Derivatives and Concentration of Credit Risk | 9 Months Ended |
Sep. 30, 2014 |
Fair Value Disclosures [Abstract] | ' |
Derivatives and Concentration of Credit Risk | ' |
Derivatives and Concentration of Credit Risk |
Energy Commodity Derivatives |
Risk Management Activities |
We are exposed to market risk from changes in energy commodity prices within our operations. We utilize derivatives to manage exposure to the variability in expected future cash flows from forecasted sales of natural gas, oil and natural gas liquids attributable to commodity price risk. Through December 2011, we elected to designate the majority of our applicable derivative instruments as cash flow hedges. Beginning in 2012, we entered into commodity derivative contracts that continued to serve as economic hedges but were not designated as cash flow hedges for accounting purposes as we elected not to utilize this method of accounting on new derivatives instruments. Remaining commodity derivatives recorded at December 31, 2011 that were designated as cash flow hedges were fully realized by the end of the first quarter of 2013. |
We produce, buy and sell natural gas, crude oil and natural gas liquids at different locations throughout the United States. To reduce exposure to a decrease in revenues from fluctuations in commodity market prices, we enter into futures contracts, swap agreements and financial option contracts to mitigate the price risk on forecasted sales of natural gas, crude oil and natural gas liquids. We have also entered into basis swap agreements to reduce the locational price risk associated with our producing basins. Our financial option contracts are either purchased options, a combination of options that comprise a net purchased option or a zero-cost collar or swaptions. |
We also enter into forward contracts to buy and sell natural gas to maximize the economic value of transportation agreements and storage capacity agreements. To reduce exposure to a decrease in margins from fluctuations in natural gas market prices, we may enter into futures contracts, swap agreements and financial option contracts to mitigate the price risk associated with these contracts. Derivatives for transportation and storage contracts economically hedge the expected cash flows generated by those agreements. |
The following table sets forth the derivative notional volumes that are economic hedges of production volumes, which are included in our commodity derivatives portfolio as of September 30, 2014. |
Derivatives related to production |
| | |
| | | | | | | | | | | | | | | |
Commodity | | Period | | Contract Type (a) | | Location | | Notional Volume (b) | | Weighted Average | | |
Price (c) | | |
Natural Gas | | | | | | | | | | | | |
Natural Gas | | Oct-Dec 2014 | | Fixed Price Swaps | | Henry Hub | | (315 | ) | | $ | 4.19 | | | |
| |
Natural Gas | | Oct-Dec 2014 | | Swaptions | | Henry Hub | | (50 | ) | | $ | 4.24 | | | |
| |
Natural Gas | | Oct-Dec 2014 | | Costless Collars | | Henry Hub | | (190 | ) | | $ 4.04 - 4.66 | | | |
| |
Natural Gas | | Oct-Dec 2014 | | Basis Swaps | | Dominion | | (39 | ) | | $ | (0.73 | ) | | |
Natural Gas | | Oct-Dec 2014 | | Basis Swaps | | NGPL | | (30 | ) | | $ | (0.19 | ) | | |
Natural Gas | | Oct-Dec 2014 | | Basis Swaps | | Rockies | | (143 | ) | | $ | (0.15 | ) | | |
Natural Gas | | Oct-Dec 2014 | | Basis Swaps | | San Juan | | (255 | ) | | $ | (0.15 | ) | | |
Natural Gas | | Oct-Dec 2014 | | Basis Swaps | | SoCal | | (73 | ) | | $ | 0.13 | | | |
| |
Natural Gas | | 2015 | | Fixed Price Swaps | | Henry Hub | | (272 | ) | | $ | 4.31 | | | |
| |
Natural Gas | | 2015 | | Swaptions | | Henry Hub | | (50 | ) | | $ | 4.38 | | | |
| |
Natural Gas | | 2015 | | Costless Collars | | Henry Hub | | (50 | ) | | $ 4.00 - 4.50 | | | |
| |
Natural Gas | | 2015 | | Basis Swaps | | NGPL | | (13 | ) | | $ | (0.16 | ) | | |
Natural Gas | | 2015 | | Basis Swaps | | Rockies | | (150 | ) | | $ | (0.11 | ) | | |
Natural Gas | | 2015 | | Basis Swaps | | San Juan | | (85 | ) | | $ | (0.10 | ) | | |
Natural Gas | | 2015 | | Basis Swaps | | SoCal | | (20 | ) | | $ | 0.18 | | | |
| |
Natural Gas | | 2016 | | Swaptions | | Henry Hub | | (90 | ) | | $ | 4.23 | | | |
| |
Crude Oil | | | | | | | | | | | | |
Crude Oil | | Oct-Dec 2014 | | Fixed Price Swaps | | WTI | | (14,975 | ) | | $ | 96.01 | | | |
| |
Crude Oil | | 2015 | | Fixed Price Swaps | | WTI | | (20,236 | ) | | $ | 94.88 | | | |
| |
