Notes to Consolidated Financial Statements
Note
1
. Description of Business and Basis of Presentation
Description of Business
Operations of our company include oil, natural gas and NGL development and production primarily located in Texas, North Dakota, New Mexico and Colorado. We specialize in development and production from tight-sands and shale formations in the Delaware, Williston and San Juan Basins. Associated with our commodity production are sales and marketing activities, referred to as gas management activities, that include oil and natural gas purchased from third-party working interest owners in operated wells and the management of various commodity contracts, such as transportation and related derivatives.
In June 2017, we signed an agreement with Howard Energy Partners (“Howard”) to jointly develop oil gathering and natural gas processing infrastructure in the Stateline area of the Delaware Basin. Under the terms of the agreement, WPX and Howard will each have a
50 percent
voting interest in the joint venture and Howard will serve as operator. At closing, WPX will contribute crude oil gathering and natural gas processing assets already in service and/or under construction, with a net book value of approximately
$36 million
as of June 30, 2017, and will receive a special cash distribution of
$300 million
. Howard will contribute
$300 million
in cash at closing and is obligated to fund the first
$263 million
of joint venture capital expenditures, including a
$132 million
carry for WPX. This transaction is expected to close during the third quarter of 2017 and we expect to account for this joint venture as an equity method investment. In connection with the joint venture, the company will dedicate its current and future leasehold interest in the Stateline area, representing
50,000
net acres in the Delaware Basin, pursuant to
20
year fixed-fee oil gathering and natural gas processing agreements. However, the agreements do not include any minimum volume commitments.
In addition, we have sold other operations which are reported as discontinued operations, as discussed below.
The consolidated businesses represented herein as WPX Energy, Inc. is also referred to as “WPX,” the “Company,” “we,” “us” or “our.”
Basis of Presentation
The accompanying interim consolidated financial statements do not include all the notes included in our annual financial statements and, therefore, should be read in conjunction with the consolidated financial statements and notes thereto for the year ended
December 31, 2016
in the Company’s Annual Report on Form 10-K. The accompanying interim consolidated financial statements include all normal recurring adjustments that, in the opinion of management, are necessary to present fairly our financial position at
June 30, 2017
, results of operations for the three and
six months ended
June 30, 2017
and
2016
, changes in equity for the
six months ended
June 30, 2017
and cash flows for the
six months ended
June 30, 2017
and
2016
. The Company has no elements of comprehensive income (loss) other than net income (loss).
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Our continuing operations comprise a single business segment, which includes the development, production and gas management activities of oil, natural gas and NGLs in the United States.
Discontinued Operations
See Note
3
for a discussion of discontinued operations. Unless indicated otherwise, the information in the Notes to Consolidated Financial Statements relates to continuing operations. Additionally, see Note
9
for a discussion of contingencies related to the former power business of The Williams Companies, Inc. (“Williams”) (most of which was disposed of in 2007).
Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09,
Improvements to Employee Share-Based Payment Accounting,
as part of the Simplification Initiative. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is required for annual periods beginning after December 15, 2016. Under ASU 2016-09, on a prospective basis, companies will no longer record excess tax benefits and deficiencies in additional paid in capital. Instead, excess tax benefits and deficiencies will be recognized as income tax expense or benefit on the statement of operations. Other portions of the standard are adopted using either a prospective, retrospective, or modified retrospective approach depending on the topic covered in the standard. The Company adopted this guidance effective January 1, 2017 which impacted (a) our income tax provision in the first two quarters of 2017 due to the tax deficiency recognized for tax and (b) the operating and financing
WPX Energy, Inc.
Notes to Consolidated Financial Statements — (Continued)
activities sections of our Consolidated Statement of Cash Flows to reflect tax payments related to shares withheld for taxes. Cash outflows of
$10 million
and
$4 million
for the
six months ended
June 30, 2017
and
2016
, respectively, would have been included in operating activities under previous guidance, but are now reflected in financing activities.
Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
and has updated it with additional ASUs. The core principle of the guidance in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09, as amended, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The FASB will permit companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016. ASU 2014-09 can be applied using either a full retrospective method, meaning the standard is applied to all of the periods presented, or a modified retrospective method, meaning the cumulative effect of initially applying the standard is recognized in the most current period presented in the financial statements.
In 2016, we performed an initial assessment of the impact of ASU 2014-09 with the assistance of an outside consultant. Our assessment was based on a bottoms-up approach, in which we analyzed our existing contracts and current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to our contracts. In 2017, we will implement appropriate changes to our business processes, systems or controls to support recognition and disclosure under the new standard. Our findings and progress toward implementation of the standard are periodically reported to management.
Currently, we do not expect the impact of adopting ASU 2014-09 to be material to our total net revenues and operating income (loss) or to our consolidated balance sheet because our performance obligations, which determine when and how revenue is recognized, are not materially changed under the new standard; thus, revenue associated with the majority of our contracts will continue to be recognized as control of products is transferred to the customer. We will adopt this standard on January 1, 2018 and, based on our evaluation to date, we anticipate using the modified retrospective method; however, we are still in the process of finalizing our documentation and assessment of the impact of the standard on our financial results and related disclosures. We anticipate additional disclosures in future filings from the adoption of this standard.
In February 2016, the FASB issued ASU 2016-02,
Leases,
to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the impact of ASU 2016-02 to the Company’s Consolidated Financial Statements or related disclosures.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
, which will require entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption in an interim period is permitted, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period.
