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Fair Value Measurement | 9 Months Ended
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Sep. 30, 2020
Fair Value Measurement [Abstract] |
Fair Value Measurement | Note 14—Fair Value Measurement We carry a portion of our assets and liabilities at fair value measured at the reporting date using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability) and disclosed according to the quality of valuation inputs under the following hierarchy: ● Level 1: Quoted prices (unadjusted) in an active market for identical assets or liabilities. ● Level 2: Inputs other than quoted prices that are directly or indirectly observable. ● Level 3: Unobservable inputs that are significant to the fair value of assets or liabilities. The classification hierarchy of an asset or liability is based on the lowest level of input significant to its fair value. Those that are initially classified as Level 3 are subsequently reported as Level 2 when the fair value derived from unobservable inputs is inconsequential to the overall fair value, or if corroborated market data becomes available. Assets and liabilities initially reported as Level 2 are subsequently reported as Level 3 if corroborated market data is no longer available. There were no material transfers into or out of Level 3 during 2020 or 2019. Recurring Fair Value Measurement Financial assets and liabilities reported at fair value on a recurring basis primarily include our investment in Cenovus Energy common shares, our investments in debt securities classified as available for sale, and commodity derivatives. ● Level 1 derivative assets and liabilities primarily represent exchange-traded futures and options that are valued using unadjusted prices available from the underlying exchange. Level 1 also includes our investment in common shares of Cenovus Energy, which is valued using quotes for shares on the NYSE, and our investments in U.S. government obligations classified as available for sale debt securities, which are valued using exchange prices. ● Level 2 derivative assets and liabilities primarily represent OTC swaps, options and forward purchase and sale contracts that are valued using adjusted exchange prices, prices provided by brokers or pricing service companies that are all corroborated by market data. Level 2 also includes our investments in debt securities classified as available for sale including investments in corporate bonds, commercial paper, asset-backed securities, U.S. government agency obligations and foreign government obligations that are valued using pricing provided by brokers or pricing service companies that are corroborated with market data. ● Level 3 derivative assets and liabilities consist of OTC swaps, options and forward purchase and sale contracts where a significant portion of fair value is calculated from underlying market data that is not readily available. The derived value uses industry standard methodologies that may consider the historical relationships among various commodities, modeled market prices, time value, volatility factors and other relevant economic measures. The use of these inputs results in management’s best estimate of fair value. Level 3 activity was not material for all periods presented. The following table summarizes the fair value hierarchy for gross financial assets and liabilities (i.e., unadjusted where the right of setoff exists for commodity derivatives accounted for at fair value on a recurring basis): Millions of Dollars September 30, 2020 December 31, 2019 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets Investment in Cenovus Energy $ 809 - - 809 2,111 - - 2,111 Investments in debt securities 21 461 - 482 25 216 - 241 Commodity derivatives 173 117 11 301 172 114 36 322 Total assets $ 1,003 578 11 1,592 2,308 330 36 2,674 Liabilities Commodity derivatives $ 173 89 15 277 174 115 22 311 Total liabilities $ 173 89 15 277 174 115 22 311 The following table summarizes those commodity derivative balances subject to the right of setoff as presented on our consolidated balance sheet. