CAPITULO 1 MARCO TEORICO
1.1 Las Normas Internacionales de Información Financiera
1.1.2 En el Perú
We are exposed to market risks related to the volatility of liquid hydrocarbon, natural gas, synthetic crude oil and refined product prices. We employ various strategies, including the use of commodity derivative instruments, to manage the risks related to these price fluctuations. We are also exposed to market risks related to changes in interest rates and foreign currency exchange rates. We employ various strategies, including the use of financial derivative instruments, to manage the risks related to these fluctuations. We are at risk for changes in the fair value of all of our derivative instruments; however, such risk should be mitigated by price or rate changes related to the underlying commodity or financial transaction.
We believe that our use of derivative instruments, along with our risk assessment procedures and internal controls, does not expose us to material adverse consequences. While the use of derivative instruments could materially affect our results of operations in particular quarterly or annual periods, we believe that the use of these instruments will not have a material adverse effect on our financial position or liquidity.
See Notes 16 and 17 to the consolidated financial statement for more information about the fair value measurement of our derivatives, as well as the amounts recorded in our consolidated balance sheets and statements of income for those which qualify as hedges and those not designated as hedges.
Commodity Price Risk
Our strategy is to obtain competitive prices for our products and allow operating results to reflect market price movements dictated by supply and demand. However, management has the authority, within board-approved levels, to protect prices on forecasted sales, as deemed appropriate. We use a variety of commodity derivative instruments, including futures, forwards, swaps and combinations of options, as part of an overall program to manage commodity price risk in our different businesses. We also may utilize the market knowledge gained from these activities to do a limited amount of trading not directly related to our physical transactions.
We regularly use commodity derivative instruments in the E&P segment to manage natural gas price risk during the time that the natural gas is held in storage before it is sold or on natural gas that is purchased to be marketed with our own natural gas production. We may act opportunistically to protect prices on forecasted sales of liquid hydrocarbon, natural gas or synthetic crude oil in our E&P or OSM segments. In late December 2009 and early January 2010, we saw an opportunity to protect a portion of our 2010 forecasted sales against the risk of declining prices.
Our RM&T segment primarily uses commodity derivative instruments to manage price risk on crude oil and refined product inventories. We also use derivative instruments to manage price risk related to the acquisition of foreign-sourced crude oil and ethanol blended with refined petroleum products. In addition, we may use commodity derivative instruments to manage risk on fixed price contracts for the sale of refined products. The majority of these derivatives are exchange-traded contracts for crude oil, natural gas, refined products, ethanol and natural gas measured at fair value with a market approach using the close-of-day settlement prices for the market making them a Level 1 in the fair value hierarchy.
Open Commodity Derivative Positions and Sensitivity Analysis
At December 31, 2009, we held open derivative contracts in our E&P segment to manage the price risk on natural gas held in storage or purchased to be marketed with our own natural gas production. These hedges were in amounts in line with normal levels of activity.
Beginning in December 2009 and into January 2010, we entered swaps on a portion of our forecast 2010 sales of liquid hydrocarbon, natural gas and synthetic crude oil as follows:
• 40 percent of natural gas sales from the lower 48 states of the U.S.
• 80 percent of synthetic crude oil sales in Canada, and
• 20 percent of liquid hydrocarbon sales in the U.S. and Norway.
We have not qualified these swaps for hedge accounting. As a result, we recognize in net income all changes in the fair value of derivative instruments used in those operations. The majority of these derivatives are measured at fair value with a market approach using broker quotes or third-party pricing services, which have been
corroborated with data from active markets, making them a Level 2 in the fair value hierarchy described in the fair value accounting standards. The largest portion of open derivative contracts in our E&P and OSM segments are those related to 2010 forecasted sales, as listed on the table below:
Term Bbls per Day
Weighted Average
Swap Price Benchmark
Crude Oil
U.S. January - June 2010 35,000 $80.77 West Texas Intermediate
Norway January - June 2010 30,000 $80.42 Dated Brent
Canada January - December 2010 25,000 $82.56 West Texas Intermediate
.
Term Mmbtu per Day(a) Weighted Average
Swap Price Benchmark
Natural Gas
U.S. Lower 48 January - December 2010 80,000 $ 5.39 CIG Rocky Mountains(b) U.S. Lower 48 January - December 2010 30,000 $ 5.59 NGPL Mid Continent(c)
(a) Million British thermal units
(b) Colorado Interstate Gas Co. (“CIG”)
(c) Natural Gas Pipeline Co. of America (“NGPL”)
In the table below are the significant open derivative contracts for our RM&T segment at December 31, 2009.
These contracts enable us to effectively correlate our commodity price exposure to the relevant market indicators, thereby mitigating fixed price risk.
Position Bbls per Day Weighted Average Price Benchmark Crude Oil
Exchange-traded Long(a) 61,677 $76.67 NYMEX Crude
Exchange-traded Short(a) (54,395) $76.85 NYMEX Crude
.
Term Bbls per Day
Weighted Average
Swap Price Benchmark
Refined Products
Exchange-traded Long(b) 11,773 $ 2.00 NYEX Heating Oil and
RBOB
Exchange-traded Short(b) (17,030) $ 2.00 NYEX Heating Oil and
RBOB
(a) 75 percent of these contracts expire in the first quarter of 2010.
(b) 90 percent of these contracts expire in the first quarter of 2010.
Sensitivity analysis of the incremental effects on income from operations (“IFO”) of hypothetical 10 percent and 25 percent increases and decreases in commodity prices for open commodity derivative instruments as of December 31, 2009, is provided in the following table.
