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Derivative Instruments | 9 Months Ended
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Sep. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | Derivative Instruments Occidental uses a variety of derivative financial instruments and physical contracts to manage its exposure to commodity-price fluctuations and transportation commitments, to fix margins on the future sale of stored commodity volumes and interest rate risks. Occidental also enters into derivative financial instruments for trading purposes. Occidental may elect normal purchases and normal sales exclusions when physically delivered commodities are purchased or sold to a customer. Occidental occasionally applies cash flow hedge accounting treatment to derivative financial instruments to lock in margins on the forecasted sales of its natural gas storage volumes, and at times for other strategies, such as to lock rates on forecasted debt issuances. Derivatives are carried at fair value and on a net basis when a legal right of offset exists with the same counterparty. Derivatives Not Designated as Hedging Instruments As of September 30, 2019, Occidental's derivatives not designated as hedges consist of three-way oil collars and call options, interest rate swaps, marketing derivatives and the Warrant. Derivative instruments that are derivatives not designated as hedging instruments are required to be recorded on the statement of operations and balance sheet at fair value. Changes in fair value will impact Occidental's earnings through mark-to-market adjustments until the physical commodity is delivered or the financial instrument is settled. The fair value does not reflect the realized or cash value of the instrument. Three-way Oil Collars and Call Options In July 2019, Occidental entered into three-way costless collar derivative instruments for 2020 and additional call options in 2021 to manage its near-term exposure to cash-flow variability from commodity-price risks. A three-way collar is a combination of three options: a sold call, a purchased put and a sold put. The sold call establishes the ceiling price that Occidental will receive for the contracted commodity volume for a defined period of time. The purchased put establishes the floor price that Occidental will receive for the contracted volumes unless the market price for the commodity falls below the sold put strike price, at which point the floor price equals the reference price plus the difference between the purchased put strike price and the sold put strike price for a defined period of time. Occidental entered into the 2021 call options to substantially improve the ceiling price that Occidental will receive for the contracted commodity volumes in 2020. In the Merger, Occidental also assumed three-way costless collars that expire throughout the rest of 2019. Net gains and losses associated with collars and calls are recognized currently in net sales. Hedge accounting was not elected for these contracts. Occidental had the following collars and calls outstanding at September 30, 2019:
Collars and Calls, not designated as hedges |  |
2019 Settlement |  |  |
Three-way collars (Oil MMBL) |  |  | 8.0 |
| Average price per barrel (NYMEX/Brent oil pricing) |  |  |
|  | Ceiling sold price (call) |  |  | $ | 72.98 |
|  | Floor purchased price (put) |  |  | $ | 56.72 |
|  | Floor sold price (put) |  |  | $ | 46.72 |
2020 Settlement |  |  |
Three-way collars (Oil MMBL) |  |  | 109.8 |
| Average price per barrel (Brent oil pricing) |  |  |
|  | Ceiling sold price (call) |  |  | $ | 74.09 |
|  | Floor purchased price (put) |  |  | $ | 55.00 |
|  | Floor sold price (put) |  |  | $ | 45.00 |
2021 Settlement |  |  |
Call Options sold (Oil MMBL) |  |  | 109.5 |
| Average price per barrel (Brent oil pricing) |  |  |
|  | Ceiling sold price (call) |  |  | $ | 74.09 |
Occidental Interest Rate Swaps (Excluding WES Midstream) Occidental acquired interest rate swap contracts in the Merger. The contracts lock in a fixed interest rate in exchange for a floating interest rate indexed to three-month London Inter-Bank Offered Rate (LIBOR) throughout the reference period. Net gains and losses associated with interest rate derivative instruments not designated as hedging instruments are recognized currently in losses on interest rate swaps and warrants, net. Occidental had the following outstanding interest rate swaps at September 30, 2019:
