XML 31 R20.htm IDEA: XBRL DOCUMENT

Derivative and Financial Instruments

6 Months Ended

Jun. 30, 2019

Derivative and Financial Instruments [Abstract]

Note 13—Derivative and Financial Instruments

Derivative Instruments

We use futures, forwards, swaps and options in various markets to meet our customer needs and capture market opportunities. Our commodity business primarily consists of natural gas, crude oil, bitumen, LNG and NGLs.

Our derivative instruments are held at fair value on our consolidated balance sheet. Where these balances have the right of setoff, they are presented on a net basis. Related cash flows are recorded as operating activities on our consolidated statement of cash flows. On our consolidated income statement, realized and unrealized gains and losses are recognized either on a gross basis if directly related to our physical business or a net basis if held for trading. Gains and losses related to contracts that meet and are designated with the NPNS exception are recognized upon settlement. We generally apply this exception to eligible crude contracts. We do not use hedge accounting for our commodity derivatives.

The following table presents the gross fair values of our commodity derivatives, excluding collateral, and the line items where they appear on our consolidated balance sheet:

	Millions of Dollars
	June 30		December 31
	2019		2018
Assets
Prepaid expenses and other current assets	$	339	410
Other assets		38	40
Liabilities
Other accruals		330	370
Other liabilities and deferred credits		28	30

The gains (losses) from commodity derivatives incurred, and the line items where they appear on our consolidated income statement were:

	Millions of Dollars
	Three Months Ended			Six Months Ended
	June 30			June 30
	2019		2018	2019	2018

Sales and other operating revenues	$	45	(20)	64	23
Other income		2	5	1	9
Purchased commodities		(31)	24	(51)	(3)

The table below summarizes our material net exposures resulting from outstanding commodity derivative contracts:

	Open Position
	Long/(Short)
	June 30		December 31
	2019		2018
Commodity
Natural gas and power (billions of cubic feet equivalent)
Fixed price		(19)	(17)
Basis		(12)	(1)

Foreign Currency Exchange Derivatives

We have foreign currency exchange rate risk resulting from international operations. Our foreign currency exchange derivative activity primarily relates to managing our cash-related foreign currency exchange rate exposures, such as firm commitments for capital programs or local currency tax payments, dividends and cash returns from net investments in foreign affiliates, and investments in equity securities. We do not elect hedge accounting on our foreign currency exchange derivatives.

The following table presents the gross fair values of our foreign currency exchange derivatives, excluding collateral, and the line items where they appear on our consolidated balance sheet:

	Millions of Dollars
	June 30		December 31
	2019		2018
Assets
Prepaid expenses and other current assets	$	-	7
Liabilities
Other accruals		9	6
Other liabilities and deferred credits		15	-

The (gains) losses from foreign currency exchange derivatives incurred, and the line item where they appear on our consolidated income statement were:

	Millions of Dollars
	Three Months Ended			Six Months Ended
	June 30			June 30
	2019		2018	2019	2018

Foreign currency transaction (gains) losses	$	23	2	21	(3)

We had the following net notional position of outstanding foreign currency exchange derivatives:

	In Millions
	Notional Currency
		June 30	December 31
	2019		2018
Foreign Currency Exchange Derivatives
Sell U.S. dollar, buy British pound	USD	-	805
Sell British pound, buy other currencies*	GBP	-	21
Buy British pound, sell Euro	GBP	15	-
Sell Canadian dollar, buy U.S. dollar	CAD	1,350	1,242
*Primarily euro and Norwegian krone.

In December 2017, we entered into foreign exchange zero cost collars buying the right to sell $1.25 billion CAD at $0.707 CAD and selling the right to buy $1.25 billion CAD at $0.842 CAD against the U.S. dollar. The collar expired during the second quarter of 2019 and we entered into new foreign currency exchange forward contracts to sell $1.35 billion CAD at $0.748 CAD against the U.S. dollar.

Financial Instruments

We invest excess cash in financial instruments with maturities based on our cash forecasts for the various currency pools we manage. The maturities of these investments may from time to time extend beyond 90 days. The types of financial instruments in which we currently invest include:

Time deposits: Interest bearing deposits placed with approved financial institutions.

Commercial paper: Unsecured promissory notes issued by a corporation, commercial bank or government agency purchased at a discount to mature at par.

Government or government agency obligations: Short-term securities issued by the U.S. government or U.S. government agencies.

These financial instruments appear in the “Cash and cash equivalents” line on our consolidated balance sheet if the maturities at the time we made the investments were 90 days or less; otherwise, these financial instruments are included in the “Short-term investments” line on our consolidated balance sheet.

	Millions of Dollars
	Carrying Amount
	Cash and Cash Equivalents			Short-Term Investments
	June 30		December 31	June 30	December 31
	2019		2018	2019	2018

Cash	$	764	876
Time deposits
Remaining maturities from 1 to 90 days		4,520	3,509	42	-
Commercial paper
Remaining maturities from 1 to 90 days		247	229	690	248
Government obligations
Remaining maturities from 1 to 90 days		410	1,301	-	-
	$	5,941	5,915	732	248

Credit Risk

Financial instruments potentially exposed to concentrations of credit risk consist primarily of cash equivalents, short-term investments, OTC derivative contracts and trade receivables. Our cash equivalents and short-term

investments are placed in high-quality commercial paper, government money market funds, government debt securities and time deposits with major international banks and financial institutions.

The credit risk from our OTC derivative contracts, such as forwards, swaps and options, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements until settled; however, we are exposed to the credit risk of those exchange brokers for receivables arising from daily margin cash calls, as well as for cash deposited to meet initial margin requirements.

Our trade receivables result primarily from our petroleum operations and reflect a broad national and international customer base, which limits our exposure to concentrations of credit risk. The majority of these receivables have payment terms of 30 days or less, and we continually monitor this exposure and the creditworthiness of the counterparties. We do not generally require collateral to limit the exposure to loss; however, we will sometimes use letters of credit, prepayments and master netting arrangements to mitigate credit risk with counterparties that both buy from and sell to us, as these agreements permit the amounts owed by us or owed to others to be offset against amounts due to us.

Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if we fall below investment grade. Cash is the primary collateral in all contracts; however, many also permit us to post letters of credit as collateral, such as transactions administered through the New York Mercantile Exchange.

The aggregate fair value of all derivative instruments with such credit risk-related contingent features that were in a liability position on June 30, 2019 and December 31, 2018, was $73 million and $62 million, respectively. For these instruments, no collateral was posted as of June 30, 2019 or December 31, 2018. If our credit rating had been downgraded below investment grade on June 30, 2019, we would be required to post $71 million of additional collateral, either with cash or letters of credit.