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Derivatives | 9 Months Ended
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Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives |
NOTE 6 - DERIVATIVES
Occidental uses a variety of derivative financial instruments and physical contracts to manage its exposure to commodity price fluctuations, interest rate risks and 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. DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS As of September 30, 2020, Occidental’s derivatives not designated as hedges consist of three-way oil collars and call options, natural gas collars, interest rate swaps and marketing derivatives. 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. 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 oil 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. Occidental received cash of $643 million associated with the oil collars in the nine months ended September 30, 2020. In September 2020, Occidental entered into two-way collar derivative instruments for 2021 to manage its near-term exposure to cash-flow variability from natural gas commodity price risks. A two-way collar is a combination of two options: a sold call and a purchased 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. Net gains and losses associated with collars and calls are recognized in net sales. Occidental had the following collars and calls outstanding at September 30, 2020:
Collars and Calls, not designated as hedges |
2020 Settlement - oil |
Three-way collars (Oil MMBBL) | 32.2 |
| 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 - oil |
Call options sold (Oil MMBBL) | 127.8 |
| Average price per barrel (Brent oil pricing) |
|  | Ceiling sold price (call) | $ | 74.16 |
2021 Settlement - natural gas |
Natural Gas Collars (millions of MMBTU) | 182.5 |
| Volume weighted average price per MMBTU (NYMEX) |
|  | Ceiling sold price (call) | $ | 3.61 |
|  | Floor purchased price (put) | $ | 2.50 |
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 InterBank 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 gains (losses) on interest rate swaps and warrants, net. Occidental had the following outstanding interest rate swaps at September 30, 2020:
millions, except percentages |  |  |  | Mandatory |  | Weighted-Average
Notional Principal Amount |  | Reference Period |  | Termination Date |  | Interest Rate
$ | 400 |  |  |  | September 2016 - 2046 |  | September 2021 |  | 6.348 | %
$ | 350 |  |  |  | September 2017 - 2047 |  | September 2021 |  | 6.662 | %
$ | 275 |  |  |  | September 2016 - 2046 |  | September 2022 |  | 6.709 | %
$ | 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. In the first quarter of 2020, Occidental extended all 2020 mandatory termination dates to 2021 or thereafter. In addition to the interest rate swaps, Occidental has approximately $1.1 billion of debt referenced to LIBOR that matures after 2021. It is expected that a number of private-sector banks currently reporting information used to set LIBOR will stop doing so after 2021. Occidental is currently evaluating the potential effect to its debt and derivative obligations due to the transition from LIBOR to another benchmark rate. The effect to our LIBOR indexed contracts will depend on the alternative reference rate selected by our counterparties and the contracts' relative values at the time of the transition. Derivative settlements and collateralization are classified as cash flow 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 payments related to settlements were $47 million and $94 million for the three and nine months ended September 30, 2020, respectively. Collateral with respect to interest rate swap agreements was returned (paid) in the amount of $37 million and $(283) million for the three and nine months ended September 30, 2020, respectively. 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 settled at a weighted average contract price of $41.73 per barrel and $2.36 per thousand cubic feet (Mcf) for crude oil and natural gas, respectively, at September 30, 2020. The weighted-average contract price was $60.60 per barrel and $2.17 per Mcf for crude oil and natural gas, respectively, at December 31, 2019. 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.
|  | September 30, 2020 |  | December 31, 2019
Crude Oil Commodity Contracts |  |  |  |
Volume (MMBBL) |  | (5) |  |  | 55 |
Natural Gas Commodity Contracts |  |  |  |
Volume (Bcf) |  | (111) |  |  | (128) |
THE BERKSHIRE WARRANTS Warrants for 80 million shares of Occidental stock, with an initial exercise price of $62.50, were issued in connection with the financing of the Acquisition (the Berkshire Warrants). The Berkshire Warrants are 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 time the Berkshire Warrants expire. The holders of the Berkshire Warrants could have required net cash settlement if certain shareholder and regulatory approvals to issue shares of Occidental's common stock underlying the Berkshire Warrants were not obtained. Prior to these approvals, the fair value of the Berkshire Warrants was remeasured each reporting date with gains and losses being recorded on the income statement. At Occidental's May 29, 2020 annual shareholders meeting, all remaining approvals were obtained and the Berkshire Warrants can no longer be cash settled. Upon these approvals, the fair value of the Berkshire Warrants was remeasured at May 29, 2020, using the Black-Scholes option model. The reclassification from liabilities to "Additional paid-in capital" was $103 million. The following inputs were used in the Black-Scholes option model: the expected life of the Berkshire Warrants, a volatility factor and the exercise price. The expected life is based on the estimated term of the Berkshire Warrants, the volatility factor is based on historical volatilities of Occidental common stock, and the initial exercise price of $62.50. The Berkshire Warrants contain an anti-dilution provision that adjusts the exercise price and the number of shares of Occidental's common stock issuable on exercise upon the occurrence of certain distributions to common shareholders. On June 26, 2020, Occidental's Board of Directors declared a distribution to its common shareholders of warrants to purchase additional shares of common stock, see Note 13 - Earnings Per Share and Stockholders' Equity. This distribution to common shareholders resulted in an anti-dilution adjustment to the Berkshire Warrants, which lowered its exercise price to $59.624 and increased the number of shares of Occidental's common stock issuable on exercise of the Berkshire Warrants by approximately 3.9 million shares. 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, 2020 and December 31, 2019, cash flow hedges were immaterial. FAIR VALUE OF DERIVATIVES The following tables present the fair values of Occidental’s outstanding derivatives. Fair values are presented at gross amounts below, including when the derivatives are subject to master netting arrangements, and are presented on a net basis in the Consolidated Condensed Balance Sheets.