millions except percentages |  |  |  | Mandatory |  | Weighted-Average
Notional Principal Amount |  | Reference Period |  | Termination Date |  | Interest Rate
$ | 125 |  |  |  | September 2016 - 2046 |  | October 2019 |  | 6.782 | %
$ | 550 |  |  |  | September 2016 - 2046 |  | September 2020 |  | 6.418 | %
$ | 125 |  |  |  | September 2016 - 2046 |  | September 2022 |  | 6.835 | %
$ | 100 |  |  |  | September 2017 - 2047 |  | September 2020 |  | 6.891 | %
$ | 250 |  |  |  | September 2017 - 2047 |  | September 2021 |  | 6.570 | %
$ | 450 |  |  |  | September 2017 - 2047 |  | September 2023 |  | 6.445 | %
Depending on market conditions, liability-management actions or other factors, Occidental may enter into offsetting interest rate swap positions or settle or amend certain or all of the currently outstanding interest rate swaps. Derivative settlements and collateralization are classified as cash flows from operating activities unless the derivatives contain an other-than-insignificant financing element, in which case the settlements and collateralization are classified as cash flows from financing activities. As a result of prior extensions of reference-period start dates without settlement of the related interest rate derivative obligations, the interest rate derivatives in Occidental's portfolio contain an other-than-insignificant financing element, and therefore, any settlements, collateralization or cash payments for amendments related to these extended interest rate derivatives are classified as cash flows from financing activities. Net cash payments related to settlements and amendments of interest rate swap agreements were $43 million during the period from August 8, 2019, through September 30, 2019. Subsequent to September 30, 2019, Occidental settled interest rate swaps that had a mandatory termination date of October 11, 2019, and a notional value of $125 million. WES Interest Rate Swaps In the Merger, Occidental also acquired interest rate swap contracts held by WES. WES exchanged a floating interest rate indexed to the three-month LIBOR for a fixed interest rate. Net gains and losses associated with these interest rate derivative instruments are recognized currently in losses on interest rate swaps and warrants, net. The following interest rate swaps were outstanding at September 30, 2019:
millions except percentages |  |  |  | Mandatory |  | Weighted-Average
Notional Principal Amount |  | Reference Period |  | Termination Date |  | Interest Rate
$ | 375 |  |  |  | December 2019 - 2024 |  | December 2019 |  | 2.662 | %
$ | 375 |  |  |  | December 2019 - 2029 |  | December 2019 |  | 2.802 | %
$ | 375 |  |  |  | December 2019 - 2049 |  | December 2019 |  | 2.885 | %
Depending on market conditions, liability-management actions, or other factors, WES may settle or amend certain or all of the currently outstanding interest rate swaps. Marketing Derivatives Occidental's marketing derivative instruments not designated as hedges are physical and financial forward contracts which typically settle within three months. A substantial majority of Occidental's physically settled derivative contracts are index-based and carry no mark-to-market valuation in earnings. These instruments settle at a weighted-average contract price of $58.39 per barrel and $2.22 per thousand cubic feet (Mcf) for crude oil and natural gas, respectively, at September 30, 2019. The weighted-average contract price was $58.81 per barrel and $3.18 per Mcf for crude oil and natural gas, respectively, at December 31, 2018. Net gains and losses associated with marketing derivative instruments not designated as hedging instruments are recognized currently in net sales. The following table summarizes net long/(short) volumes associated with the outstanding marketing commodity derivatives not designated as hedging instruments as of September 30, 2019, and December 31, 2018.