Crude Oil | | 2015 | | Swaptions | | WTI | | (8,382 | ) | | $ | 94.9 | | | |
| |
Crude Oil | | 2016 | | Swaptions | | WTI | | (5,250 | ) | | $ | 97.55 | | | |
| |
NGL | | | | | | | | | | | | |
NGL Ethane | | Oct-Dec 2014 | | Fixed Price Swaps | | Mont Belvieu | | (3,261 | ) | | $ | 0.29 | | | |
| |
NGL Propane | | Oct-Dec 2014 | | Fixed Price Swaps | | Mont Belvieu | | (489 | ) | | $ | 1.17 | | | |
| |
NGL Iso Butane | | Oct-Dec 2014 | | Fixed Price Swaps | | Mont Belvieu | | (652 | ) | | $ | 1.37 | | | |
| |
NGL Normal Butane | | Oct-Dec 2014 | | Fixed Price Swaps | | Mont Belvieu | | (652 | ) | | $ | 1.34 | | | |
| |
NGL Natural Gasoline | | Oct-Dec 2014 | | Fixed Price Swaps | | Mont Belvieu | | (1,630 | ) | | $ | 2.06 | | | |
| |
__________ |
| | | | | | | | | | | | | | | |
(a) | Derivatives related to crude oil production are business day average swaps, basis swaps and swaptions. The derivatives related to natural gas production are fixed price swaps, basis swaps, swaptions and costless collars. The derivatives related to natural gas liquids are fixed price swaps. In connection with several natural gas and crude oil swaps entered into, we granted swaptions to the swap counterparties in exchange for receiving premium hedged prices on the natural gas and crude oil swaps. These swaptions grant the counterparty the option to enter into future swaps with us. | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(b) | Natural gas volumes are reported in BBtu/day, crude oil volumes are reported in Bbl/day, and natural gas liquids are reported in Bbl/day. | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(c) | The weighted average price for natural gas is reported in $/MMBtu, the crude oil price is reported in $/Bbl and natural gas liquids are reported in $/Gallon. All natural gas basis swaps are based on a differential to Henry Hub. | | | | | | | | | | | | | | |
|
The following table sets forth the derivative notional volumes of the net long (short) positions of derivatives primarily related to storage and transportation contracts, which are included in our commodity derivatives portfolio as of September 30, 2014. |
Derivatives primarily related to storage and transportation |
| | | | |
| | | | | | | | | | | | | | | |
Commodity | | Period | | Contract Type (a) | | Location (b) | | Notional Volume (c) | | Weighted Average | | | | |
Price (d) | | | | |
Natural Gas | | Oct-Dec 2014 | | Fixed Price Swaps | | Multiple | | 8 | | | — | | | | |
| | | |
Natural Gas | | Oct-Dec 2014 | | Basis Swaps | | Multiple | | (31 | ) | | — | | | | |
Natural Gas | | Oct-Dec 2014 | | Index | | Multiple | | (145 | ) | | — | | | | |
Natural Gas | | 2015 | | Fixed Price Swaps | | Multiple | | (11 | ) | | — | | | | |
Natural Gas | | 2015 | | Basis Swaps | | Multiple | | (12 | ) | | — | | | | |
Natural Gas | | 2015 | | Index | | Multiple | | (118 | ) | | — | | | | |
Natural Gas | | 2016 | | Index | | Multiple | | (70 | ) | | — | | | | |
Natural Gas | | 2017+ | | Index | | Multiple | | (478 | ) | | — | | | | |
__________ |
| | | | | | | | | | | | | | | |
(a) | WPX Marketing enters into exchange traded fixed price and basis swaps, over the counter fixed price and basis swaps, physical fixed price transactions and transactions with an index component. | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(b) | WPX Marketing transacts at multiple locations primarily around our core assets to maximize the economic value of our transportation, storage and asset management agreements. | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(c) | Natural gas volumes are reported in BBtu/day, crude oil volumes are reported in Bbl/day, and natural gas liquids are reported in Bbl/day. | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(d) | The weighted average price is not reported since the notional volumes represent a net position comprised of buys and sells with positive and negative transaction prices. | | | | | | | | | | | | | | |
Fair values and gains (losses) |
The following table presents the fair value of energy commodity derivatives. Our derivatives are presented as separate line items in our Consolidated Balance Sheets as current and noncurrent derivative assets and liabilities. Derivatives are classified as current or noncurrent based on the contractual timing of expected future net cash flows of individual contracts. The expected future net cash flows for derivatives classified as current are expected to occur within the next 12 months. The fair value amounts are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements. Further, the amounts below do not include cash held on deposit in margin accounts that we have received or remitted to collateralize certain derivative positions. |
