Hess 2014 Annual Report Download - page 55

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Impairment of Long-lived 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. Long-lived assets are
tested based on identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. If the
carrying amounts of the long-lived assets are not expected to be recovered by estimated undiscounted future net cash flows,
the assets are impaired and an impairment loss is recorded. The amount of impairment is determined based on the estimated
fair value of the assets generally determined by discounting anticipated future net cash flows, an income valuation approach,
or by a market-based valuation approach, which are Level 3 fair value measurements.
In the case of oil and gas fields, the present value of future net cash flows 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 and discounted at a risk-adjusted rate. The projected production volumes represent reserves, including
probable reserves, expected to be produced based on a stipulated 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 historical twelve month average prices.
The Corporation’s impairment tests of long-lived E&P producing assets are based on its best estimates of future
production volumes (including recovery factors), selling prices, operating and capital costs, the timing of future production
and other factors, which are updated each time an impairment test is performed. The 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. As a result of the
significant decline in crude oil prices in the fourth quarter of 2014, the Corporation tested its oil and gas properties for
impairment and determined no impairment existed at December 31, 2014.
Impairment of Goodwill: The Corporation’s goodwill is tested for impairment annually on October 1st or when events or
circumstances indicate that the carrying amount of the goodwill may not be recoverable based on a two-step process. The
goodwill test is conducted at a reporting unit level, which is defined in accounting standards as an operating segment or one
level below an operating segment. The reporting unit or units to be used in an evaluation and measurement of goodwill for
impairment testing are determined from a number of factors, including the manner in which the business is managed.
Following a reorganization of its management structure in 2013, the Corporation concluded that within its E&P segment it
has two reporting units, offshore and onshore, consistent with the manner in which performance is assessed by the Operating
segment manager.
In step one of the impairment test, the fair value of a reporting unit is compared with its carrying amount, including
goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value of
the reporting unit exceeds its fair value, the Corporation performs step two to determine possible impairment by comparing
the implied fair value of goodwill with the carrying amount. The implied fair value of goodwill is determined by assuming
the reporting unit is purchased at fair value with assets and liabilities of the reporting unit being reflected at fair value in the
same manner as the accounting prescribed for a business combination. The resulting excess of fair value of the reporting unit
over the amounts assigned to the reporting unit’s assets and liabilities represents the implied fair value of goodwill. If the
implied fair value of goodwill is less than its carrying amount, an impairment loss would be recorded.
The Corporation’s fair value estimate of each reporting unit is the sum of the anticipated discounted cash flows of
producing assets and known development projects and 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 and
increased market share. The determination of the fair value of each reporting unit depends on estimates about oil and gas
reserves, future prices, timing of future net cash flows and market premiums. The Corporation also considers the relative
market valuation of similar peer companies, and other market data if available, in determining fair value of a reporting unit.
In addition, a qualitative reconciliation of the Corporation’s market capitalization to the fair value of the reporting units used
in the goodwill impairment test is performed as of the testing date to assess reasonableness of the reporting unit fair values.
Significant extended declines in crude oil and natural gas prices or reduced reserve estimates could lead to a decrease in
the fair value of a reporting unit that could result in failing step one and potentially result in an impairment of goodwill based
on the outcome of step two. If a reporting unit fails step one, it is possible that the implied fair value of goodwill in step two
exceeds its carrying value due to one or more assets of the reporting unit having a fair value below its carrying value, or one
or more assets of the reporting unit having taxable temporary differences that result in recognition of goodwill for the
reporting unit under purchase accounting requirements in a business combination.