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DERIVATIVES | 12 Months Ended
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Dec. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVES |
NOTE 9 - DERIVATIVES
OBJECTIVE AND STRATEGY Occidental uses a variety of derivative financial instruments and physical contracts to manage its exposure to commodity-price fluctuations, interest rate risks, transportation commitments, and to fix margins on the future sale of stored commodity volumes. 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. See Note 1 - Summary of Significant Accounting Policies for Occidental’s accounting policy on derivatives. DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS As of December 31, 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 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 2019, Occidental entered into three-way costless collar derivative instruments for 2020 along with 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 terms for the ceiling price that Occidental will receive for the contracted commodity volumes in 2020. Net gains and losses associated with collars and calls are recognized currently in net sales. Occidental had the following collars and calls outstanding at December 31, 2019:
Collars and Calls, not designated as hedges |  |
2020 Settlement |  |
Three-way collars (oil MMBBL) |  | 128.1 |
| Volume weighted average price per barrel (Brent oil pricing) |  |
|  | Ceiling sold price (call) |  | $ | 74.16 |
|  | Floor purchased price (put) |  | $ | 55.00 |
|  | Floor sold price (put) |  | $ | 45.00 |
2021 Settlement |  |
Call options sold (oil MMBBL) |  | 127.8 |
| Volume weighted average price per barrel (Brent oil pricing) |  |
|  | Ceiling sold price (call) |  | $ | 74.16 |
INTEREST RATE SWAPS Occidental acquired interest rate swap contracts in the Acquisition. 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. Occidental also acquired interest rate swap contracts held by WES, which were settled as of December 31, 2019. Net gains and losses associated with interest rate derivative instruments not designated as hedging instruments are recognized currently in gains (losses) on interest rate swaps and warrants, net. Occidental had the following outstanding interest rate swaps at December 31, 2019:
millions except percentages |  |  |  | Mandatory |  | Weighted-Average |
Notional Principal Amount |  | Reference Period |  | Termination Date |  | Interest Rate |
$ | 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. Occidental settled interest rate swaps with a notional value of $125 million in October 2019. In January and February 2020, Occidental extended September 2020 mandatory termination dates to September 2021 and September 2022 for swaps with a notional value of $500 million and $150 million, respectively. 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. Due to the liability position of the interest rate derivatives at the date of the Acquisition, the interest rate derivatives in Occidental’s portfolio contain an other-than-insignificant financing element, and therefore, any settlements, collateralization or cash payments related to interest rate derivatives are classified as cash flow from financing activities. Net cash receipts related to settlements, and collateralization of interest rate swap agreements were $120 million during the period from August 8, 2019 through December 31, 2019. 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 $60.60 per barrel and $2.17 per thousand cubic feet (Mcf) for oil and natural gas, respectively, at December 31, 2019. The weighted-average contract price was $58.81 per barrel and $3.18 per Mcf for 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 December 31, 2019, and 2018:
|  | 2019 |  |  | 2018 |
Oil Commodity Contracts |  |  |  |
Volume (MMBBL) |  | 55 |  |  | 61 |
Natural gas commodity contracts |  |  |  |
Volume (Bcf) |  | (128 | ) |  | (142 | )
THE WARRANT The Warrant issued with the Preferred Stock in connection with the Acquisition 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 Acquisition 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. Occidental occasionally elects cash flow hedge accounting for derivative instruments which are used to fix margins on the future sales of the stored volumes. The amount of cash flow hedges related to stored gas, including the ineffective portion, was immaterial for the years ended December 31, 2019, and 2018. In June 2019, in anticipation of issuing debt in the third quarter to partially finance the cash portion of the Acquisition 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 Occidental has categorized its assets and liabilities that are measured at fair value in a three-level fair value hierarchy, based on the inputs to the valuation techniques: Level 1 – using quoted prices in active markets for the assets or liabilities; Level 2 – using observable inputs other than quoted prices for the assets or liabilities; and Level 3 – using unobservable inputs. Transfers between levels, if any, are reported at the end of each reporting period. The following table presents the fair values of Occidental’s outstanding derivatives. Fair values are presented at gross amounts below, including when derivatives are subject to netting arrangements, and are presented on a net basis in the Consolidated Balance Sheets.
millions |  | Fair Value Measurements Using |  |  |  | Total Fair Value |
Balance Sheet Classification |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Netting (a) |  |
December 31, 2019 |  |  |  |  |  |  |  |  |  |
Oil Collars and Calls |  |  |  |  |  |  |  |  |  |
Other current assets |  | $ | — |  |  | $ | 92 |  |  | $ | — |  |  | $ | — |  |  | $ | 92 |
Deferred credits and other liabilities - other |  | — |  |  | (160 | ) |  | — |  |  | — |  |  | (160 | )
Marketing Derivatives |  |  |  |  |  |  |  |  |  |
Other current assets |  | 945 |  |  | 79 |  |  | — |  |  | (973 | ) |  | 51 |
Long-term receivables and other assets, net |  | 4 |  |  | 12 |  |  | — |  |  | (4 | ) |  | 12 |
Accrued liabilities |  | (1,008 | ) |  | (44 | ) |  | — |  |  | 973 |  |  | (79 | )
Deferred credits and other liabilities - other |  | (4 | ) |  | (1 | ) |  | — |  |  | 4 |  |  | (1 | )
Interest Rate Swaps |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other current assets |  | — |  |  | 5 |  |  | — |  |  | — |  |  | 5 |
Long-term receivables and other assets, net |  | — |  |  | 5 |  |  | — |  |  | — |  |  | 5 |
Accrued liabilities |  | — |  |  | (657 | ) |  | — |  |  | — |  |  | (657 | )
Deferred credits and other liabilities - other |  | — |  |  | (776 | ) |  | — |  |  | — |  |  | (776 | )
Warrant |  |  |  |  |  |  |  |  |  |
Deferred credits and other liabilities - other |  | — |  |  | (107 | ) |  | — |  |  | — |  |  | (107 | )
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 December 31, 2019, $104 million of collateral has been netted against derivative liabilities related to interest rate swaps. Occidental had $65 million and $54 million of initial margin deposited with brokers as of December 31, 2019 and 2018, respectively, related to marketing derivatives.
GAINS AND LOSSES ON DERIVATIVES The following table presents gains and (losses) related to Occidental’s derivative instruments on the Consolidated Statements of Operations:
millions |  | December 31,
Income Statement Classification |  | 2019 |  |  | 2018 |  |  | 2017 |
Oil Collars and Calls |  |  |  |  |  |
Net sales |  | $ | (107 | ) |  | $ | — |  |  | $ | — |
Marketing Derivatives |  |  |  |  |  |
Net sales (a) |  | 1,804 |  |  | 2,254 |  |  | (138 | )
Interest Rate Swaps (Excluding WES) |  |  |  |  |  |
Gain on interest rate swaps and warrants, net |  | 122 |  |  | — |  |  | — |
Interest Rate Swaps (WES) |  |  |  |  |  |
Gain on interest rate swaps and warrants, net |  | 30 |  |  | — |  |  | — |
Warrant |  |  |  |  |  |
Gain on interest rate swaps and warrants, net |  | 81 |  |  | — |  |  | — |
(a) | Included derivative and non-derivative marketing activity.
CREDIT RISK The majority of Occidental’s counterparty credit risk is related to the physical delivery of energy commodities to its customers and their 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 of Occidental’s OTC 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-contingent features for which a net liability position existed at December 31, 2019 was $787 million (net of $169 million 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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