In January 2017, FASB issued ASU 2017-01,
Business Combinations,
clarifying the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those years.
In February 2017, the FASB issued ASU 2017-05,
Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.
This ASU clarifies the scope and application of ASC 610-20 on the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. The amendments are effective at the same time as the new revenue standard. For public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted. The Company does not expect any significant impact on its consolidated financial statements from the adoption of the standard.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718).
The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including
WPX Energy, Inc.
Notes to Consolidated Financial Statements — (Continued)
adoption in any interim period. The Company does not expect any significant impact on its consolidated financial statements from the adoption of the standard.
Note
2
. Acquisition
On January 12, 2017, we signed an agreement to acquire certain assets from Panther Energy Company II, LLC and Carrier Energy Partners, LLC (the “Panther Acquisition”) for
$775 million
, subject to post-closing adjustments. The transaction closed in March 2017 for
$798 million
including estimated closing adjustments. The assets, as of the closing date, include
25
producing wells (
18
horizontals),
three
drilled but uncompleted horizontal laterals, approximately
18,000
net acres and more than
900
gross undeveloped locations in the Delaware Basin. As of June 30, 2017, we estimate that approximately
$599 million
of the purchase price is allocable to unproved properties and approximately
$200 million
is allocable to proved properties and facilities. This estimate is based on discounted cash flow models, which include estimates and assumptions such as future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk adjusted discount rates. These assumptions represent Level 3 inputs. The purchase price is preliminary and subject to post-closing adjustments. At the time of the acquisition closing, production was approximately
10,000
Boe per day. The impact of this acquisition to prior periods is not material to our results of operations for those periods.
Note
3
. Discontinued Operations
On February 8, 2016, we signed an agreement with Terra Energy Partners LLC to sell WPX Energy Rocky Mountain, LLC that held our Piceance Basin operations. The parties closed this sale in April of 2016 for proceeds of
$862 million
. The amounts in the table below for 2016, primarily relate to the Piceance Basin. The loss from discontinued operations for the three and six months ended June 30, 2017 on the Consolidated Statement of Operations primarily relates to accretion on retained transportation and gathering contracts related to Powder River Basin assets that were sold in 2015.
Summarized Results of Discontinued Operations
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2016
|
|
Six months ended June 30, 2016
|
|
(Millions)
|
Total revenues(a)
|
$
|
(4
|
)
|
|
$
|
64
|
|
Costs and expenses:
|
|
|
|
Depreciation, depletion and amortization
|
$
|
—
|
|
|
$
|
9
|
|
Lease and facility operating
|
1
|
|
|
18
|
|
Gathering, processing and transportation
|
5
|
|
|
48
|
|
Taxes other than income
|
(1
|
)
|
|
1
|
|
General and administrative
|
1
|
|
|
8
|
|
Other—net
|
2
|
|
|
6
|
|
Total costs and expenses
|
8
|
|
|
90
|
|
Operating loss
|
(12
|
)
|
|
(26
|
)
|
Gain on sale of assets
|
52
|
|
|
52
|
|
Income from discontinued operations before income taxes
|
40
|
|
|
26
|
|
Income tax provision(b)
|
15
|
|
|
13
|
|
Income from discontinued operations
|
$
|
25
|
|
|
$
|
13
|
|
__________
(a) The three and six months ended June 30, 2016 include
$13 million
and
$33 million
, respectively, net loss on derivatives.
(b) The six month ended June 30, 2016 includes a valuation allowance on certain state tax carryovers.
Cash Flows Attributable to Discontinued Operations
Excluding income taxes and changes to working capital, total cash provided by discontinued operations was
$29 million
for the six months ended June 30,
2016
. In addition, cash outflows related to previous accruals for the Powder River Basin gathering and transportation contracts retained by WPX were
$29 million
and
$30 million
for the
six months ended June 30, 2017
and
2016
, respectively. Total cash used in investing activities related to discontinued operations was
$31 million
for the six months ended June 30,
2016
.
WPX Energy, Inc.
Notes to Consolidated Financial Statements — (Continued)
Note
4
. Earnings (Loss) Per Common Share from Continuing Operations
The following table summarizes the calculation of earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended June 30,
|
|
Six months
ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Millions, except per-share amounts)
|
Income (loss) from continuing operations
|
$
|
76
|
|
|
$
|
(223
|
)
|
|
$
|
170
|
|
|
$
|
(223
|
)
|
Less: Dividends on preferred stock
|
4
|
|
|
6
|
|
|
8
|
|
|
11
|
|
Income (loss) from continuing operations available to WPX Energy, Inc. common stockholders for basic earnings (loss) per common share
|
$
|
72
|
|
|
$
|
(229
|
)
|
|
$
|
162
|
|
|
$
|
(234
|
)
|
Add: Dividends on preferred stock upon assumed conversion of 6.25% Series A mandatory convertible preferred stock
|
4
|
|
|
—
|
|
|
8
|
|
|
—
|
|
Income (loss) from continuing operations available to WPX Energy, Inc. common stockholders for diluted earnings (loss) per common share
|
$
|
76
|
|
|
$
|
(229
|
)
|
|
$
|
170
|
|
|
$
|
(234
|
)
|
|
|
|
|
|
|
|
|
Basic weighted-average shares
|
397.8
|
|
|
300.7
|
|
|
392.1
|
|
|
288.2
|
|
Effect of dilutive securities(a):
|
|
|
|
|
|
|
|
Nonvested restricted stock units and awards
|
1.5
|
|
|
—
|
|
|
2.7
|
|
|
—
|
|
Stock options
|
0.1
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
Common shares issuable upon assumed conversion of 6.25% Series A mandatory convertible preferred stock
|
23.8
|
|
|
—
|
|
|
23.8
|
|
|
—
|
|
Diluted weighted-average shares
|
423.2
|
|
|
300.7
|
|
|
418.8
|
|
|
288.2
|
|
Earnings (loss) per common share from continuing operations:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.18
|
|
|
$
|
(0.76
|
)
|
|
$
|
0.41
|
|
|
$
|
(0.81
|
)
|
Diluted
|
$
|
0.18
|
|
|
$
|
(0.76
|
)
|
|
$
|
0.40
|
|
|
$
|
(0.81
|
)
|
__________
(a) The following table includes amounts that have been excluded from the computation of diluted earnings per common share as their inclusion would be antidilutive due to our loss from continuing operations attributable to WPX Energy, Inc. available to common stockholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended June 30,
|
|
Six months
ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Millions)
|
Weighted-average nonvested restricted stock units and awards
|
—
|
|
|
1.1
|
|
|
—
|
|
|
1.6
|
|
Common shares issuable upon assumed conversion of 6.25% Series A mandatory convertible preferred stock
|
—
|
|
|
34.7
|
|
|
—
|
|
|
34.7
|
|
The table below includes information related to stock options that were outstanding at
June 30, 2017
and
2016
but have been excluded from the computation of weighted-average stock options due to the option exercise price exceeding the
second quarter
weighted-average market price of our common shares.