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements when a legal right of setoff exists. Millions of Dollars Amounts Subject to Right of Setoff Gross Amounts Not Gross Net Amounts Subject to Gross Amounts Amounts Cash Net Recognized Right of Setoff Amounts Offset Presented Collateral Amounts September 30, 2020 Assets $ 301 1 300 204 96 5 91 Liabilities 277 - 277 204 73 7 66 December 31, 2019 Assets $ 322 3 319 193 126 4 122 Liabilities 311 4 307 193 114 12 102 At September 30, 2020 and December 31, 2019, we did not present any amounts gross on our consolidated balance sheet where we had the right of setoff. Non-Recurring Fair Value Measurement The following table summarizes the fair value hierarchy by major category and date of remeasurement for assets accounted for at fair value on a non-recurring basis: Millions of Dollars Fair Value Measurement Using Fair Value Level 3 Inputs Before-Tax Loss Net PP&E (held for use) March 31, 2020 $ 77 77 510 During the first quarter of 2020 , the estimated fair value of our assets in the Wind River Basin operations area declined to an amount below the carrying value. The Wind River Basin operations area consists of certain developed natural gas properties in the Madden Field and the Lost Cabin Gas Plant and is included in our Lower 48 segment. The carrying value was written down to fair value. The fair value was estimated based on an internal discounted cash flow model using estimates of future production, an outlook of future prices using a combination of exchanges (short-term) and external pricing services companies (long-term), future operating costs and capital expenditures, and a discount rate believed to be consistent with those used by principal market participants. The range and arithmetic average of significant unobservable inputs used in the Level 3 fair value measurement were as follows: Fair Value (Millions of Dollars) Valuation Technique Unobservable Inputs Range (Arithmetic Average) March 31, 2020 Wind River Basin $ 77 Discounted cash flow Natural gas production (MMCFD) 8.4 - 55.2 ( 22.9 ) Natural gas price outlook* ($/MMBTU) $ 2.67 - $ 9.17 ($ 5.68 ) Discount rate** 7.9 % - 9.1 % ( 8.3 %) *Henry Hub natural gas price outlook based on external pricing service companies' outlooks for years 2022-2034; future prices escalated at 2.2 % annually after year 2034. **Determined as the weighted average cost of capital of a group of peer companies, adjusted for risks where appropriate. Reported Fair Values of Financial Instruments We used the following methods and assumptions to estimate the fair value of financial instruments: ● Cash and cash equivalents and short-term investments: The carrying amount reported on the balance sheet approximates fair value. For those investments classified as available for sale debt securities, the carrying amount reported on the balance sheet is fair value. ● Accounts and notes receivable (including long-term and related parties): The carrying amount reported on the balance sheet approximates fair value. The valuation technique and methods used to estimate the fair value of the current portion of fixed-rate related party loans is consistent with Loans and advances—related parties. ● Investment in Cenovus Energy: See Note 6—Investment in Cenovus Energy for a discussion of the carrying value and fair value of our investment in Cenovus Energy common shares. ● Investments in debt securities classified as available for sale: The fair value of investments in debt securities categorized as Level 1 in the fair value hierarchy is measured using exchange prices. The fair value of investments in debt securities categorized as Level 2 in the fair value hierarchy is measured using pricing provided by brokers or pricing service companies that are corroborated with market data. See Note 13—Derivatives and Financial Instruments, for additional information. ● Loans and advances—related parties: The carrying amount of floating-rate loans approximates fair value. The fair value of fixed-rate loan activity is measured using market observable data and is categorized as Level 2 in the fair value hierarchy. See Note 5—Investments, Loans and Long-Term Receivables, for additional information. ● Accounts payable (including related parties) and floating-rate debt: The carrying amount of accounts payable and floating-rate debt reported on the balance sheet approximates fair value. ● Fixed-rate debt: The estimated fair value of fixed-rate debt is measured using prices available from a pricing service that is corroborated by market data; therefore, these liabilities are categorized as Level 2 in the fair value hierarchy. ● Commercial paper: The carrying amount of our commercial paper instruments approximates fair value and is reported on the balance sheet as short-term debt. See Note 9—Debt, for additional information. The following table summarizes the net fair value of financial instruments (i.e., adjusted where the right of setoff exists for commodity derivatives): Millions of Dollars Carrying Amount Fair Value September 30 December 31 September 30 December 31 2020 2019 2020 2019 Financial assets Investment in Cenovus Energy $ 809 2,111 809 2,111 Commodity derivatives 92 125 92 125 Investments in debt securities 482 241 482 241 Total loans and advances—related parties 219 339 219 339 Financial liabilities Total debt, excluding finance leases 14,482 14,175 18,827 18,108 Commodity derivatives 66 106 66 106

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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