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MRO » Topics » Impairment Assessments of Goodwill and Long-Lived Assets

These excerpts taken from the MRO 10-K filed Feb 27, 2009.

Impairment Assessments of Goodwill and Long-Lived Assets

Fair value calculated for the purpose of testing for impairment of our long-lived assets and goodwill is estimated using the expected present value of future cash flows method and comparative market prices when appropriate. A significant amount of judgment is involved performing these fair value estimates for goodwill and long-lived assets since the results are based on forecasted assumptions. Significant assumptions include:

 

  •  

Future liquid hydrocarbon and natural gas prices. Our estimates of future prices are based on our analysis of market supply and demand and consideration of market price indicators. Although liquid hydrocarbon and natural gas prices may experience extreme volatility in any given year, we believe long-term industry prices are driven by global market supply and demand. To estimate supply, we consider numerous factors, including the world-wide resource base, depletion rates, and OPEC production policies. We believe demand is largely driven by global economic factors, such as population and income growth, governmental policies, and vehicle stocks. Such price estimates are consistent with those used in our planning and capital investment reviews. There has been significant volatility in the liquid hydrocarbon and natural gas prices and estimates of such price curves are inherently imprecise.

 

  •  

Estimated recoverable quantities of liquid hydrocarbons, natural gas and bitumen. This is based on a combination of proved and risk-adjusted probable and possible reserves. These estimates are based on work performed by our engineers and that of outside consultants. Because of their very nature, probable and possible reserves are less precise than those of proved reserves. We evaluate our probable and possible reserves using drilling results, reservoir performance, seismic interpretation and future plans to develop acreage. Reserves are adjusted as new information becomes available.

 

  •  

Expected timing of production. Production forecasts are based on a combination of proved and risk-adjusted probable and possible reserves based on engineering studies. The actual timing of the production could be different than the projection. Cash flows realized later in the projection period are less valuable than those realized earlier due to the time value of money.

 

  •  

Future margins on refined products produced and sold. Our estimates of future product margins are based on our own analysis of various supply and demand factors, which includes, among other things, industry-wide capacity, our planned utilization rate, end-user demand, capital expenditures, and economic conditions. Such estimates are consistent with those used in our planning and capital investment reviews.

 

  •  

Discount rate commensurate with the risks involved. We apply a discount rate to our cash flows based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions, if possible. A higher discount rate decreases the net present value of cash flows.

 

  •  

Future capital requirements. This is based on authorized spending and internal forecasts.

 

63

Table of Contents
Index to Financial Statements

We base our fair value estimates on projected financial information which we believe to be reasonable. However, actual results may differ from those projections.

The need to test for impairment can be based on several indicators, including a significant reduction in prices of liquid hydrocarbons or natural gas, unfavorable adjustments to reserves, significant changes in the expected timing of production, significant reduction in refining margins, other changes to contracts or changes in the regulatory environment in which the property is located.

Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate that the carrying value of the assets may not be recoverable. For purposes of impairment evaluation, long-lived assets must be grouped at the lowest level for which independent cash flows can be identified, which generally is field-by-field for E&P assets, project level for oil sands mining assets, refinery and associated distribution system level or pipeline system level for refining and transportation assets, or site level for retail stores. If the sum of the undiscounted estimated pretax cash flows is less than the carrying value of an asset group, the carrying value is written down to the estimated fair value.

Unlike long-lived assets, goodwill must be tested for impairment at least annually, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment at the reporting unit level.

An estimate as to the sensitivity to earnings resulting from impairment calculations is not practicable, given the numerous assumptions (e.g. reserves, pricing and discount rates) that can materially affect our estimates. That is, unfavorable adjustments to some of the above listed assumptions may be offset by favorable adjustments in other assumptions.

Impairment Assessments of Goodwill and Long-Lived Assets

Fair value calculated for the purpose of testing for impairment of our long-lived assets and goodwill is estimated using the expected present value of future cash flows method and comparative market prices when appropriate. A significant amount of judgment is involved performing these fair value estimates for goodwill and long-lived assets since the results are based on forecasted assumptions. Significant assumptions include:

 

  •  

Future liquid hydrocarbon and natural gas prices. Our estimates of future prices are based on our analysis of market supply and demand and consideration of market price indicators. Although liquid hydrocarbon and natural gas prices may experience extreme volatility in any given year, we believe long-term industry prices are driven by global market supply and demand. To estimate supply, we consider numerous factors, including the world-wide resource base, depletion rates, and OPEC production policies. We believe demand is largely driven by global economic factors, such as population and income growth, governmental policies, and vehicle stocks. Such price estimates are consistent with those used in our planning and capital investment reviews. There has been significant volatility in the liquid hydrocarbon and natural gas prices and estimates of such price curves are inherently imprecise.

 

  •  

Estimated recoverable quantities of liquid hydrocarbons, natural gas and bitumen. This is based on a combination of proved and risk-adjusted probable and possible reserves. These estimates are based on work performed by our engineers and that of outside consultants. Because of their very nature, probable and possible reserves are less precise than those of proved reserves. We evaluate our probable and possible reserves using drilling results, reservoir performance, seismic interpretation and future plans to develop acreage. Reserves are adjusted as new information becomes available.

 

  •  

Expected timing of production. Production forecasts are based on a combination of proved and risk-adjusted probable and possible reserves based on engineering studies. The actual timing of the production could be different than the projection. Cash flows realized later in the projection period are less valuable than those realized earlier due to the time value of money.

 

  •  

Future margins on refined products produced and sold. Our estimates of future product margins are based on our own analysis of various supply and demand factors, which includes, among other things, industry-wide capacity, our planned utilization rate, end-user demand, capital expenditures, and economic conditions. Such estimates are consistent with those used in our planning and capital investment reviews.

 

  •  

Discount rate commensurate with the risks involved. We apply a discount rate to our cash flows based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions, if possible. A higher discount rate decreases the net present value of cash flows.

 

  •  

Future capital requirements. This is based on authorized spending and internal forecasts.

 

63

Table of Contents
Index to Financial Statements

We base our fair value estimates on projected financial information which we believe to be reasonable. However, actual results may differ from those projections.

The need to test for impairment can be based on several indicators, including a significant reduction in prices of liquid hydrocarbons or natural gas, unfavorable adjustments to reserves, significant changes in the expected timing of production, significant reduction in refining margins, other changes to contracts or changes in the regulatory environment in which the property is located.

Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate that the carrying value of the assets may not be recoverable. For purposes of impairment evaluation, long-lived assets must be grouped at the lowest level for which independent cash flows can be identified, which generally is field-by-field for E&P assets, project level for oil sands mining assets, refinery and associated distribution system level or pipeline system level for refining and transportation assets, or site level for retail stores. If the sum of the undiscounted estimated pretax cash flows is less than the carrying value of an asset group, the carrying value is written down to the estimated fair value.

Unlike long-lived assets, goodwill must be tested for impairment at least annually, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment at the reporting unit level.

An estimate as to the sensitivity to earnings resulting from impairment calculations is not practicable, given the numerous assumptions (e.g. reserves, pricing and discount rates) that can materially affect our estimates. That is, unfavorable adjustments to some of the above listed assumptions may be offset by favorable adjustments in other assumptions.

EXCERPTS ON THIS PAGE:

10-K (2 sections)
Feb 27, 2009

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