|  | 2019 |  | 2018
Crude Oil Commodity Contracts |  |  |  |
Volume (MMBL) |  | 36 |  |  | 61 |
Natural Gas Commodity Contracts |  |  |  |
Volume (Bcf) |  | (128 | ) |  | (142 | )
The Warrant The Warrant issued with the Preferred Stock in connection with the Merger is exercisable at the holder's option, in whole or in part, until the first anniversary of the date on which no shares of Preferred Stock remain outstanding at which point the Warrant expires. The holder of the Warrant may require net cash settlement if certain shareholder and regulatory approvals to issue Occidental common stock are not obtained on a timely basis. The initial fair value of the Warrant, $188 million, was measured at the date of the Merger using the Black Scholes option model. The following inputs were used in the Black Scholes option model; the expected life is based on the estimated term of the Warrant, the volatility factor is based on historical volatilities of Occidental common stock, and the call option price for Occidental common stock at $62.50. The fair value of the Warrant is remeasured each reporting period based on changes in the inputs above. Derivatives Designated as Hedging Instruments Net gains and losses attributable to derivative instruments subject to cash flow hedge accounting reside in accumulated other comprehensive loss and are reclassified to earnings as the transactions to which the derivatives relate are recognized in earnings. Cash Flow Hedges Occidental’s marketing operations store natural gas purchased from third parties at Occidental’s leased storage facilities. Derivative instruments are used to fix margins on the future sales of the stored volumes. As of September 30, 2019, Occidental had approximately 5 billion cubic feet (Bcf) of natural gas held in storage, and had cash flow hedges for the forecast sales, to be settled by physical delivery, of approximately 3 Bcf of stored natural gas. As of December 31, 2018, Occidental had approximately 5 Bcf of natural gas held in storage, and had cash flow hedges for the forecasted sales, to be settled by physical delivery, of approximately 4 Bcf of stored natural gas. The fair value of the cash flow hedges associated with stored natural gas was immaterial at September 30, 2019 and December 31, 2018. The ineffective portion recognized through earnings was immaterial for the nine months ended September 30, 2019, and the year ended December 31, 2018. In June 2019, in anticipation of issuing debt in the third quarter to partially finance the cash portion of the Merger consideration, Occidental entered into a series of U.S. treasury locks which were designated as cash flow hedges. In August 2019, the U.S. treasury locks were unwound with the issuance of the $13.0 billion new senior unsecured notes, and the resulting after-tax accumulated other comprehensive loss of $125 million will be amortized to interest expense over the life of the underlying senior notes. Fair Value of Derivatives The following tables present the fair values of Occidental’s outstanding derivatives. Fair values are presented at gross amounts, including when the derivatives are subject to master netting arrangements, and are presented on a net basis in the Consolidated Condensed Balance Sheets.
Balance Sheet Classification |  | Fair-Value Measurements Using |  | Netting (a) |  | Total Fair Value
millions |  | Level 1 |  | Level 2 |  | Level 3 |  |
September 30, 2019 |  |  |  |  |  |  |  |  |  |
Oil Collars and Calls |  |  |  |  |  |  |  |  |  |
Other current assets |  | $ | — |  |  | $ | 217 |  |  | $ | — |  |  | $ | (4 | ) |  | $ | 213 |
Accrued liabilities |  | — |  |  | 3 |  |  | — |  |  | (3 | ) |  | — |
Deferred credits and other liabilities - other |  | — |  |  | 97 |  |  | — |  |  | — |  |  | 97 |
Marketing Derivatives |  |  |  |  |  |  |  |  |  |
Other current assets |  | 838 |  |  | 97 |  |  | — |  |  | (861 | ) |  | 74 |
Long-term receivables and other assets, net |  | 70 |  |  | 12 |  |  | — |  |  | (70 | ) |  | 12 |
Accrued liabilities |  | 827 |  |  | 45 |  |  | — |  |  | (861 | ) |  | 11 |
Deferred credits and other liabilities - other |  | 71 |  |  | 1 |  |  | — |  |  | (70 | ) |  | 2 |
Interest Rate Swaps (excluding WES) |  |  |  |  |  |  |  |  |  |
Other current assets |  | — |  |  | 14 |  |  | — |  |  | — |  |  | 14 |
Long-term receivables and other assets, net |  | — |  |  | 13 |  |  | — |  |  | — |  |  | 13 |
Accrued liabilities |  | — |  |  | 882 |  |  | — |  |  | — |  |  | 882 |
Deferred credits and other liabilities - other |  | — |  |  | 879 |  |  | — |  |  | — |  |  | 879 |
WES Interest Rate Swaps |  |  |  |  |  |  |  |  |  |
Accrued liabilities |  | — |  |  | 171 |  |  | — |  |  | — |  |  | 171 |
Warrant |  |  |  |  |  |  |  |  |  |
Deferred credits and other liabilities - other |  | — |  |  | 168 |  |  | — |  |  | — |  |  | 168 |
December 31, 2018 |  |  |  |  |  |  |  |  |  |
Marketing Derivatives |  |  |  |  |  |  |  |  |  |
Other current assets |  | $ | 2,531 |  |  | $ | 110 |  |  | $ | — |  |  | $ | (2,392 | ) |  | $ | 249 |
Long-term receivables and other assets, net |  | 5 |  |  | 9 |  |  | — |  |  | (6 | ) |  | 8 |
Accrued liabilities |  | 2,357 |  |  | 101 |  |  | — |  |  | (2,392 | ) |  | 66 |
Deferred credits and other liabilities - other |  | 6 |  |  | 2 |  |  | — |  |  | (6 | ) |  | 2 |
(a) | These amounts do not include collateral.
