Derivative and Financial Instruments

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 10—Derivative and Financial Instruments

We use futures, forwards, swaps and options in various markets to meet our customers' needs, capture market opportunities and manage foreign exchange currency risk. Certain of our equity method investments use swaps to manage interest rate risk.

Commodity Derivative Instruments

Our commodity business primarily consists of natural gas, crude oil, bitumen, LNG, NGLs and power.

Commodity 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, 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 and certain gas contracts. We do not apply hedge accounting for our commodity derivatives.

The following table presents the gross fair values of our commodity derivatives, excluding collateral, on our consolidated balance sheet:


	Millions of Dollars
	September 30 2023		December 31 2022
Assets
Prepaid expenses and other current assets	$	535	1,795
Other assets	127		242
Liabilities
Other accruals	506		1,800
Other liabilities and deferred credits	97		210

The gains (losses) from commodity derivatives included in our consolidated income statement are presented in the following table:


	Millions of Dollars
	Three Months Ended September 30			Nine Months Ended September 30
	2023		2022	2023	2022

Sales and other operating revenues	$	(11)	(129)	1	(549)
Other income	(5)		(4)	(6)	(2)
Purchased commodities	7		6	(49)	352

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


	Open Position Long (Short)
	September 30 2023	December 31 2022
Commodity
Natural gas and power (billions of cubic feet equivalent)
Fixed price	(23)	(14)
Basis	(4)	(8)

Foreign Currency Exchange Derivatives

In the second quarter of 2023, we entered into foreign exchange forward contracts to buy $5.2 billion CAD at $0.751 against the USD for settlement in September 2023, in anticipation of our planned acquisition of the additional interest in Surmont. For both the three- and nine-month periods ended September 30, 2023, we recorded a realized loss of $76 million in the "Foreign currency transaction (gain) loss" line on our consolidated income statement. The related cash flows associated with the loss on derivatives are included in the "Other" line within investing activities on our consolidated statement of cash flows. We subsequently entered into additional foreign exchange forward contracts to buy $4.3 billion CAD at $0.736 against the USD. At September 30, 2023, the forward contracts had a net fair value of $36 million. The derivative asset of $47 million and the derivative liability of $11 million are reported within the "Prepaid expenses and other current assets" and "Other accruals" lines, respectively, on our consolidated balance sheet. For the three- and nine-month periods ended September 30, 2023, we recorded an unrealized gain of $17 million and $36 million, respectively, in the "Foreign currency transaction (gain) loss" line on our consolidated income statement related to these contracts, which settled in the fourth quarter.

Interest Rate Derivative Instruments

During 2023, PALNG executed interest rate swaps that had the effect of converting 60 percent of the projected term loans outstanding to finance the cost of development and construction of Phase 1 from floating to fixed rate. These swaps were designated and qualify for hedge accounting under ASC Topic 815, "Derivatives and Hedging", as a cash flow hedge with changes in the fair value of the designated hedging instrument reported as a component of other comprehensive income and reclassified into earnings in the same periods that the hedged transactions will affect earnings. We recognize our proportionate share of PALNG’s adjustments for other comprehensive income as a change to our equity method investment with corresponding adjustments in equity. For the three- and nine-month periods ended September 30, 2023, we recognized an unrealized gain of $46 million in other comprehensive income related to these swaps.

Financial Instruments

We invest in financial instruments with maturities based on our cash forecasts for the various accounts and currency pools we manage. The types of financial instruments in which we currently invest include:

•Time deposits: Interest bearing deposits placed with financial institutions for a predetermined amount of time.

•Demand deposits: Interest bearing deposits placed with financial institutions. Deposited funds can be withdrawn without notice.

•Commercial paper: Unsecured promissory notes issued by a corporation, commercial bank or government agency purchased at a discount, reaching par value at maturity.

•U.S. government or government agency obligations: Securities issued by the U.S. government or U.S. government agencies.

•Foreign government obligations: Securities issued by foreign governments.

•Corporate bonds: Unsecured debt securities issued by corporations.