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2017
|
|
2016
|
Options excluded (millions)
|
1.9
|
|
|
2.4
|
|
Weighted-average exercise price of options excluded
|
$
|
16.68
|
|
|
$
|
16.46
|
|
Exercise price range of options excluded
|
$11.75 - $21.81
|
|
|
$11.75 - $21.81
|
|
Second quarter weighted-average market price
|
$
|
11.40
|
|
|
$
|
9.02
|
|
WPX Energy, Inc.
Notes to Consolidated Financial Statements — (Continued)
The diluted weighted-average shares excludes the effect of approximately
2.0 million
and
3.5 million
nonvested restricted stock units for the
six months ended June 30, 2017
and
2016
, respectively. These restricted stock units were antidilutive under the treasury stock method.
Note
5
. Asset Sales and Exploration Expenses
Asset Sales
2017
Net gain on sales of assets for the three and six months ended June 30, 2017 includes gains from exchanges of leasehold acreage, recognition of deferred gains related to the completion of commitments from the sales of gathering systems in prior years and a net gain recognized on the sales of certain Green River Basin and Appalachian Basin assets. As of June 30, 2017, the estimated remaining deferred gains and the estimated remaining commitments related to the sales of these gathering systems were approximately
$37 million
and
$21 million
, respectively.
In conjunction with exchanges of leasehold, we estimate the fair value of the leasehold through discounted cash flow models and consideration of market data. Our estimates and assumptions include future commodity prices, projection of estimated quantities of oil and natural gas reserves, expectations for future development and operating costs and risk adjusted discount rates, all of which are Level 3 inputs.
2016
On March 9, 2016, we completed the sale of our San Juan Basin gathering system for consideration of approximately
$309 million
. The consideration reflected
$285 million
in cash, subject to closing adjustments, and a commitment estimated at
$24 million
in capital designated by the purchaser to expand the system to support WPX's development in the Gallup oil play. We are obligated to complete certain in-progress construction as of the closing which resulted in the deferral of a portion of the gain. As a result of this transaction, we recorded a gain of
$199 million
in first-quarter 2016 and an additional
$5 million
in second-quarter 2016 as certain in-progress construction was completed.
Exploration Expenses
The following table presents a summary of exploration expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended June 30,
|
|
Six months
ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Millions)
|
Unproved leasehold property impairment, amortization and expiration
|
$
|
20
|
|
|
$
|
10
|
|
|
$
|
58
|
|
|
$
|
19
|
|
Geologic and geophysical costs
|
1
|
|
|
1
|
|
|
2
|
|
|
1
|
|
Dry hole costs and impairments of exploratory area well costs
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total exploration expenses
|
$
|
21
|
|
|
$
|
12
|
|
|
$
|
60
|
|
|
$
|
21
|
|
Unproved leasehold property impairment, amortization and expiration for the six months ended June 30, 2017 includes costs in excess of the accumulated amortization balance associated with certain leases in the Permian Basin that expired during the first quarter of 2017. These leases were renewed in second-quarter 2017.
Note
6
. Inventories
The following table presents a summary of our inventories as of the dates indicated below.
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
(Millions)
|
Material, supplies and other
|
$
|
39
|
|
|
$
|
34
|
|
Crude oil production in transit
|
2
|
|
|
2
|
|
Total inventories
|
$
|
41
|
|
|
$
|
36
|
|
WPX Energy, Inc.
Notes to Consolidated Financial Statements — (Continued)
Note
7
. Debt and Banking Arrangements
The following table presents a summary of our debt as of the dates indicated below.
