v3.20.2
Derivative and Financial Instruments
 9 Months Ended
Sep. 30, 2020
Derivative and Financial Instruments [Abstract]  
Derivative and Financial Instruments
Note 13—Derivative and Financial Instruments
 
We use futures, forwards, swaps and options in various markets to meet our customer needs,
 
capture market
opportunities and manage foreign exchange currency
 
risk.
 
 
Commodity Derivative Instruments
Our commodity business primarily consists
 
of natural gas, crude oil, bitumen, LNG and NGLs.
 
 
Commodity derivative instruments are held at fair
 
value on our consolidated balance sheet.
 
Where these
balances have the right of setoff, they are presented on a
 
net basis.
 
Related cash flows are recorded as
operating activities on our consolidated statement
 
of cash flows.
 
On our consolidated income statement,
realized and unrealized gains and losses are recognized
 
either on a gross basis if directly related to our
 
physical
business or a net basis if held for trading.
 
Gains and losses related to contracts that meet
 
and are designated
with the NPNS exception are recognized upon settlement.
 
We generally apply this exception to eligible crude
contracts.
 
We do not elect hedge accounting for our commodity derivatives.
The following table presents the gross fair values
 
of our commodity derivatives, excluding
 
collateral, and the
line items where they appear on our consolidated
 
balance sheet:
Millions of Dollars
September 30
December 31
2020
2019
Assets
Prepaid expenses and other current assets
$
273
288
Other assets
28
34
Liabilities
Other accruals
258
283
Other liabilities and deferred credits
19
28
The gains (losses) from commodity derivatives
 
incurred, and the line items where they appear on
 
our
consolidated income statement were:
Millions of Dollars
 
Three Months Ended
Nine Months Ended
September 30
September 30
2020
2019
2020
2019
Sales and other operating revenues
$
33
4
30
68
Other income (loss)
(2)
3
3
4
Purchased commodities
(27)
(9)
(29)
(60)
The table below summarizes our material net exposures
 
resulting from outstanding commodity
 
derivative
contracts:
Open Position
Long/(Short)
September 30
December 31
2020
2019
Commodity
Natural gas and power (billions of cubic feet equivalent)
 
Fixed price
(9)
(5)
 
Basis
(50)
(23)
Foreign Currency Exchange Derivatives
We have foreign currency exchange rate risk resulting from international operations.
 
Our foreign currency
exchange derivative activity primarily
 
relates to managing our cash-related foreign currency
 
exchange rate
exposures, such as firm commitments for
 
capital programs or local currency tax payments,
 
dividends and cash
returns from net investments in foreign affiliates, and investments
 
in equity securities.
 
Our foreign currency exchange derivative instruments
 
are held at fair value on our consolidated
 
balance sheet.
Related cash flows are recorded as operating activities
 
on our consolidated statement of cash flows.
 
We do not
elect hedge accounting on our foreign currency exchange
 
derivatives.
The following table presents the gross fair values
 
of our foreign currency exchange derivatives,
 
excluding
collateral, and the line items where they appear
 
on our consolidated balance sheet:
Millions of Dollars
September 30
December 31
2020
2019
Assets
Prepaid expenses and other current assets
$
16
1
Liabilities
Other accruals
-
20
Other liabilities and deferred credits
-
8
The (gains) losses from foreign currency exchange
 
derivatives incurred, and the line item where
 
they appear
on our consolidated income statement were:
Millions of Dollars
 
Three Months Ended
Nine Months Ended
September 30
September 30
2020
2019
2020
2019
Foreign currency transaction (gain) loss
$
7
(24)
(55)
(3)
We had the following net notional position of outstanding foreign currency exchange
 
derivatives:
In Millions
Notional Currency
September 30
December 31
2020
2019
Foreign Currency Exchange Derivatives
Buy GBP,
 
sell EUR
GBP
3
4
Sell CAD, buy USD
CAD
416
1,337
In the second quarter of 2019, we entered into foreign currency exchange contracts to sell CAD 1.35 billion at
CAD 0.748 against the USD. In the first quarter of 2020, we entered into forward currency exchange contracts
to buy CAD 0.9 billion at CAD 0.718 against the USD
Financial Instruments
We invest in financial instruments with maturities based on our cash forecasts for
 
the various accounts and
currency pools we manage.
 
The types of financial instruments in which we
 
currently invest include:
 
●
 
Time deposits: Interest bearing deposits placed with financial
 
institutions for a predetermined amount
of time.
 
●
 
Demand deposits: Interest bearing deposits placed
 
with financial institutions.
 
Deposited funds can be
withdrawn without notice.
●
 
Commercial paper: Unsecured promissory notes issued
 
by a corporation, commercial bank or
government agency purchased at a discount to
 
mature at par.
●
 
U.S. government or government agency obligations:
 
Securities issued by the U.S. government
 
or U.S.
government agencies.
●
 
Foreign government obligations: Securities
 
issued by foreign governments.
●
 
Corporate bonds: Unsecured debt securities
 
issued by corporations.
●
 
Asset-backed securities: Collateralized debt securities.
The following investments are carried on our
 
consolidated balance sheet at cost, plus accrued
 
interest:
 
