Hess 2002 Annual Report Download - page 25

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The following table summarizes the fair values of net receivables,
including option premiums, relating to the Corporation’s trading
activities and the credit rating of counterparties at December 31:
Millions of dollars 2002 2001
Investment grade determined by outside sources $309 $260
Investment grade determined internally* 70 110
Less than investment grade 61 24
Not determined 24
$442 $398
*Based on information provided by counterparties and other available sources.
Critical Accounting Policies
Accounting policies affect the recognition of assets and liabilities on
the Corporation’s balance sheet and revenues and expenses on the
income statement. The accounting methods used can affect net
income, stockholders’ equity and various financial statement ratios.
However, the Corporation’s accounting policies generally do not
change cash flows or liquidity.
The Corporation uses the successful efforts method of accounting
for oil and gas producing activities. Costs to acquire or lease
unproved and proved oil and gas properties are capitalized. Costs
incurred in connection with the drilling and equipping of successful
exploratory wells are also capitalized. If proved reserves are not
found, these costs are charged to expense. Other exploration costs,
including seismic, are charged to expense as incurred. Development
costs, which include the costs of drilling and equipping development
wells, are capitalized. Depreciation, depletion and amortization of
capitalized costs of proved oil and gas properties are computed on
the unit-of-production method on a field basis.
The determination of proved reserves is a significant element in
arriving at the results of operations of exploration and production
activities. The estimates of proved reserves can impact well capital-
izations, undeveloped lease impairments and the depreciation rates
of proved properties, wells and equipment. Reduction in reserve esti-
mates may result in the need for impairments of proved properties
and related assets.
The Corporation reviews long-lived assets, including oil and gas fields,
for impairment whenever events or changes in circumstances indicate
that the carrying amounts may not be recovered. If the carrying
amounts are not expected to be recovered by undiscounted future
cash flows, the assets are impaired and an impairment loss is
recorded. The amount of impairment is based on the estimated fair
value of the assets determined by discounting anticipated future net
cash flows. In the case of oil and gas fields, the net present value of
future cash flow is based on management’s best estimate of future
prices, which is determined with reference to recent historical prices
and published forward prices, applied to projected production volumes
of individual fields and discounted at a rate commensurate with the
risks involved.The projected production volumes represent reserves,
including probable reserves, expected to be produced based on a stip-
ulated amount of capital expenditures.The production volumes, prices
and timing of production are consistent with internal projections and
other externally reported information. Oil and gas prices used for
determining asset impairments will generally differ from those used in
the standardized measure of discounted future net cash flows, since
the standardized measure requires the use of actual prices on the last
day of the year.
The Corporation’s impairment tests are based on its best estimates
of future production volumes (including recovery factors), selling
prices, operating and capital costs and the timing of future produc-
tion, which are updated each time an impairment test is performed.
In 2002, the Corporation recorded significant impairments of the
Ceiba field and LLOG properties that were required primarily
because of reduced estimates of oil and gas production volumes
and, in the case of Ceiba, anticipated additional development costs.
The impairment charges did not result from changes in the other
factors. The change in timing of production on the Ceiba field did not
significantly affect the undiscounted future cash flows, but did
reduce the fair value of the field determined by discounted cash
flows. The Corporation could have additional impairments if the pro-
jected production volumes on other fields were reduced. Significant
extended declines in crude oil and natural gas selling prices could
also result in asset impairments.
The Corporation has recorded $977 million of goodwill in connection
with the purchase of Triton. In accordance with FAS No. 142, goodwill
is no longer amortized but must be tested for impairment annually.
The impairment test is performed at the reporting unit level, which
for the Corporation is the exploration and production operating
segment. The determination of the fair value of the exploration and
production operating segment depends on judgments about oil and
gas reserves, future prices and timing of future cash flows. Signifi-
cant 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. The Corporation evaluates its goodwill at the
level of the exploration and production operating segment because
the exploration and production components have similar economic
characteristics. No impairment of goodwill exists because the fair
value of the exploration and production operating segment exceeds
its recorded book value.