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
(Millions)
|
Credit facility agreement
|
$
|
25
|
|
|
$
|
—
|
|
7.500% Senior Notes due 2020
|
500
|
|
|
500
|
|
6.000% Senior Notes due 2022
|
1,100
|
|
|
1,100
|
|
8.250% Senior Notes due 2023
|
500
|
|
|
500
|
|
5.250% Senior Notes due 2024
|
500
|
|
|
500
|
|
Other
|
1
|
|
|
1
|
|
Total long-term debt
|
$
|
2,626
|
|
|
$
|
2,601
|
|
Less: Debt issuance costs on long-term debt(a)
|
25
|
|
|
26
|
|
Total long-term debt, net(a)
|
$
|
2,601
|
|
|
$
|
2,575
|
|
__________
(a) Debt issuance costs related to our Credit Facility are recorded in other noncurrent assets on the Consolidated Balance Sheets.
Our
$1.2 billion
senior secured revolving credit facility (“Credit Facility”) has a maturity date of
October 28, 2019
. As of
June 30, 2017
, there were
$66 million
of letters of credit issued under the Credit Facility and we were in compliance with our financial covenants with full access to the Credit Facility subject to the Borrowing Base discussed below. Subsequent to June 30, 2017, we have borrowed an additional
$180 million
on our revolving credit facility.
During a Collateral Trigger Period, loans under the Credit Facility are subject to a Borrowing Base as calculated in accordance with the provisions of the Credit Facility. As of December 31, 2016, the Borrowing Base was
$1.025 billion
. The Borrowing Base was increased to
$1.2 billion
in April 2017 and will remain in effect until the next Redetermination Date as set forth in the Credit Facility Agreement. The Borrowing Base is recalculated at least every six months per the terms of the Credit Facility.
See our Annual Report on Form 10-K for the year ended December 31, 2016 for additional discussion related to our Credit Facility and our senior notes.
Note
8
. Provision (Benefit) for Income Taxes
The following table presents the provision (benefit) for income taxes from continuing operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended June 30,
|
|
Six months
ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Millions)
|
Current:
|
|
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
5
|
|
|
(119
|
)
|
|
51
|
|
|
(119
|
)
|
State
|
(58
|
)
|
|
(11
|
)
|
|
(73
|
)
|
|
24
|
|
|
(53
|
)
|
|
(130
|
)
|
|
(22
|
)
|
|
(95
|
)
|
Total provision (benefit)
|
$
|
(53
|
)
|
|
$
|
(130
|
)
|
|
$
|
(22
|
)
|
|
$
|
(95
|
)
|
The effective income tax rate for the three months ended
June 30, 2017
, differs from the federal statutory rate due to the impact of ASU 2016-09 discussed in Note 1, the effect of state income taxes and other permanent items, as applied by ASC 740 interim period allocation methodology based on an estimated full year pre-tax loss.
The effective income tax rate for the
six months ended June 30, 2017
, differs from the federal statutory rate due to the impact of ASU 2016-09 discussed in Note 1 and the decrease of the blended state income tax rate due to changes in state apportionment factors resulting from increased presence in the Delaware Basin operations in Texas following the Panther
WPX Energy, Inc.
Notes to Consolidated Financial Statements — (Continued)
Acquisition (see Note
2
) and other permanent items, as applied by ASC 740 interim period allocation methodology based on an estimated full year pre-tax loss.
The effective income tax rate for the
three months ended June 30, 2016
, differs from the federal statutory rate due to the effects of state income taxes.
The effective income tax rate for the
six months ended
June 30, 2016
, differs from the federal statutory rate due to state tax adjustments resulting from the sale of our Piceance Basin operations in Colorado. In 2016, we recorded
$8 million
of valuation allowances against Colorado state tax loss and credit carryovers generated in prior years. We also increased our blended state income tax rate by less than one half percent to reflect changes in our then expected future apportionment among the states where we operate which resulted in a
$14 million
increase of our deferred tax liability as of the beginning of the year.
We have recorded valuation allowances against deferred tax assets attributable primarily to certain state net operating loss (“NOL”) carryovers as well as our federal capital loss carryover. When assessing the need for a valuation allowance, we primarily consider future reversals of existing taxable temporary differences. To a lesser extent we may also consider future taxable income exclusive of reversing temporary differences and carryovers, and tax-planning strategies that would, if necessary, be implemented to accelerate taxable amounts to utilize expiring carryovers. The ultimate amount of deferred tax assets realized could be materially different from those recorded, as influenced by future operational performance, potential changes in jurisdictional income tax laws and other circumstances surrounding the actual realization of related tax assets. Valuation allowances that we have recorded are due to our expectation that we will not have sufficient income, or income of a sufficient character, in those jurisdictions to which the associated deferred tax asset applies. We have not recorded a valuation allowance against our federal NOL carryover, but a valuation allowance could be required in future periods if the federal NOL carryover continues to increase or circumstances change. When assessing the need for a valuation allowance for the federal NOL carryover, we primarily consider future reversals of existing taxable temporary differences.
The ability of WPX to utilize loss carryovers or minimum tax credits to reduce future federal taxable income and income tax could be subject to limitations under the Internal Revenue Code. The utilization of such carryovers may be limited upon the occurrence of certain ownership changes during any
three
-year period resulting in an aggregate change of more than
50 percent
in beneficial ownership (an “Ownership Change”). As of
June 30, 2017
, we do not believe that an Ownership Change has occurred for WPX, but an Ownership Change did occur for RKI effective with the acquisition. Therefore, there is an annual limitation on the benefit that WPX can claim from RKI carryovers that arose prior to the acquisition.