Incremental Change in IFO from a Hypothetical Price
Increase of
Incremental Change in IFO from a Hypothetical Price
Decrease of
(In millions) 10% 25% 10% 25%
E&P Segment
Crude oil $(67) $(167) $ 67 $167
Natural gas (22) (56) 22 56
OSM Segment
Crude oil $(75) $(188) $ 75 $188
RM&T Segment
Crude oil $ 24 $ 61 $(20) $ (50)
Refined products (12) (37) 12 29
We remain at risk for possible changes in the market value of commodity derivative instruments; however, such risk should be mitigated by price changes in the underlying physical commodity. Effects of these offsets are not reflected in the above sensitivity analysis.
We evaluate our portfolio of commodity derivative instruments on an ongoing basis and add or revise strategies in anticipation of changes in market conditions and in risk profiles. Changes to the portfolio after December 31, 2009, would cause future IFO effects to differ from those presented above.
Interest Rate Risk
We are impacted by interest rate fluctuations which affect the fair value of certain financial instruments. We manage our exposure to interest rate movements by utilizing financial derivative instruments. The primary objective of this program is to reduce our overall cost of borrowing by managing the mix of fixed and floating interest rate debt in our portfolio. As of December 31, 2009, we had multiple interest rate swap agreements with a total notional amount of $1.35 billion at a weighted-average, LIBOR-based, floating rate of 4.37 percent. These interest rate swaps are designated as fair value hedges, which effectively results in an exchange of existing obligations to pay fixed interest rates for obligations to pay floating rates.
Sensitivity analysis of the projected incremental effect of a hypothetical 10 percent change in interest rates on financial assets and liabilities as of December 31, 2009, is provided in the following table.
(In millions)
Fair Value
Incremental Change in Fair Value Financial assets (liabilities)(a)
Receivable from United States Steel $ 360 $ 2(c)
Interest rate swap agreements $ 5(b) $ 9(c)
Long-term debt, including amounts due within one year $(8,754)(b) $(348)(c)
(a) Fair values of cash and cash equivalents, receivables, notes payable, accounts payable and accrued interest approximate carrying value and are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments.
Accordingly, these instruments are excluded from the table.
(b) Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities.
(c) For receivables from United States Steel and long-term debt, this assumes a 10 percent decrease in the weighted average yield-to-maturity of our receivables and long-term debt at December 31, 2009. For interest rate swap agreements, this assumes a 10 percent decrease in the effective swap rate at December 31, 2009.
At December 31, 2009, our portfolio of long-term debt was substantially comprised of fixed rate instruments.
Therefore, the fair value of the portfolio is relatively sensitive to interest rate fluctuations. Our sensitivity to interest rate declines and corresponding increases in the fair value of our debt portfolio unfavorably affects our results of operations and cash flows only when we elect to repurchase or otherwise retire fixed-rate debt at prices above carrying value.
Foreign Currency Exchange Rate Risk
We manage our exposure to foreign currency exchange rates by utilizing forward and option contracts. The primary objective of this program is to reduce our exposure to movements in foreign currency exchange rates by locking in such rates. The following tables summarize our foreign currency derivative instruments as of December 31, 2009.
(In millions) Settlement Period
Notional Amount
Weighted Average Forward Rate(a) Foreign Currency Forwards
Dollar (Canada) January 2010 - February 2010 $24 1.062(b)
Euro March 2010 - June 2010 $ 3 1.278(c)
(a) Rates shown are weighted average forward rates for the period.
(b) U.S. dollar to foreign currency.
(c) Foreign currency to U.S. dollar.
(In millions) Period Notional
Amount Weighted Average Exercise Price(a) Foreign Currency Options
Dollar (Canada) January 2010 - September 2010 $144 1.042(b)
(a) Rates shown are weighted average exercise prices for the period.
(b) U.S. dollar to foreign currency.
Sensitivity analysis of the incremental effects on IFO of hypothetical 10 percent increases and decreases in exchange rates for open foreign currency derivative instruments as of December 31, 2009, is provided in the following table:
Incremental Change in IFO from a Hypothetical Exchange Rate (In millions)
Increase of 10%
Decrease of 10%
Forwards $ (3) $ 3
Options (3) 9
Total $ (6) $ 12
Counterparty Risk
We are also exposed to financial risk in the event of nonperformance by counterparties. The creditworthiness of counterparties is reviewed and master netting agreements are used when appropriate.
Safe Harbor
These quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management’s opinion about risks associated with the use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply of and demand for liquid hydrocarbons, natural gas, synthetic crude oil and refined products and other feedstocks. If these assumptions prove to be inaccurate, future outcomes with respect to our use of derivative instruments may differ materially from those discussed in the forward-looking statements.
Item 8. Financial Statements and Supplementary Data Index
Page
Management’s Responsibilities for Financial Statements 72
Management’s Report on Internal Control Over Financial Reporting 72
Report of Independent Registered Public Accounting Firm 73
Audited Consolidated Financial Statements
Consolidated Statements of Income 74
Consolidated Balance Sheets 75
Consolidated Statements of Cash Flows 76
Consolidated Statements of Stockholders’ Equity 77
Consolidated Statements of Comprehensive Income 78
Notes to Consolidated Financial Statements 79
Select Quarterly Financial Data (Unaudited) 125
Supplementary Information on Oil and Gas Producing Activities (Unaudited) 126
Supplemental Statistics (Unaudited) 134