Occidental Petroleum 2006 Annual Report Download - page 41
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Fair Value of Marketing and Trading Derivative Contracts
The following tables reconcile the changes in the net fair value of Occidental’s marketing and trading contracts, a portion of which are hedges,
during 2006 and 2005 and segregate the open contracts at December 31, 2006 by maturity periods.
Production Hedges
In 2005, Occidental entered into a series of fixed price swaps and costless collar agreements that qualify as cash-flow hedges for the sale of a
portion of its crude oil production. Additionally, Occidental acquired oil and gas fixed price and basis swaps with the Vintage acquisition. These
hedges continue to the end of 2011. The 2006 volume that was hedged was less than 4 percent of Occidental’s 2006 crude oil and natural gas
production. Information about these cash-flow hedges, which are included in the total fair value of ($355) million in the table above, is presented
in a tabular presentation below as of December 31, 2006 (volumes in thousands of barrels):
Quantitative Information
Occidental uses value at risk to estimate the potential effects of changes in fair values of commodity-based derivatives and commodity contracts
used in marketing and trading activities. This method determines the maximum potential negative short-term change in fair value with a 95-
percent level of confidence. The marketing and trading value at risk was immaterial during all of 2006.
Interest Rate Risk
General
Occidental's exposure to changes in interest rates relates primarily to its long-term debt obligations. In 2005, Occidental terminated all of its
interest-rate swaps that were accounted for as fair-value hedges. These hedges had effectively converted approximately $1.7 billion of fixed-rate
debt to variable-rate debt. The fair value of the swaps at termination resulted in a gain of approximately $20 million, which was recorded into
income when the debt was paid in 2005 and 2006. The amount of interest expense recorded in the income statement was lower, as a result of the
swaps and recognition of the gain, by approximately $13 million, $21 million and $56 million for the years ended December 31, 2006, 2005 and
2004, respectively.
Occidental was a party to a series of forward interest-rate locks, which qualified as cash-flow hedges. The hedges were related to the
construction of a cogeneration plant leased by Occidental that was completed in December 2002. The unamortized loss on the hedges at December