Pursuant to our tax sharing agreement with Williams, we remain responsible for the tax from audit adjustments related to our business for periods prior to our spin-off from Williams on December 31, 2011. The 2011 consolidated tax filing by Williams is currently being audited by the IRS and is the only pre spin-off period for which we continue to have exposure to audit adjustments as part of Williams. The IRS has recently proposed an adjustment related to our business for which a payment to Williams could be required. We are currently evaluating the issue and expect to protest the adjustment within the normal appeals process of the IRS. Based on the IRS position and underlying arguments available to us at this time, we do not believe reserve accruals are necessary. In addition, the alternative minimum tax credit deferred tax asset that was allocated to us by Williams at the time of the spin-off could change due to audit adjustments unrelated to our business. Any such adjustment to this deferred tax asset will not be known until the IRS examination is completed, but is not expected to result in a cash settlement.
As of
June 30, 2017
, the Company had no significant unrecognized tax benefits. During the next 12 months, we do not expect ultimate resolution of any uncertain tax position will result in a significant increase or decrease of an unrecognized tax benefit.
Note
9
. Contingent Liabilities and Commitments
Royalty litigation
In October 2011, a potential class of royalty interest owners in New Mexico and Colorado filed a complaint against us in the County of Rio Arriba, New Mexico. The complaint presently alleges failure to pay royalty on hydrocarbons including drip condensate, breach of the duty of good faith and fair dealing, fraudulent concealment, conversion, misstatement of the value of gas and affiliated sales, breach of duty to market hydrocarbons in Colorado, breach of implied duty to market, violation of the New Mexico Oil and Gas Proceeds Payment Act, and bad faith breach of contract. Plaintiffs sought monetary damages and a declaratory judgment enjoining activities relating to production, payments and future reporting. This matter was removed to the United States District Court for New Mexico where the court denied plaintiffs’ motion for class certification. In March 2017, plaintiffs appealed the denial of class certification to the Tenth Circuit. In August 2012, a second potential class action was filed against us in the United States District Court for the District of New Mexico by mineral interest owners in New Mexico and Colorado. Plaintiffs claim breach of contract, breach of the covenant of good faith and fair dealing, breach of implied duty to
WPX Energy, Inc.
Notes to Consolidated Financial Statements — (Continued)
market both in Colorado and New Mexico and violation of the New Mexico Oil and Gas Proceeds Payment Act, and seek declaratory judgment, accounting and injunctive relief. On August 16, 2016, the court denied plaintiffs’ motion for class certification. On September 15, 2016, plaintiffs filed their motion for reconsideration and filed a second motion for class certification, and the Court held a hearing on that motion on January 24, 2017 but has not yet ruled. At this time, we believe that our royalty calculations have been properly determined in accordance with the appropriate contractual arrangements and applicable laws. We do not have sufficient information to calculate an estimated range of exposure related to these claims.
Other producers have been pursuing administrative appeals with a federal regulatory agency and have been in discussions with a state agency in New Mexico regarding certain deductions, comprised primarily of processing, treating and transportation costs, used in the calculation of royalties. Although we are not a party to those matters, we are monitoring them to evaluate whether their resolution might have the potential for unfavorable impact on our results of operations. Certain outstanding issues in those matters could be material to us. We received notice from the U.S. Department of Interior Office of Natural Resources Revenue (“ONRR”) in the fourth quarter of 2010, intending to clarify the guidelines for calculating federal royalties on conventional gas production applicable to many of our federal leases in New Mexico. The guidelines for New Mexico properties were revised slightly in September 2013 as a result of additional work performed by the ONRR. The revisions did not change the basic function of the original guidance. The ONRR’s guidance provides its view as to how much of a producer’s bundled fees for transportation and processing can be deducted from the royalty payment. We believe using these guidelines would not result in a material difference in determining our historical federal royalty payments for our leases in New Mexico. No similar specific guidance has been issued by ONRR for leases in Colorado though such guidelines are expected in the future. However, the timing of any such guidance is uncertain and, independent of the issuance of additional guidance, ONRR asked producers to attempt to evaluate the deductibility of these fees directly with the midstream companies that transport and process gas.
Environmental matters
The Environmental Protection Agency (“EPA”), other federal agencies, and various state and local regulatory agencies and jurisdictions routinely promulgate and propose new rules, and issue updated guidance to existing rules. These new rules and rulemakings include, but are not limited to, new air quality standards for ground level ozone, methane, green completions, and hydraulic fracturing and water standards. We are unable to estimate the costs of asset additions or modifications necessary to comply with these new regulations due to uncertainty created by the various legal challenges to these regulations and the need for further specific regulatory guidance.
Matter related to Williams’ former power business
In connection with a Separation and Distribution Agreement between WPX and Williams, Williams is obligated to indemnify and hold us harmless from any losses arising out of liabilities assumed by us for the pending litigation described below relating to the reporting of certain natural gas-related information to trade publications.
Civil suits based on allegations of manipulating published gas price indices have been brought against us and others, seeking unspecified amounts of damages. We are currently a defendant in class action litigation and other litigation originally filed in state court in Colorado, Kansas, Missouri and Wisconsin and brought on behalf of direct and indirect purchasers of natural gas in those states. These cases were transferred to the federal court in Nevada. In 2008, the court granted summary judgment in the Colorado case in favor of us and most of the other defendants based on plaintiffs’ lack of standing. On January 8, 2009, the court denied the plaintiffs’ request for reconsideration of the Colorado dismissal and entered judgment in our favor.
