CONOCOPHILLIPS 10-K

Item 7A. Quantitative and Qualitative Disclosures about Market Risk Financial Instrument Market Risk We and certain of our subsidiaries hold and issue derivative contracts and financial instruments that expose our cash flows or earnings to changes in commodity prices, foreign currency exchange rates or interest rates. We may use financial and commodity-based derivative contracts to manage the risks produced by changes in the prices of natural gas, crude oil and related products; fluctuations in interest rates and foreign currency exchange rates; or to capture market opportunities. Our use of derivative instruments is governed by an “Authority Limitations” document approved by our Board of Directors that prohibits the use of highly leveraged derivatives or derivative instruments without sufficient liquidity. The Authority Limitations document also establishes the Value at Risk (VaR) limits for the company, and compliance with these limits is monitored daily. The Executive Vice President and Chief Financial Officer, who reports to the Chief Executive Officer, monitors commodity price risk and risks resulting from foreign currency exchange rates and interest rates. The Commercial organization manages our commercial marketing, optimizes our commodity flows and positions, and monitors risks. Commodity Price Risk Our Commercial organization uses futures, forwards, swaps and options in various markets to accomplish the following objectives: ● Meet customer needs. Consistent with our policy to generally remain exposed to market prices, we use swap contracts to convert fixed-price sales contracts, which are often requested by natural gas consumers, to floating market prices. ● Enable us to use market knowledge to capture opportunities such as moving physical commodities to more profitable locations and storing commodities to capture seasonal or time premiums. We may use derivatives to optimize these activities. We use a VaR model to estimate the loss in fair value that could potentially result on a single day from the effect of adverse changes in market conditions on the derivative financial instruments and derivative commodity instruments we hold or issue, including commodity purchases and sales contracts recorded on the balance sheet at December 31, 2021, as derivative instruments. Using Monte Carlo simulation, a 95 percent confidence level and a one-day holding period, the VaR for those instruments issued or held for trading purposes or held for purposes other than trading at December 31, 2021 and 2020, was immaterial to our consolidated cash flows and net income attributable to ConocoPhillips. Interest Rate Risk The following table provides information about our debt instruments that are sensitive to changes in U.S. interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Weighted-average variable rates are based on effective rates at the reporting date. The carrying amount of our floating-rate debt approximates its fair value. A hypothetical 10 percent change in prevailing interest rates would not have a material impact on interest expense associated with our floating-rate debt. The fair value of the fixed-rate debt is measured using prices available from a pricing service that is corroborated by market data. Changes to prevailing interest rates would not impact our cash flows associated with fixed rate debt, unless we elect to repurchase or retire such debt prior to maturity. Table of Contents ConocoPhillips 2021 10-K 72 Millions of Dollars Except as Indicated Debt Fixed Average Floating Average Rate Interest Rate Interest Expected Maturity Date Maturity Rate Maturity Rate Year-End 2021 2022 $ 346 2.53 % $ 500 1.03 % 2023 116 6.64 - - 2024 459 3.51 - - 2025 369 5.32 - - 2026 1,355 5.06 - - Remaining years 14,338 5.80 283 0.11 Total $ 16,983 $ 783 Fair value $ 21,668 $ 783 Year-End 2020 2021 $ 133 8.47 % $ 300 0.22 % 2022 346 2.53 500 1.12 2023 110 7.03 - - 2024 459 3.51 - - 2025 368 5.33 - - Remaining years 11,793 6.28 283 0.11 Total $ 13,209 $ 1,083 Fair value $ 18,023 $ 1,083 Foreign Currency Exchange Risk We have foreign currency exchange rate risk resulting from international operations. We do not comprehensively hedge the exposure to currency exchange rate changes although we may choose to selectively hedge certain foreign currency exchange rate exposures, such as firm commitments for capital projects or local currency tax payments, dividends and cash returns from net investments in foreign affiliates to be remitted within the coming year, and investments in equity securities. At December 31, 2021 and 2020, we held foreign currency exchange forwards hedging cross-border commercial activity and foreign currency exchange swaps for purposes of mitigating our cash-related exposures. Although these forwards and swaps hedge exposures to fluctuations in exchange rates, we elected not to utilize hedge accounting. As a result, the change in the fair value of these foreign currency exchange derivatives is recorded directly in earnings. At December 31, 2021, we had outstanding foreign currency exchange forward contracts to buy $1.9 billion AUD at $0.715 AUD against the U.S. dollar. At December 31, 2020, we had outstanding foreign currency exchange forward contracts to sell $0.45 billion CAD at $0.748 CAD against the U.S. dollar. Based on the assumed volatility in the fair value calculation, the net fair value of these foreign currency contracts at December 31, 2021 and December 31, 2020, were a before-tax gain of $21 million and before -tax loss of $16 million, respectively. Based on an adverse hypothetical 10 percent change in the December 2021 and December 2020 exchange rate, this would result in an additional before-tax loss of $134 million and $39 million, respectively. The sensitivity analysis is based on changing one assumption while holding all other assumptions constant, which in practice may be unlikely to occur, as changes in some of the assumptions may be correlated. Table of Contents 73 ConocoPhillips 2021 10-K The gross notional and fair value of these positions at December 31, 2021 and 2020, were as follows : Foreign Currency Exchange Derivatives In Millions Notional Fair Value* 2021 2020 2021 2020 Sell Canadian dollar, buy U.S. dollar CAD - 450 - (16) Buy Canadian dollar, sell U.S. dollar CAD 77 80 (1) 2 Buy Australian dollar, sell U.S. dollar AUD 1,850 - 21 - Sell British pound, buy euro GBP 239 8 (8) - Buy British pound, sell euro GBP 394 3 7 - *Denominated in USD. For additional information about our use of derivative instruments, see Note 12 . Table of Contents ConocoPhillips 2021 10-K 74