|
| | | | | | | | | | | | | | | |
| 30-Sep-14 | | 31-Dec-13 |
| Assets | | Liabilities | | Assets | | Liabilities |
| (Millions) |
Derivatives related to production not designated as hedging instruments | $ | 110 | | | $ | 26 | | | $ | 26 | | | $ | 39 | |
|
Derivatives related to physical marketing agreements not designated as hedging instruments | 19 | | | 61 | | | 31 | | | 83 | |
|
Total derivatives not designated as hedging instruments | $ | 129 | | | $ | 87 | | | $ | 57 | | | $ | 122 | |
|
|
During the first nine months of 2013, we reclassified $5 million of net gain on derivatives designated as cash flow hedges from accumulated other comprehensive income (loss) into income. These gains primarily represent realized gains on derivatives designated as hedges of our production and are reflected in natural gas sales. |
There were no gains or losses recognized in income as a result of excluding amounts from the assessment of hedge effectiveness. |
The following table presents the net gain (loss) related to our energy commodity derivatives. |
|
| | | | | | | | | | | | | | | |
| Three months | | Nine months |
ended September 30, | ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (Millions) |
Gain (loss) from derivatives related to production not designated as hedging instruments (a) | $ | 150 | | | $ | (18 | ) | | $ | 40 | | | $ | (29 | ) |
|
Gain (loss) from derivatives related to physical marketing agreements not designated as hedging instruments (b) | (2 | ) | | 3 | | | (104 | ) | | (2 | ) |
|
Net gain (loss) on derivatives not designated as hedges | $ | 148 | | | $ | (15 | ) | | $ | (64 | ) | | $ | (31 | ) |
|
__________ |
| | | | | | | | | | | | | | | |
(a) | Includes receipts totaling $10 million and $1 million for settlements of derivatives during the three months ended September 30, 2014 and 2013, respectively; and payments totaling $57 million and $14 million for the nine months ended September 30, 2014 and 2013, respectively. | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(b) | Includes receipts totaling $5 million for settlements of derivatives during the three months ended September 30, 2014 and payments totaling $2 million during the three months ended September 30, 2013; and payments totaling $114 million for the nine months ended September 30, 2014 and receipts of $1 million for the nine months ended September 30, 2013. | | | | | | | | | | | | | | |
The cash flow impact of our derivative activities is presented in the Consolidated Statements of Cash Flows as changes in current and noncurrent derivative assets and liabilities. |
Offsetting of derivative assets and liabilities |
The following table presents our gross and net derivative assets and liabilities. |
|
| | | | | | | | | | | | | | | |
| Gross Amount Presented on Balance Sheet | | Netting Adjustments (a) | | Cash Collateral Posted (Received) | | Net Amount |
30-Sep-14 | (Millions) |
Derivative assets with right of offset or master netting agreements | $ | 129 | | | $ | (43 | ) | | $ | — | | | $ | 86 | |
|
Derivative liabilities with right of offset or master netting agreements | $ | (87 | ) | | $ | 43 | | | $ | 43 | | | $ | (1 | ) |
|
| | | | | | | |
31-Dec-13 | | | | | | | |
Derivative assets with right of offset or master netting agreements | $ | 57 | | | $ | (50 | ) | | $ | — | | | $ | 7 | |
|
Derivative liabilities with right of offset or master netting agreements | $ | (122 | ) | | $ | 50 | | | $ | 52 | | | $ | (20 | ) |
|
__________ |
| | | | | | | | | | | | | | | |
(a) | With all of our financial trading counterparties, we have agreements in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements. Additionally, we have negotiated master netting agreements with some of our counterparties. These master netting agreements allow multiple entities that have multiple underlying agreements the ability to net derivative assets and derivative liabilities at settlement or in the event of a default or a termination under one or more of the underlying contracts. | | | | | | | | | | | | | | |
Credit-risk-related features |
