Hess 2000 Annual Report Download - page 26

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The Corporation has announced several acquisitions
which, if completed as anticipated, will involve addi-
tional capital expenditures in 2001. These expenditures
will be financed primarily with internally generated funds
supplemented by borrowings to the extent necessary. The
Corporation reached agreement to purchase substantially
all of the assets of a privately held exploration and pro-
duction company for approximately $750 million, after
expected closing adjustments. The properties acquired
are located on the Gulf of Mexico shelf and onshore
Louisiana. Production currently is averaging approxi-
mately 200,000 Mcf of natural gas equivalent per day and
is expected to rise to 250,000 Mcf of natural gas equivalent
per day in 2003. The Corporation also has agreed to pur-
chase three natural gas properties in the Gulf of Mexico
for approximately $95 million, which will add natural gas
production of approximately 30,000 Mcf per day. In
addition, the Corporation will invest approximately $90
million in a 50% owned joint venture which will operate
120 gasoline stations and 21 travel centers. The Corpora-
tion will also acquire a chain of 53 retail outlets that will
be financed with operating leases.
Derivative Instruments
The Corporation is exposed to market risks related to vola-
tility in the selling prices of crude oil, natural gas and
refined products, as well as to changes in interest rates
and foreign currency values. Derivative instruments are
used to reduce these price and rate fluctuations. The Cor-
poration has guidelines for, and controls over, the use of
derivative instruments.
The Corporation uses futures, forwards, options and
swaps to reduce the effects of changes in the selling prices
of crude oil, natural gas and refined products. These
instruments fix the selling prices of a portion of the Cor-
poration’s products and the related gains or losses are
an integral part of the Corporation’s selling prices. In the
fourth quarter of 2000, the Corporation hedged an
increased percentage of its crude oil production in antici-
pation of the proposed acquisition of another oil company.
As a result, at December 31 the Corporation had open
hedge positions equal to 65% of its estimated 2001
worldwide crude oil production and 25% of its 2002
production. The Corporation also has hedges covering
15% of its 2001 United States natural gas production. The
Corporation also uses derivatives in its energy marketing
activities to fix the purchase prices of energy products
sold under fixed-price contracts. As market conditions
change, the Corporation will adjust its hedge positions.
The Corporation owns an interest in a partnership that
trades energy commodities and energy derivatives. The
accounts of the partnership are consolidated with those of
the Corporation. The Corporation also takes trading posi-
tions for its own account.
The Corporation uses value at risk to estimate the poten-
tial effects of changes in fair values of derivatives and
other instruments used in hedging activities and deriva-
tives and commodities used in trading activities. This
method determines the potential one-day change in fair
value with 95% confidence. The analysis is based on his-
torical simulation and other assumptions. The value at
risk is summarized below:
Hedging Trading
Millions of dollars Activities Activities
2000
At December 31 $36 $16
Average for the year 25 15
High during the year 36 18
Low during the year 17 9
1999
At December 31 $13 $ 6
Average for the year 67
High during the year 13 10
Low during the year 25
The Corporation may use interest-rate swaps to balance
exposure to interest rates. At December 31, 2000, the Cor-
poration has substantially all fixed-rate debt and no inter-
est-rate swaps. At December 31, 1999, the Corporation had
$400 million of notional value, interest-rate swaps that
decreased its percentage of floating-rate debt to 24%. The
Corporation’s outstanding debt of $2,050 million has a fair
value of $2,149 million at December 31, 2000 ($2,299 at
December 31, 1999). A 10% change in interest rates would
change the fair value of debt at December 31, 2000 by
$110 million. The impact of a 10% change in interest rates
on debt and related interest rate swaps at December 31,
1999 was $120 million.