NOTE 9 DERIVATIVES

General

We use a variety of derivative instruments to protect our cash flow, operating margin and capital program from the cyclical nature of commodity prices. These derivatives are intended to help us maintain adequate liquidity and improve our ability to comply with the covenants of our Credit Facilities in case of price deterioration. We will continue to be strategic and opportunistic in implementing our hedging program as market conditions permit. Derivatives are carried at fair value and on a net basis when a legal right of offset exists with the same counterparty.

Commodity Contracts

As of September 30, 2018, we did not have any derivatives designated as hedges. Unless otherwise indicated, we use the term "hedge" to describe derivative instruments that are designed to achieve our hedging program goals, even though they are not necessarily accounted for as cash-flow or fair-value hedges. As part of our hedging program, we entered into a number of derivative transactions that resulted in the following Brent-based crude oil contracts as of September 30, 2018:


	Q4		Q1			Q2		Q3		Q4
	2018		2019			2019		2019		2019
Sold Calls:
Barrels per day		15,000		15,000			5,000		—		—
Weighted-average price per barrel	$	58.83	$	66.15		$	68.45	$	—	$	—

Purchased Calls:
Barrels per day		—		2,000			—		—		—
Weighted-average price per barrel	$	—	$	71.00		$	—	$	—	$	—

Purchased Puts:
Barrels per day		—		33,000			35,000		30,000		20,000
Weighted-average price per barrel	$	—	$	63.48		$	68.29	$	71.67	$	75.00

Sold Puts:
Barrels per day		19,000		35,000			30,000		30,000		20,000
Weighted-average price per barrel	$	45.00	$	50.71		$	55.00	$	56.67	$	60.00

Swaps:
Barrels per day		48,000		7,000	(1)		—		—		—
Weighted-average price per barrel	$	60.35	$	67.71		$	—	$	—	$	—

Note: Additional hedges for 2019 and 2020 were put in place after September 30, 2018 that are not included in the table above.

(1)

Certain of our counterparties have options to increase swap volumes by up to 5,000 barrels per day at a weighted-average Brent price of $70.00 for the first quarter of 2019.

The BSP JV entered into crude oil derivatives that are included in our consolidated results but not in the above table. The hedges entered into by the BSP JV could affect the timing of the redemption of the JV interest. The BSP JV sold calls for up to approximately 1,000 barrels per day at a weighted-average price per barrel of $60.00 per barrel for 2018 through 2020. The BSP JV purchased puts for up to approximately 2,000 barrels per day at a weighted-average price per barrel of approximately $50.00 for 2018 through 2021. This joint venture also entered into natural gas swaps for insignificant volumes for periods through May 2021.

The outcomes of the derivative instruments are as follows:

Sold calls – we make settlement payments for prices above the indicated weighted-average price per barrel.

Purchased calls – we receive settlement payments for prices above the indicated weighted-average price per barrel.

Purchased puts – we receive settlement payments for prices below the indicated weighted-average price per barrel.

Sold puts – we make settlement payments for prices below the indicated weighted-average price per barrel.

From time to time, we may use combinations of these and other derivative instruments to increase the efficacy of our commodity hedging program.

Interest-Rate Contracts

In May 2018, we entered into derivative contracts that limit our interest rate exposure with respect to $1.3 billion of our variable-rate indebtedness. These interest-rate contracts reset monthly and require the counterparties to pay any excess interest owed on such amount in the event the one-month LIBOR exceeds 2.75% for any monthly period prior to May 4, 2021.

Fair Value of Derivatives

Our derivative contracts are measured at fair value using industry-standard models with various inputs, including quoted forward prices, and are classified as Level 2 in the required fair value hierarchy for the periods presented. We recognize fair value changes on derivative instruments in each reporting period. The changes in fair value result from new positions and settlements that occurred during the period, as well as the relationship between contract prices or interest rates and the associated forward curves.

Commodity Contracts

The following table presents the fair values (at gross and net) of our outstanding commodity derivatives as of September 30, 2018 and December 31, 2017 (in millions):


September 30, 2018
	Gross		Gross		Net Fair Value
	Amounts		Amounts		Presented in
	Recognized at		Offset in the		the Balance
Balance Sheet Classification	Fair Value		Balance Sheet		Sheet
Assets:
Other current assets	$	34	$	—	$	34
Other assets		13		—		13
Liabilities:
Accrued liabilities		(191)		—		(191)
Other long-term liabilities		(9)		—		(9)
Total derivatives	$	(153)	$	—	$	(153)


December 31, 2017
	Gross		Gross		Net Fair Value
	Amounts		Amounts		Presented in
	Recognized at		Offset in the		the Balance
Balance Sheet Classification	Fair Value		Balance Sheet		Sheet
Assets:
Other current assets	$	39	$	(16)	$	23
Other assets		1		—		1
Liabilities:
Accrued liabilities		(170)		16		(154)
Other long-term liabilities		(3)		—		(3)
Total derivatives	$	(133)	$	—	$	(133)

Interest-Rate Contracts

As of September 30, 2018, we reported the fair value of our interest rate derivatives of $9 million in other assets on our condensed consolidated balance sheets. For the three months ended September 30, 2018, we reported a $1 million gain on these contracts in other non-operating expense on our condensed consolidated statements of operations.