related to production

The following table sets forth the derivative notional volumes of the net long (short) positions that are economic hedges of production volumes, which are included in our commodity derivatives portfolio as of September 30, 2020.


Commodity	Period	Contract Type (a)	Location	Notional Volume (b)	Weighted Average Price (c)

Crude Oil
Crude Oil	Oct - Dec 2020	Fixed Price Swaps	WTI	(91,800)	$	53.06
Crude Oil	Oct - Dec 2020	Basis Swaps	Midland/Cushing	(35,000)	$	0.63
Crude Oil	Oct - Dec 2020	Basis Swaps	Nymex CMA Roll	(50,000)	$	(0.43)
Crude Oil	Oct - Dec 2020	Basis Swaps	Brent/WTI Spread	(5,000)	$	8.36
Crude Oil	Oct - Dec 2020	Fixed Price Collars	WTI	(20,000)	$53.33 - $63.48
Crude Oil	2021	Fixed Price Swap	WTI	(64,878)	$	41.35
Crude Oil	2021	Fixed Price Swaptions	WTI	(5,041)	$	40.12
Crude Oil	2021	Fixed Price Swaptions	WTI	(20,000)	$	57.02
Crude Oil	2021	Fixed Price Calls	WTI	(5,000)	$	39.50
Crude Oil	2021	Basis Swaps	Brent/WTI Spread	(1,000)	$	8.00
Crude Oil	2021	Basis Swaps	Midland/Cushing	(15,000)	$	0.64
Crude Oil	2022	Fixed Price Swaps	WTI	(25,000)	$	43.79
Crude Oil	2022	Fixed Price Swaptions	WTI	(10,493)	$	46.36
Crude Oil	2022	Basis Swaps	Brent/WTI Spread	(1,000)	$	7.75
Natural Gas
Natural Gas	Oct - Dec 2020	Basis Swaps	Waha	(100)	$	(1.14)
Natural Gas	2021	Fixed Price Swaps	Henry Hub	(240)	$	2.62
Natural Gas	2021	Fixed Price Calls	Henry Hub	(50)	$	2.68
Natural Gas	2021	Basis Swaps	Waha	(80)	$	(0.65)
Natural Gas	2022	Fixed Price Swaptions	Henry Hub	(100)	$	2.70
Natural Gas	2022	Basis Swaps	Waha	(70)	$	(0.57)
Natural Gas	2023	Basis Swaps	Waha	(70)	$	(0.51)
Natural Gas	2024	Basis Swaps	Waha	(40)	$	(0.51)
Physical Derivatives
Natural Gas	Oct - Dec 2020	Index	HSC	(8)	N/A
Natural Gas	2021	Index	HSC	(4)	N/A

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(a)Derivatives related to crude oil production are fixed price swaps settled on the business day average, basis swaps, fixed price calls, collars or swaptions. The derivatives related to natural gas production are fixed price swaps, basis swaps, fixed price calls or swaptions. In connection with swaps, we may sell call options or swaptions to the swap counterparties in exchange for receiving premium hedge prices on the swaps. The sold call or swaption establishes a maximum price we will receive for the volumes under contract and are financially settled. Basis swaps for the Nymex CMA (Calendar Monthly Average) Roll location are pricing adjustments to the trade month versus the delivery month for contract pricing. Basis swaps for the Brent/WTI location are priced off the Brent and WTI futures spread.

(b)Crude oil volumes are reported in Bbl/day and natural gas volumes are reported in BBtu/day.

(c)The weighted average price for crude oil is reported in $/Bbl and natural gas is reported in $/MMBtu.

Fair values and gains (losses)

Our derivatives are presented as separate line items in our Consolidated Balance Sheets as current and noncurrent derivative assets and liabilities. Derivatives are classified as current or noncurrent based on the contractual timing of expected future net cash flows of individual contracts. The expected future net cash flows for derivatives classified as current are expected to occur within the next 12 months. The fair value amounts are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements. Further, the amounts below do not include cash held on deposit in margin accounts that we have received or remitted to collateralize certain derivative positions.

We enter into commodity derivative contracts that serve as economic hedges but are not designated as cash flow hedges for accounting purposes as we do not utilize this method of accounting for derivative instruments. Net gain (loss) on derivatives on the Consolidated Statements of Operations includes net settlements received of $124 million and $578 million for the three and nine months ended September 30, 2020, respectively, and net settlements received of $4 million and $3 million for the three and nine months ended September 30, 2019, respectively.

The cash flow impact of our derivative activities is presented as separate line items within the operating activities on the Consolidated Statements of Cash Flows.

