Hess 2011 Annual Report Download - page 67

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•Swaps: The Corporation uses financially settled swap contracts with third parties as part of its risk
management and trading activities. Cash flows from swap contracts are determined based on
underlying commodity prices or interest rates and are typically settled over the life of the contract.
•Options: Options on various underlying energy commodities include exchange traded and third party
contracts and have various exercise periods. As a seller of options, the Corporation receives a premium
at the outset and bears the risk of unfavorable changes in the price of the commodity underlying the
option. As a purchaser of options, the Corporation pays a premium at the outset and has the right to
participate in the favorable price movements in the underlying commodities.
•Energy Securities: Energy securities include energy-related equity or debt securities issued by a
company or government or related derivatives on these securities.
Risk Management Activities
Energy marketing activities: In its energy marketing activities, the Corporation sells refined petroleum
products, natural gas and electricity principally to commercial and industrial businesses at fixed and floating
prices for varying periods of time. Commodity contracts such as futures, forwards, swaps and options together
with physical assets, such as storage, are used to obtain supply and reduce margin volatility or lower costs related
to sales contracts with customers.
Corporate risk management: Corporate risk management activities include transactions designed to
reduce risk in the selling prices of crude oil, refined petroleum products or natural gas produced by the
Corporation or to reduce exposure to foreign currency or interest rate movements. Generally, futures, swaps or
option strategies may be used to reduce risk in the selling price of a portion of the Corporation’s crude oil or
natural gas production. Forward contracts may also be used to purchase certain currencies in which the
Corporation does business with the intent of reducing exposure to foreign currency fluctuations. Interest rate
swaps may also be used, generally to convert fixed-rate interest payments to floating.
The Corporation has outstanding foreign exchange contracts used to reduce its exposure to fluctuating
foreign exchange rates for various currencies, including the British Pound and the Thai Baht. At
December 31, 2011, the Corporation had a payable for foreign exchange contracts maturing in 2012 with a fair
value of $14 million. The change in fair value of the foreign exchange contracts from a 10% strengthening of the
U.S. Dollar exchange rate is estimated to be a loss of approximately $89 million at December 31, 2011.
The Corporation’s outstanding long-term debt of $6,040 million has a fair value of $7,317 million at
December 31, 2011. A 15% decrease in the rate of interest would increase the fair value of debt by approximately
$247 million at December 31, 2011.
Following is the value at risk for the Corporation’s energy marketing and risk management commodity
derivatives activities, excluding foreign exchange and interest rate derivatives described above:
2011 2010
(Millions of dollars)
AtDecember31 ..................................................... $94 $5
Average ........................................................... 30 5
High .............................................................. 94 6
Low............................................................... 84
The increase in the value at risk for the Corporation’s energy marketing and risk management commodity
derivatives activities in 2011 primarily reflects additional Brent crude oil cash flow hedge positions as described
in Note 17, Risk Management and Trading Activities in the notes to the Consolidated Financial Statements.
Trading Activities
Trading activities are conducted principally through a trading partnership in which the Corporation has a
50% voting interest. This consolidated entity intends to generate earnings through various strategies primarily
using energy commodities, securities and derivatives. The Corporation also takes trading positions for its own
account.
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