As of September 30, 2019, $359 million of collateral has been netted against derivative liabilities related to interest rate swaps. Occidental had $36 million of initial margin deposited with brokers as of September 30, 2019, related to marketing derivatives. As of December 31, 2018, $45 million collateral received has been netted against derivative assets, and collateral posted of $1 million has been netted against derivative liabilities. Occidental had $178 million of initial margin deposited with brokers as of December 31, 2018. Initial margin is included in other current assets in the Consolidated Condensed Balance Sheets and has not been reflected in these derivative fair-value tables. Gains and Losses on Derivatives The following table presents the effect of Occidental's derivative instruments on the Consolidated Condensed Statements of Operations:
Income Statement Classification |  | Three months ended September 30 |  | Nine months ended September 30
millions |  | 2019 |  | 2018 |  | 2019 |  | 2018
Oil Collars and Calls |  |  |  |  |  |  |  |
Net sales |  | $ | 75 |  |  | $ | — |  |  | $ | 75 |  |  | $ | — |
Marketing Derivatives |  |  |  |  |  |  |  |
Net sales |  | 91 |  |  | 36 |  |  | (119 | ) |  | 8 |
Interest Rate Swaps (Excluding WES) |  |  |  |  |  |  |  |
Losses on interest rate swaps and warrants, net |  | (45 | ) |  | — |  |  | (45 | ) |  | — |
Interest Rate Swaps (WES) |  |  |  |  |  |  |  |
Losses on interest rate swaps and warrants, net |  | (8 | ) |  | — |  |  | (8 | ) |  | — |
Warrants |  |  |  |  |  |  |  |
Gains on interest rate swaps and warrants, net |  | 20 |  |  | — |  |  | 20 |  |  | — |
Credit Risk Occidental's counterparty credit risk related to the physical delivery of energy commodities results from its customers' potential inability to meet their settlement commitments. Occidental manages credit risk by selecting counterparties that it believes to be financially strong, by entering into netting arrangements with counterparties and by requiring collateral or other credit risk mitigants, as appropriate. Occidental actively evaluates the creditworthiness of its counterparties, assigns appropriate credit limits and monitors credit exposures against those assigned limits. Occidental also enters into future contracts through regulated exchanges with select clearinghouses and brokers, which are subject to minimal credit risk as a significant portion of these transactions settle on a daily margin basis. Certain over-the-counter derivative instruments contain credit-risk-contingent features, primarily tied to credit ratings for Occidental or its counterparties, which may affect the amount of collateral that each party would need to post. The aggregate fair value of derivative instruments with credit-risk-related contingent features for which a net liability position existed at September 30, 2019 was $1.6 billion (net of $0.3 billion collateral), primarily related to acquired interest-rate swaps, and $68 million (net of $1 million of collateral) existed at December 31, 2018.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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