In the other cases, on July 18, 2011, the Nevada district court granted our joint motions for summary judgment to preclude the plaintiffs’ state law claims because the federal Natural Gas Act gives the Federal Energy Regulatory Commission exclusive jurisdiction to resolve those issues. The court also denied the plaintiffs’ class certification motion as moot. The plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit. On April 10, 2013, the United States Court of Appeals for the Ninth Circuit issued its opinion in the In re: Western States Wholesale Antitrust Litigation, holding that the Natural Gas Act does not preempt the plaintiffs’ state antitrust claims and reversing the summary judgment previously entered in favor of the defendants. The U.S. Supreme Court granted Defendants’ writ of certiorari. On April 21, 2015, the U.S. Supreme Court determined that the state antitrust claims are not preempted by the federal Natural Gas Act. On March 7, 2016, the putative class plaintiffs in several of the cases filed their motions for class certification. On March 30, 2017, the court denied the motions for class certification, which decision was appealed on June 20, 2017. On May 24, 2016, in Reorganized FLI Inc. v. Williams Companies, Inc., the Court granted Defendants’ Motion for Summary Judgment in its entirety, and an agreed amended judgment was entered by the court on January 4, 2017. Because of the uncertainty around pending unresolved issues, including an insufficient description of the purported classes and other related matters, we cannot reasonably estimate a range of potential exposure at this time.
WPX Energy, Inc.
Notes to Consolidated Financial Statements — (Continued)
Other Indemnifications
Pursuant to various purchase and sale agreements relating to divested businesses and assets, including the agreement pursuant to which we divested our Piceance Basin operations, we have indemnified certain purchasers against liabilities that they may incur with respect to the businesses and assets acquired from us. The indemnities provided to the purchasers are customary in sale transactions and are contingent upon the purchasers incurring liabilities that are not otherwise recoverable from third parties. The indemnities generally relate to breaches of representations and warranties, tax liabilities, historic litigation, personal injury, environmental matters and rights-of-way. The indemnity provided to the purchaser of the entity that held our Piceance Basin operations relates in substantial part to liabilities arising in connection with litigation over the appropriate calculation of royalty payments. Plaintiffs in that litigation have asserted claims regarding, among other things, the method by which we took transportation costs into account when calculating royalty payments.
As of June 30, 2017, we have not received a claim against any of these indemnities and thus have no basis from which to estimate any reasonably possible loss beyond any amount already accrued. Further, we do not expect any of the indemnities provided pursuant to the sales agreements to have a material impact on our future financial position. However, if a claim for indemnity is brought against us in the future, it may have a material adverse effect on our results of operations in the period in which the claim is made.
In connection with the separation from Williams, we agreed to indemnify and hold Williams harmless from any losses resulting from the operation of our business or arising out of liabilities assumed by us. Similarly, Williams has agreed to indemnify and hold us harmless from any losses resulting from the operation of its business or arising out of liabilities assumed by it.
Summary
As of
June 30, 2017
and
December 31, 2016
, respectively, the Company had accrued approximately
$14 million
and
$13 million
for loss contingencies associated with royalty litigation and other contingencies. In certain circumstances, we may be eligible for insurance recoveries, or reimbursement from others. Any such recoveries or reimbursements will be recognized only when realizable.
Management, including internal counsel, currently believes that the ultimate resolution of the foregoing matters, taken as a whole and after consideration of amounts accrued, insurance coverage, recovery from customers or other indemnification arrangements, is not expected to have a materially adverse effect upon our future liquidity or financial position; however, it could be material to our results of operations in any given year.
Commitments
During the second quarter of 2017, we signed long-term transportation agreements that will ultimately provide
300,000
MMBtu per day (15 years) and
200,000
MMBtu per day (11 years) of natural gas capacity from our Delaware Basin properties in the Stateline area to markets in west Texas. One of the agreements allows us the option to increase our capacity over time by
200,000
MMBtu per day to a total of
500,000
MMBtu per day. Total commitments related to these agreements, excluding the option, were approximately
$337 million
as of June 30, 2017.
Note
10
. Stockholders’ Equity
On January 12, 2017, we completed an underwritten public offering of
51.675 million
shares of our common stock, which included
6.675 million
shares of common stock issued pursuant to an option granted to the underwriters to purchase additional shares. The stock was sold to the underwriters at
$12.97
per share and we received proceeds of approximately
$670 million
from the sale of these shares of common stock, net of offering expenses and underwriting discounts and commissions.
WPX Energy, Inc.
Notes to Consolidated Financial Statements — (Continued)
Note
11
. Fair Value Measurements
The following table presents, by level within the fair value hierarchy, our assets and liabilities that are measured at fair value on a recurring basis. The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, restricted cash, and margin deposits and customer margin deposits payable approximate fair value due to the nature of the instrument and/or the short-term maturity of these instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(Millions)
|
|
(Millions)
|
Energy derivative assets
|
$
|
—
|
|
|
$
|
168
|
|
|
$
|
—
|
|
|
$
|
168
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
38
|
|
Energy derivative liabilities
|
$
|
—
|
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
215
|
|
|
$
|
—
|
|
|
$
|
215
|
|
Total debt(a)
|
$
|
—
|
|
|
$
|
2,658
|
|
|
$
|
—
|
|
|
$
|
2,658
|
|
|
$
|
—
|
|
|
$
|
2,702
|
|
|
$
|
—
|
|
|
$
|
2,702
|
|
__________
|
|
(a)
|
The carrying value of total debt, excluding capital leases and debt issuance costs, was
$2,625 million
and $2,600 million as of
June 30, 2017
and
December 31, 2016
, respectively. The fair value of our debt, which also excludes capital leases and debt issuance costs, is determined on market rates and the prices of similar securities with similar terms and credit ratings.
|
Energy derivatives include commodity based exchange-traded contracts and over-the-counter (“OTC”) contracts. Exchange-traded contracts include futures, swaps and options. OTC contracts include forwards, swaps, options and swaptions. These are carried at fair value on the Consolidated Balance Sheets.