Offsetting of derivative assets and liabilities

The following table presents our gross and net derivative assets and liabilities.


	Gross Amount Presented on Balance Sheet		Netting Adjustments (a)		Net Amount
September 30, 2020	(Millions)
Derivative assets with right of offset or master netting agreements	$	204	$	(121)	$	83
Derivative liabilities with right of offset or master netting agreements	$	(199)	$	121	$	(78)

December 31, 2019
Derivative assets with right of offset or master netting agreements	$	67	$	(45)	$	22
Derivative liabilities with right of offset or master netting agreements	$	(91)	$	45	$	(46)

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(a)With all of our financial trading counterparties, we have agreements in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements. Additionally, we have negotiated master netting agreements with some of our counterparties. These master netting agreements allow multiple entities that have multiple underlying agreements the ability to net derivative assets and derivative liabilities at settlement or in the event of a default or a termination under one or more of the underlying contracts.

Credit-risk-related features

Certain of our derivative contracts contain credit-risk-related provisions that would require us, under certain events, to post additional collateral in support of our net derivative liability positions. These credit-risk-related provisions require us to post collateral in the form of cash or letters of credit when our net liability positions exceed an established credit threshold. The credit thresholds are typically based on our senior unsecured debt ratings from Standard and Poor’s and/or Moody’s Investment Services. Under these contracts, a credit ratings decline would lower our credit thresholds, thus requiring us to post additional collateral. We also have contracts that contain adequate assurance provisions giving the counterparty the right to request collateral in an amount that corresponds to the outstanding net liability.

As of September 30, 2020, we had no collateral posted to derivative counterparties to support the aggregate fair value of our net $78 million derivative liability position (reflecting master netting arrangements in place with certain counterparties), which includes a reduction of less than $3 million to our liability balance for our own nonperformance risk. Assuming our credit thresholds were eliminated and a call for adequate assurance under the credit risk provisions in our derivative contracts was triggered, the additional collateral that we would have been required to post at September 30, 2020 was $78 million.

Concentration of Credit Risk

Cash equivalents

Our cash equivalents are primarily invested in funds with high-quality, short-term securities and instruments that are issued or guaranteed by the U.S. government.

Accounts receivable

Accounts receivable are carried on a gross basis, with no discounting, less the allowance for credit losses. We estimate the allowance for credit losses based on historic write offs, existing and reasonable forecasted economic conditions, the financial conditions and available credit ratings of the customers and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for credit losses only after all collection attempts have been exhausted. A portion of our receivables are from joint interest owners of properties we operate. Thus, we may have the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings.

Derivative assets and liabilities

We have a risk of loss from derivative counterparties not performing pursuant to the terms of their contractual obligations. Counterparty performance can be influenced by changes in the economy and regulatory issues, among other factors. Risk of loss is impacted by several factors, including credit considerations and the regulatory environment in which a counterparty transacts. We attempt to minimize credit-risk exposure to derivative counterparties and brokers through formal credit policies, consideration of credit ratings from public ratings agencies, monitoring procedures, master netting agreements and collateral support under certain circumstances. Collateral support could include letters of credit, payment under margin agreements and guarantees of payment by credit worthy parties.

We also enter into master netting agreements to mitigate counterparty performance and credit risk. During 2020 and 2019, we did not incur any significant losses due to counterparty bankruptcy filings. We assess our credit exposure on a net basis to reflect master netting agreements in place with certain counterparties. We offset our credit exposure to each counterparty with amounts we owe the counterparty under derivative contracts.

Our gross and net credit exposure from our derivative contracts were $204 million and $83 million, respectively, as of September 30, 2020. All of our credit exposure is with investment grade financial institutions. We determine investment grade primarily using publicly available credit ratings. We include counterparties with a minimum S&P’s rating of BBB- or Moody’s Investors Service rating of Baa3 to be investment grade.

Our five largest net counterparty positions represent approximately 83 percent of our net credit exposure. Under our marginless hedging agreements with key banks, neither party is required to provide collateral support related to hedging activities.

Other

Collateral support for our commodity agreements could include margin deposits, letters of credit, surety bonds and guarantees of payment by credit worthy parties.

One of our senior officers is on the board of directors of NGL Energy Partners, LP (“NGL Energy”). In the normal course of business, we sell crude oil to NGL Energy. For the first nine months of 2020, sales to NGL Energy were approximately 13 percent of our total consolidated revenues adjusted for gain (loss) on derivatives. In addition, a subsidiary of NGL Energy provides water disposal services for WPX that represent approximately one percent of operating expenses.

WPX ENERGY, INC. 10-Q