Hess 2008 Annual Report Download - page 50

Corporation could have impairments if the projected production volumes from oil and gas fields decrease, crude oil
and natural gas selling prices decline significantly for an extended period or future estimated capital and operating
costs increase significantly.
In accordance with FAS 142, Goodwill and Other Intangible Assets, the Corporation’s goodwill is not
amortized, but is tested for impairment at a reporting unit level, which is an operating segment or one level below an
operating segment. The impairment test is conducted annually in the fourth quarter or when events or changes in
circumstances indicate that the carrying amount of the goodwill may not be recoverable. The reporting unit or units
used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the
business is managed. The Corporation’s goodwill is assigned to the Exploration and Production operating segment
and it expects that the benefits of goodwill will be recovered through the operation of that segment.
The Corporation’s fair value estimate of the Exploration and Production segment is the sum of: (1) the
discounted anticipated cash flows of producing assets and known developments, (2) the estimated risk adjusted
present value of exploration assets, and (3) an estimated market premium to reflect the market price an acquirer
would pay for potential synergies including cost savings, access to new business opportunities, enterprise control,
improved processes and increased market share. The Corporation also considers the relative market valuation of
similar Exploration and Production companies.
The determination of the fair value of the Exploration and Production operating segment depends on estimates
about oil and gas reserves, future prices, timing of future net cash flows and market premiums. Significant extended
declines in crude oil and natural gas prices or reduced reserve estimates could lead to a decrease in the fair value of
the Exploration and Production operating segment that could result in an impairment of goodwill.
Because there are significant differences in the way long-lived assets and goodwill are evaluated and measured
for impairment testing, there may be impairments of individual assets that would not cause an impairment of the
goodwill assigned to the Exploration and Production segment.
Asset Retirement Obligations: The Corporation has material legal obligations to remove and dismantle long
lived assets and to restore land or seabed at certain exploration and production locations. In accordance with
generally accepted accounting principles, the Corporation recognizes a liability for the fair value of required asset
retirement obligations. In addition, the fair value of any legally required conditional asset retirement obligations is
recorded if the liability can be reasonably estimated. The Corporation capitalizes such costs as a component of the
carrying amount of the underlying assets in the period in which the liability is incurred. In order to measure these
obligations, the Corporation estimates the fair value of the obligations by discounting the future payments that will
be required to satisfy the obligations. In determining these estimates, the Corporation is required to make several
assumptions and judgments related to the scope of dismantlement, timing of settlement, interpretation of legal
requirements, inflationary factors and discount rate. In addition, there are other external factors which could
significantly affect the ultimate settlement costs for these obligations including: changes in environmental
regulations and other statutory requirements, fluctuations in industry costs and foreign currency exchange
rates, and advances in technology. As a result, the Corporation’s estimates of asset retirement obligations are
subject to revision due to the factors described above. Changes in estimates prior to settlement result in adjustments
to both the liability and related asset values.
Derivatives: The Corporation utilizes derivative instruments for both non-trading and trading activities. In
non-trading activities, the Corporation uses futures, forwards, options and swaps, individually or in combination to
mitigate its exposure to fluctuations in the prices of crude oil, natural gas, refined products and electricity, and
changes in foreign currency exchange rates. In trading activities, the Corporation, principally through a
consolidated partnership, trades energy commodities and derivatives, including futures, forwards, options and
swaps, based on expectations of future market conditions.
All derivative instruments are recorded at fair value in the Corporation’s balance sheet. The Corporation’s
policy for recognizing the changes in fair value of derivatives varies based on the designation of the derivative. The
changes in fair value of derivatives that are not designated as hedges under FAS 133, Accounting for Derivative
Instruments and Hedging Activities, are recognized currently in earnings. Derivatives may be designated as hedges
of expected future cash flows or forecasted transactions (cash flow hedges) or hedges of firm commitments (fair
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