Many contracts have bid and ask prices that can be observed in the market. Our policy is to use a mid-market pricing (the mid-point price between bid and ask prices) convention to value individual positions and then adjust on a portfolio level to a point within the bid and ask range that represents our best estimate of fair value. For offsetting positions by location, the mid-market price is used to measure both the long and short positions.
The determination of fair value for our assets and liabilities also incorporates the time value of money and various credit risk factors which can include the credit standing of the counterparties involved, master netting arrangements, the impact of credit enhancements (such as cash collateral posted and letters of credit) and our nonperformance risk on our liabilities. The determination of the fair value of our liabilities does not consider noncash collateral credit enhancements.
Forward, swap, option and swaption contracts included in Level 2 are valued using an income approach including present value techniques and option pricing models. Option contracts, which hedge future sales of our production, are structured as costless collars, calls or swaptions and are financially settled. All of our financial options are valued using an industry standard Black-Scholes option pricing model. In connection with several crude oil and natural gas swaps entered into, we granted swaptions to the swap counterparties in exchange for receiving premium hedged prices on the crude oil and natural gas swaps. These swaptions grant the counterparty the option to enter into future swaps with us. Significant inputs into our Level 2 valuations include commodity prices, implied volatility and interest rates, as well as considering executed transactions or broker quotes corroborated by other market data. These broker quotes are based on observable market prices at which transactions could currently be executed. In certain instances where these inputs are not observable for all periods, relationships of observable market data and historical observations are used as a means to estimate fair value. Also categorized as Level 2 is the fair value of our debt, which is determined on market rates and the prices of similar securities with similar terms and credit ratings. Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2.
Our energy derivatives portfolio is largely comprised of over-the-counter products or like products and the tenure of our derivatives portfolio extends through the end of 2020. Due to the nature of the products and tenure, we are consistently able to obtain market pricing. All pricing is reviewed on a daily basis and is formally validated with broker quotes or market indications and documented on a quarterly basis.
Certain instruments trade with lower availability of pricing information. These instruments are valued with a present value technique using inputs that may not be readily observable or corroborated by other market data. These instruments are classified within Level 3 when these inputs have a significant impact on the measurement of fair value. We did not have any instruments included in Level 3 as of
June 30, 2017
.
Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. No significant transfers occurred during the periods ended
June 30, 2017
and
2016
.
There have been no material changes in the fair value of our net energy derivatives and other assets classified as Level 3 in the fair value hierarchy.
WPX Energy, Inc.
Notes to Consolidated Financial Statements — (Continued)
Note
12
. 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 crude oil, natural gas and natural gas liquids attributable to commodity price risk.
We produce, buy and sell crude oil, natural gas 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 crude oil, natural gas 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 or sold options, or a combination of options that comprise a net purchased option, zero-cost collar or swaptions.
Derivatives related to production
The following table sets forth the derivative notional volumes of the net long (short) positions that are economic hedges of production volumes, which are included in our commodity derivatives portfolio as of
June 30, 2017
.
|
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|
|
|
|
|
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Commodity
|
|
Period
|
|
Contract Type (a)
|
|
Location
|
|
Notional Volume (b)
|
|
Weighted Average
Price (c)
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil
|
|
|
|
|
|
|
|
|
|
|
Crude Oil
|
|
Jul- Dec 2017
|
|
Fixed Price Swaps
|
|
WTI
|
|
(50,750
|
)
|
|
$
|
50.26
|
|
Crude Oil
|
|
Jul - Dec 2017
|
|
Basis Swaps
|
|
Midland-Cushing
|
|
(15,000
|
)
|
|
$
|
(0.60
|
)
|
Crude Oil
|
|
Jul - Dec 2017
|
|
Fixed Price Calls
|
|
WTI
|
|
(4,500
|
)
|
|
$
|
56.47
|
|
Crude Oil
|
|
2018
|
|
Fixed Price Swaps
|
|
WTI
|
|
(50,500
|
)
|
|
$
|
53.16
|
|
Crude Oil
|
|
2018
|
|
Basis Swaps
|
|
Midland-Cushing
|
|
(13,000
|
)
|
|
$
|
(0.94
|
)
|
Crude Oil
|
|
2018
|
|
Fixed Price Calls
|
|
WTI
|
|
(13,000
|
)
|
|
$
|
58.89
|
|
Crude Oil
|
|
2019
|
|
Basis Swaps
|
|
Midland-Cushing
|
|
(7,000
|
)
|
|
$
|
(1.00
|
)
|
Crude Oil
|
|
2020
|
|
Basis Swaps
|
|
Midland-Cushing
|
|
(5,000
|
)
|
|
$
|
(1.16
|
)
|
Natural Gas
|
|
|
|
|
|
|
|
|
|
|
Natural Gas
|
|
Jul-Dec 2017
|
|
Fixed Price Swaps
|
|
Henry Hub
|
|
(170
|
)
|
|
$
|
3.02
|
|
Natural Gas
|
|
Jul-Dec 2017
|
|
Basis Swaps
|
|
Permian
|
|
(73
|
)
|
|
$
|
(0.20
|
)
|
Natural Gas
|
|
Jul-Dec 2017
|
|