Certain of our derivative contracts contain credit-risk-related provisions that would require us, under certain events, to post additional collateral in support of our net derivative liability positions. These credit-risk-related provisions require us to post collateral in the form of cash or letters of credit when our net liability positions exceed an established credit threshold. The credit thresholds are typically based on our senior unsecured debt ratings from Standard and Poor’s and/or Moody’s Investment Services. Under these contracts, a credit ratings decline would lower our credit thresholds, thus requiring us to post additional collateral. We also have contracts that contain adequate assurance provisions giving the counterparty the right to request collateral in an amount that corresponds to the outstanding net liability. |
As of September 30, 2014, we had collateral totaling $51 million posted to derivative counterparties, which included $8 million of initial margin to clearinghouses or exchanges to enter into positions and $43 million of maintenance margin for changes in the fair value of those positions, to support the aggregate fair value of our net $44 million derivative liability position (reflecting master netting arrangements in place with certain counterparties), which includes a reduction of less than $1 million to our liability balance for our own nonperformance risk. The additional collateral that we would have been required to post, assuming our credit thresholds were eliminated and a call for adequate assurance under the credit risk provisions in our derivative contracts was triggered, was $1 million at September 30, 2014. |
Concentration of Credit Risk |
Cash equivalents |
Our cash equivalents are primarily invested in funds with high-quality, short-term securities and instruments that are issued or guaranteed by the U.S. government. |
|
Derivative assets and liabilities |
We have a risk of loss from counterparties not performing pursuant to the terms of their contractual obligations. Counterparty performance can be influenced by changes in the economy and regulatory issues, among other factors. Risk of loss is impacted by several factors, including credit considerations and the regulatory environment in which a counterparty transacts. We attempt to minimize credit-risk exposure to derivative counterparties and brokers through formal credit policies, consideration of credit ratings from public ratings agencies, monitoring procedures, master netting agreements and collateral support under certain circumstances. Collateral support could include letters of credit, payment under margin agreements and guarantees of payment by credit worthy parties. |
|
We also enter into master netting agreements to mitigate counterparty performance and credit risk. During 2014 and 2013, we did not incur any significant losses due to counterparty bankruptcy filings. We assess our credit exposure on a net basis to reflect master netting agreements in place with certain counterparties. We offset our credit exposure to each counterparty with amounts we owe the counterparty under derivative contracts. |
|
The gross and net credit exposure from our derivative contracts as of September 30, 2014, is summarized as follows: |
|
| | | | | | | | | | | | | | | |
Counterparty Type | Gross Investment | | Gross Total | | Net Investment | | Net Total |
Grade (a) | Grade (a) |
| (Millions) |
Financial institutions | $ | 128 | | | $ | 128 | | | $ | 85 | | | $ | 85 | |
|
Utilities | — | | | 1 | | | — | | | 1 | |
|
| $ | 128 | | | 129 | | | $ | 85 | | | 86 | |
|
Credit reserves | | | — | | | | | — | |
|
Credit exposure from derivatives | | | $ | 129 | | | | | $ | 86 | |
|
|
__________ |
| | | | | | | | | | | | | | | |
(a) | We determine investment grade primarily using publicly available credit ratings. We include counterparties with a minimum Standard & Poor’s rating of BBB- or Moody’s Investors Service rating of Baa3 in investment grade. | | | | | | | | | | | | | | |
|
Our nine largest net counterparty positions represent approximately 94 percent of our gross credit exposure from derivatives and are all with investment grade counterparties. Under our marginless hedging agreements with key banks, neither party is required to provide collateral support related to hedging activities. |
Other |
The customer margin deposits payable as of September 30, 2014 related to our commodity agreements. Collateral support for our commodity agreements could also include letters of credit and guarantees of payment by credit worthy parties. |