millions | Fair Value Measurements Using |  | Netting (a) |  | Total Fair Value
Balance Sheet Classifications | Level 1 |  | Level 2 |  | Level 3 |  |
September 30, 2020 |  |  |  |  |  |  |  |  |
Collars and Call Options |  |  |  |  |  |  |  |  |
Other current assets | $ | — |  |  | $ | 269 |  |  | $ | — |  |  | $ | — |  |  | $ | 269 |
Deferred credits and other liabilities - other | — |  |  | (18) |  |  | — |  |  | — |  |  | (18) |
Marketing Derivatives |  |  |  |  |  |  |  |  |
Other current assets | 1,162 |  |  | 37 |  |  | — |  |  | (1,194) |  |  | 5 |
Long-term receivables and other assets, net | 77 |  |  | 2 |  |  | — |  |  | (77) |  |  | 2 |
Accrued liabilities | (1,180) |  |  | (49) |  |  | — |  |  | 1,194 |  |  | (35) |
Deferred credits and other liabilities - other | (77) |  |  | — |  |  | — |  |  | 77 |  |  | — |
Interest Rate Swaps |  |  |  |  |  |  |  |  |
Accrued liabilities | — |  |  | (1,011) |  |  | — |  |  | — |  |  | (1,011) |
Deferred credits and other liabilities - other | — |  |  | (894) |  |  | — |  |  | — |  |  | (894) |
December 31, 2019 |  |  |  |  |  |  |  |  |
Collars and Call Options |  |  |  |  |  |  |  |  |
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) |
Berkshire Warrants (b) |  |  |  |  |  |  |  |  |
Deferred credits and other liabilities - other | — |  |  | (107) |  |  | — |  |  | — |  |  | (107) |
(a)These amounts do not include collateral. (b)Berkshire Warrants were reclassified to equity on May 29, 2020. As of September 30, 2020 and December 31, 2019, $388 million and $104 million of collateral had been netted against derivative liabilities related to interest rate swaps, respectively. As of September 30, 2020, Occidental had deposited $15 million of collateral with brokers related to marketing derivatives, which is netted with derivative liabilities. Initial margin of $65 million was deposited with brokers as of December 31, 2019, related to marketing derivatives. GAINS AND LOSSES ON DERIVATIVES The following table presents the effect of Occidental's derivative instruments on the Consolidated Condensed Statements of Operations:
millions |  | Three months ended September 30, |  | Nine months ended September 30,
Income Statement Classification |  | 2020 |  | 2019 |  | 2020 |  | 2019
Collars and Calls |  |  |  |  |  |  |  |
Net sales |  | $ | 110 |  |  | $ | 75 |  |  | $ | 1,067 |  |  | $ | 75 |
Marketing Derivatives |  |  |  |  |  |  |  |
Net sales (a) |  | (18) |  |  | 91 |  |  | — |  |  | (119) |
Interest Rate Swaps |  |  |  |  |  |  |  |
Gains (losses) on interest rate swaps and warrants, net |  | 88 |  |  | (53) |  |  | (577) |  |  | (53) |
Berkshire Warrants |  |  |  |  |  |  |  |
Gains on interest rate swaps and warrants, net (b) |  | $ | — |  |  | $ | 20 |  |  | $ | 5 |  |  | $ | 20 |
(a) Includes derivative and non-derivative marketing activity. (b) Includes losses and gains on Berkshire Warrants prior to the May 29, 2020 reclassification to equity. 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 of Occidental's 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, 2020, was $35 million (net of $388 million of collateral), of which $12 million related to marketing activity, and the balance related to interest-rate swaps. The aggregate fair value of derivative instruments with credit-risk-related contingent features for which a net liability position existed at December 31, 2019, was $787 million (net of $169 million of collateral)

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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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