Basis Swaps
|
|
San Juan
|
|
(98
|
)
|
|
$
|
(0.18
|
)
|
Natural Gas
|
|
Jul-Dec 2017
|
|
Fixed Price Calls
|
|
Henry Hub
|
|
(16
|
)
|
|
$
|
4.50
|
|
Natural Gas
|
|
2018
|
|
Fixed Price Swaps
|
|
Henry Hub
|
|
(185
|
)
|
|
$
|
2.98
|
|
Natural Gas
|
|
2018
|
|
Basis Swaps
|
|
Permian
|
|
(43
|
)
|
|
$
|
(0.28
|
)
|
Natural Gas
|
|
2018
|
|
Basis Swaps
|
|
San Juan
|
|
(50
|
)
|
|
$
|
(0.34
|
)
|
Natural Gas
|
|
2018
|
|
Basis Swaps
|
|
Waha
|
|
(63
|
)
|
|
$
|
(0.16
|
)
|
Natural Gas
|
|
2018
|
|
Fixed Price Swaptions
|
|
Henry Hub
|
|
(20
|
)
|
|
$
|
3.33
|
|
Natural Gas
|
|
2018
|
|
Fixed Price Calls
|
|
Henry Hub
|
|
(16
|
)
|
|
$
|
4.75
|
|
Natural Gas
|
|
2019
|
|
Basis Swaps
|
|
Permian
|
|
(20
|
)
|
|
$
|
(0.34
|
)
|
Natural Gas
|
|
2019
|
|
Basis Swaps
|
|
Waha
|
|
(80
|
)
|
|
$
|
(0.19
|
)
|
__________
|
|
(a)
|
Derivatives related to crude oil production are fixed price swaps settled on the business day average, basis swaps, fixed price calls and swaptions. The derivatives related to natural gas production are fixed price swaps, basis swaps, fixed price calls and swaptions. In connection with several crude oil and natural gas swaps entered into, we granted swaptions to the swap counterparties in exchange for receiving premium hedged prices on the crude oil and natural gas swaps. These swaptions grant the counterparty the option to enter into future swaps with us.
|
|
|
(b)
|
Crude oil volumes are reported in Bbl/day and natural gas volumes are reported in BBtu/day.
|
|
|
(c)
|
The weighted average price for crude oil is reported in $/Bbl and natural gas is reported in $/MMBtu.
|
WPX Energy, Inc.
Notes to Consolidated Financial Statements — (Continued)
Fair values and gains (losses)
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.
We enter into commodity derivative contracts that serve as economic hedges but are not designated as cash flow hedges for accounting purposes as we do not utilize this method of accounting for derivative instruments. Net gain (loss) on derivatives on the Consolidated Statements of Operations includes settlements to be received of
$14 million
and
$69 million
for the
three months ended June 30, 2017
and
2016
, respectively, and
$9 million
and
$202 million
for the
six months ended June 30, 2017
and
2016
, respectively.
The cash flow impact of our derivative activities is presented as separate line items within the operating activities on the Consolidated Statements of Cash Flows.
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)
|
|
Net Amount
|
June 30, 2017
|
(Millions)
|
Derivative assets with right of offset or master netting agreements
|
$
|
168
|
|
|
$
|
(33
|
)
|
|
$
|
135
|
|
Derivative liabilities with right of offset or master netting agreements
|
$
|
(35
|
)
|
|
$
|
33
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
Derivative assets with right of offset or master netting agreements
|
$
|
38
|
|
|
$
|
(33
|
)
|
|
$
|
5
|
|
Derivative liabilities with right of offset or master netting agreements
|
$
|
(215
|
)
|
|
$
|
33
|
|
|
$
|
(182
|
)
|
__________
|
|
(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.
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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
June 30, 2017
, we had no collateral posted to derivative counterparties, to support the aggregate fair value of our net
$2 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
$2 million
at
June 30, 2017
.
Concentration of Credit Risk
Cash equivalents
Our
cash equivalents are primarily invested in funds with high-quality, short-term securities and instruments that are
WPX Energy, Inc.
Notes to Consolidated Financial Statements — (Continued)
issued or guaranteed by the U.S. government.
Accounts receivable
Accounts receivable are carried on a gross basis, with no discounting, less the allowance for doubtful accounts. We estimate the allowance for doubtful accounts based on existing economic conditions, the financial conditions of the customers and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after all collection attempts have been exhausted. A portion of our receivables are from joint interest owners of properties we operate. Thus, we may have the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings.
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
2017
and
2016
, 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.
Our gross and net credit exposure from our derivative contracts were
$168 million
and
$135 million
, respectively, as of
June 30, 2017
. Over
99%
of our credit exposure is with investment grade financial institutions. We determine investment grade primarily using publicly available credit ratings. We include counterparties with a minimum S&P’s rating of BBB- or Moody’s Investors Service rating of Baa3 to be investment grade.
Our
eight
largest net counterparty positions represent approximately
98 percent
of our net credit exposure. Under our marginless hedging agreements with key banks, neither party is required to provide collateral support related to hedging activities.
One of our senior officers is on the board of directors of NGL Energy Partners, LP ("NGL Energy"). In the normal course of business, we sell crude oil to NGL Energy. For the first six months of 2017, sales to NGL Energy were approximately
10 percent
of our total consolidated revenues adjusted for gain (loss) on derivatives.
Other
Collateral support for our commodity agreements could include margin deposits, letters of credit, surety bonds and guarantees of payment by credit worthy parties.