•Asset-backed securities: Collateralized debt securities.

The following investments are carried on our consolidated balance sheet at cost, plus accrued interest, and the table reflects remaining maturities at September 30, 2023, and December 31, 2022:


	Millions of Dollars
	Carrying Amount
	Cash and Cash Equivalents			Short-Term Investments
	September 30 2023		December 31 2022	September 30 2023	December 31 2022
Cash	$	500	593
Demand Deposits	2,459		1,638
Time Deposits
1 to 90 days	3,895		4,116	86	1,288
91 to 180 days				11	883
Within one year				15	11
U.S. Government Obligations
1 to 90 days	1,965		14	—	—
	$	8,819	6,361	112	2,182

The following investments in debt securities classified as available for sale are carried at fair value on our consolidated balance sheet at September 30, 2023, and December 31, 2022:


	Millions of Dollars
	Carrying Amount
	Cash and Cash Equivalents			Short-Term Investments		Investments and Long-Term Receivables
	September 30 2023		December 31 2022	September 30 2023	December 31 2022	September 30 2023	December 31 2022
Major Security Type
Corporate Bonds	$	1	—	220	323	517	309
Commercial Paper	10		97	150	156
U.S. Government Obligations	—		—	118	115	158	63
U.S. Government Agency Obligations				12	8	6	5
Foreign Government Obligations				3	—	8	7
Asset-Backed Securities				1	1	150	138
	$	11	97	504	603	839	522

Cash and Cash Equivalents and Short-Term Investments have remaining maturities within one year.

Investments and Long-Term Receivables have remaining maturities greater than one year through five years.

The following table summarizes the amortized cost basis and fair value of investments in debt securities classified as available for sale:


	Millions of Dollars
	Amortized Cost Basis			Fair Value
	September 30 2023		December 31 2022	September 30 2023	December 31 2022
Major Security Type
Corporate Bonds	$	747	641	738	632
Commercial Paper	160		253	160	253
U.S. Government Obligations	280		181	276	178
U.S. Government Agency Obligations	18		13	18	13
Foreign Government Obligations	11		7	11	7
Asset-Backed Securities	152		139	151	139
	$	1,368	1,234	1,354	1,222

As of September 30, 2023, and December 31, 2022, total unrealized losses for debt securities classified as available for sale with net losses were $14 million and $12 million, respectively. No allowance for credit losses has been recorded on investments in debt securities which are in an unrealized loss position.

For the three- and nine-month periods ended September 30, 2023, proceeds from sales and redemptions of investments in debt securities classified as available for sale were $258 million and $809 million, respectively. For the three- and nine-month periods ended September 30, 2022, proceeds from sales and redemptions of investments in debt securities classified as available for sale were $198 million and $399 million, respectively. Gross realized gains and losses included in earnings from those sales and redemptions were negligible. The cost of securities sold and redeemed is determined using the specific identification method.

Credit Risk

Financial instruments potentially exposed to concentrations of credit risk consist primarily of cash equivalents, short-term investments, long-term investments in debt securities, OTC derivative contracts and trade receivables. Our cash equivalents and short-term investments are placed in high-quality commercial paper, government money market funds, U.S. government and government agency obligations, time deposits with major international banks and financial institutions, high-quality corporate bonds, foreign government obligations and asset-backed securities. Our long-term investments in debt securities are placed in high-quality corporate bonds, asset-backed securities, U.S. government and government agency obligations, and foreign government obligations.

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 primarily 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 oil and gas 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 may require collateral to limit the exposure to loss including letters of credit, prepayments and surety bonds, as well as 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.

The aggregate fair value of all derivative instruments with such credit risk-related contingent features that were in a liability position at September 30, 2023, and December 31, 2022, was $108 million and $333 million, respectively. For these instruments, no collateral was posted at September 30, 2023, and $42 million of collateral was posted at December 31, 2022. If our credit rating had been downgraded below investment grade at September 30, 2023, we would have been required to post $89 million of additional collateral, either with cash or letters of credit.