v3.21.2
Derivative and Financial Instruments
 9 Months Ended
Sep. 30, 2021
Derivative and Financial Instruments [Abstract]  
Derivative and Financial Instruments
Note 11—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,
 
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
 
and certain gas contracts.
 
We do not
apply 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
2021
2020
Assets
Prepaid expenses and other current
 
assets
$
1,601
229
Other assets
109
26
Liabilities
Other accruals
1,681
202
Other liabilities and deferred credits
94
18
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
2021
2020
2021
2020
Sales and other operating revenues
$
(483)
33
(862)
30
Other income (loss)
7
(2)
23
3
Purchased commodities
405
(27)
550
(29)
On January 15, 2021, we assumed financial derivative instruments
 
consisting of oil and natural gas
 
swaps in
connection with the acquisition of Concho.
 
At the acquisition date, the financial derivative
 
instruments acquired
were recognized at fair
 
value as a net liability of $
456
 
million with settlement dates under the contracts
 
through
December 31, 2022.
 
During the first quarter of 2021, we recognized
 
a loss of $
173
 
million on Concho derivative
contracts with settlement dates
 
on or before March 31, 2021, and an
 
additional $
132
 
million loss related to all
remaining Concho derivative contracts
 
with settlement dates subsequent
 
to March 31, 2021, for a total loss of
$
305
 
million.
 
This loss associated with the acquired financial
 
instruments is recorded within the
 
“Sales and other
operating revenues” line on our
 
consolidated income statement.
By the end of March 2021, all oil and natural
 
gas derivative financial instruments
 
acquired from Concho were
contractually settled.
 
In connection with the settlement, we issued
 
a cash payment of $
692
 
million in the first
quarter of 2021 and $
69
 
million in the second quarter of 2021.
 
Cash settlements related
 
to the Concho derivative
contracts are presented
 
within “Cash Flows From Operating Activities”
 
on our consolidated statement
 
of cash
flows.
The table below summarizes our material
 
net exposures resulting from
 
outstanding commodity derivative
contracts:
Open Position
Long/(Short)
September 30
December 31
2021
2020
Commodity
Natural gas and power (billions
 
of cubic feet equivalent)
 
Fixed price
10
(20)
 
Basis
(19)
(10)
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 and the table
reflects remaining maturities at September 30, 2021 and
 
December 31, 2020:
Millions of Dollars
Carrying Amount
Cash and Cash Equivalents
Short-Term
 
Investments
Investments and Long-Term
Receivables
September 30
December 31
September 30
December 31
September 30
December 31
2021
2020
2021
2020
2021
2020
Cash
$
634
597
Demand Deposits
1,847
1,133
Time Deposits
1 to 90 days
7,226
1,225
469
2,859
91 to 180 days
8
448
Within one year
5
13
One year through five years
2
1
U.S. Government
 
Obligations
1 to 90 days
16
23
-
-
$
9,723
2,978
482
3,320
2
1
The following investments in debt securities
 
classified as available for sale are carried at
 
fair value on our consolidated
balance sheet at September 30, 2021 and December 31, 2020:
Millions of Dollars
Carrying Amount
Cash and Cash Equivalents
Short-Term
 
Investments
Investments and Long-Term
Receivables
September 30
December 31
September 30
December 31
September 30
December 31
2021
2020
2021
2020
2021
2020
Major Security Type
Corporate Bonds
$
-
-
113
130
184
143
Commercial Paper
110
13
69
155
U.S. Government
 
Obligations
-
-
-
4
6
13
U.S. Government
 
Agency Obligations
2
-
8
17
Foreign Government
 
Obligations
10
-
3
2
Asset-backed
 
Securities
2
-
59
41
$
110
13
196
289
260
216
Cash and Cash Equivalents and Short-Term
 
Investments have remaining maturities
 
within one year.
Investments and Long-Term
 
Receivables have remaining maturities greater
 
than one year through eight years.
The following table summarizes the
 
amortized cost basis and fair value
 
of investments in debt securities classified
as available for sale:
Millions of Dollars
Amortized Cost Basis
Fair Value
September 30
December 31
September 30
December 31
2021
2020
2021
2020
Major Security Type
Corporate bonds
$
296
271
297
273
Commercial paper
179
168
179
168
U.S. government obligations
6
17
6
17
U.S. government agency obligations
10
17
10
17
Foreign government obligations
13
2
13
2
Asset-backed securities
61
41
61
41
$
565
516
566
518
At September 30, 2021 and December 31, 2020, total
 
unrealized losses for debt
 
securities classified as available for
sale with net losses were negligible.
 
Additionally, at
 
September 30, 2021 and December 31, 2020, investment
 
s
 
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, 2021, proceeds
 
from sales and redemptions of
investments in debt securities classified
 
as available for sale were $
165
 
million and $
485
 
million, respectively.
 
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, U.S. government
 
and government agency obligations,
 
time deposits with major international banks
and financial institutions, high-quality corporate
 
bonds, foreign government obligations
 
and asset-backed
securities.
 
Our long-term investments in debt
 
securities are placed in high-quality corporate
 
bonds, asset-backed
securities, U.S. government and government
 
agency obligations, foreign
 
government obligations, and
 
time
deposits with major international banks
 
and financial institutions.
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 primarily 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 oil and gas 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.
 
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 at September 30, 2021 and December 31,
 
2020, was $
455
 
million and $
25
 
million, respectively.
 
For these instruments,
no
 
collateral was posted at
 
September 30, 2021 or December 31, 2020.
 
If our credit rating
had been downgraded below investment
 
grade at September 30, 2021, we
 
would have been required to post
 
$
396
million of additional collateral, either with cash
 
or letters of credit.