Millions of Dollars
Carrying Amount
Cash and Cash
Equivalents
Short-Term
Investments
September 30
December 31
September 30
December 31
2020
2019
2020
2019
Cash
$
545
759
Demand Deposits
1,182
1,483
Time Deposits
Remaining maturities from 1 to 90 days
755
2,030
2,961
1,395
Remaining maturities from 91 to 180 days
-
-
741
465
Remaining maturities within one year
-
-
7
-
Commercial Paper
Remaining maturities from 1 to 90 days
-
413
50
1,069
U.S. Government Obligations
Remaining maturities from 1 to 90 days
5
394
-
-
$
2,487
5,079
3,759
2,929
The following investments in debt securities
 
classified as available for sale are carried on our
 
consolidated
balance sheet at fair value:
Millions of Dollars
Carrying Amount
Cash and Cash Equivalents
Short-Term
Investments
Investments and Long-Term
Receivables
September 30
2020
December 31
2019
September 30
2020
December 31
2019
September 30
2020
December 31
2019
Corporate Bonds
Maturities within one year
$
-
1
157
59
-
-
Maturities greater than one year
 
through five years
-
-
-
-
128
99
Commercial Paper
Maturities within one year
3
8
108
30
-
-
U.S. Government Obligations
Maturities within one year
-
-
8
10
-
-
Maturities greater than one year
 
through five years
-
-
-
-
13
15
U.S. Government Agency Obligations
Maturities greater than one year
 
through five years
-
-
-
-
17
-
Foreign Government Obligations
Maturities greater than one year
 
through five years
-
-
-
-
2
-
Asset-backed Securities
Maturities greater than one year
 
through five years
-
-
-
-
46
19
$
3
9
273
99
206
133
The following table summarizes the amortized
 
cost basis and fair value of investments in
 
debt securities
classified as available for sale:
Millions of Dollars
September 30, 2020
December 31, 2019
Amortized
Cost Basis
Fair Value
Amortized
Cost Basis
Fair Value
Major Security Type
Corporate bonds
$
283
285
159
159
Commercial paper
111
111
38
38
U.S. government obligations
21
21
25
25
U.S. government agency obligations
17
17
-
-
Foreign government obligations
2
2
-
-
Asset-backed securities
46
46
19
19
$
480
482
241
241
As of September 30, 2020 and December 31, 2019,
 
total unrealized losses for debt securities
 
classified as
available for sale with net losses were negligible.
 
Additionally, as of September 30, 2020 and December 31,
2019, investments
 
in these debt securities in an unrealized loss
 
position for which an allowance for credit
losses has not been recorded were negligible.
 
 
For the three-
 
and nine-month periods ended September 30,
 
2020, proceeds from sales and redemptions of
investments in debt securities classified as available
 
for sale were $
109
 
million and $
298
 
million, respectively.
 
Gross realized gains and losses included in earnings
 
from those sales and redemptions were negligible.
 
The
cost of securities sold and redeemed is determined
 
using the specific identification method.
Credit Risk
Financial instruments potentially exposed to concentrations
 
of credit risk consist primarily of cash equivalents,
short-term investments, long-term investments
 
in debt securities, OTC derivative contracts and trade
receivables.
 
Our cash equivalents and short-term investments
 
are placed in high-quality commercial paper,
government money market funds, government debt
 
securities, time deposits with major international
 
banks and
financial institutions, and high-quality corporate bonds.
 
Our long-term investments in debt securities
 
are
placed in high-quality corporate bonds, U.S. government
 
and government agency obligations, foreign
government obligations, and asset-backed securities.
 
 
The credit risk from our OTC derivative contracts,
 
such as forwards, swaps and options, derives
 
from the
counterparty to the transaction.
 
Individual counterparty exposure is managed
 
within predetermined credit
limits and includes the use of cash-call margins when appropriate,
 
thereby reducing the risk of significant
nonperformance.
 
We also use futures, swaps and option contracts that have a negligible credit
 
risk because
these trades are cleared with an exchange clearinghouse
 
and subject to mandatory margin requirements until
settled; however, we are exposed to the credit risk of those exchange
 
brokers for receivables arising from daily
margin cash calls, as well as for cash deposited to meet
 
initial margin requirements.
 
 
Our trade receivables result primarily
 
from our petroleum operations and reflect a broad
 
national and
international customer base, which limits our
 
exposure to concentrations of credit risk.
 
The majority of these
receivables have payment terms of
30 days
 
or less, and we continually monitor this exposure
 
and the
creditworthiness of the counterparties.
 
Our collateral requirements will depend on the
 
creditworthiness of our
counterparties.
 
At our option, we may require collateral to limit
 
the exposure to loss including, letters of
credit, prepayments and surety bonds, as well as
 
master netting arrangements to mitigate
 
credit risk with
counterparties that both buy from and sell to
 
us, as these agreements permit the amounts
 
owed by us or owed
to others to be offset against amounts due to us.
 
Certain of our derivative instruments contain provisions that require us to post collateral if the derivative
exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts
with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts
typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert
to zero if we fall below investment grade. Cash is the primary collateral in all contracts; however, many also
permit us to post letters of credit as collateral, such as transactions administered through the New York
Mercantile Exchange.
 
The aggregate fair value of all derivative
 
instruments with such credit risk-related contingent
 
features that were
in a liability position on September 30, 2020 and December
 
31, 2019, was $
20
 
million and $
79
 
million,
respectively.
 
For these instruments,
no
 
collateral was posted as of September 30, 2020
 
or December 31, 2019.
 
If our credit rating had been downgraded below
 
investment grade on September 30, 2020, we would
 
have been
required to post $
16
 
million of additional collateral, either with
 
cash or letters of credit.