Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Overview
Hess Corporation (the Corporation) is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. The M&R segment manufactures, purchases, transports, trades and markets refined petroleum products, natural gas and electricity. Net income was $775 million for the third quarter of 2008, compared with $395 million in the third quarter of 2007.
Exploration and Production: E&P earnings were $699 million for the third quarter of 2008, compared with $414 million in the third quarter of 2007. In the third quarter of 2008, the Corporation's average worldwide crude oil selling price, including the effect of hedging, was $93.36 per barrel compared with $65.26 per barrel in the third quarter of 2007. The Corporation's average worldwide natural gas selling price, including the effect of hedging, was $7.60 per Mcf in the third quarter of 2008 compared with $5.38 per Mcf in the third quarter of 2007. Worldwide crude oil and natural gas production was 361,000 barrels of oil equivalent per day (boepd) in the third quarter of 2008 compared with 357,000 boepd in the same period of 2007. Facilities downtime associated with hurricanes in the Gulf of Mexico reduced third quarter production by an average of approximately 11,000 boepd and will also reduce fourth quarter production. As a result, full year production is now expected to be approximately 380,000 boepd.
The following is an update of recent Exploration and Production activities:
• The Corporation continued progressing its field developments during the third quarter. Production from Phase 2 at Block A-18 of the Joint Development Area of Malaysia and Thailand (Hess 50%) and the Shenzi Field (Hess 28%) in the deepwater Gulf of Mexico are expected to start up in early 2009 and oil production from the Ujung Pangkah Field (Hess 75%) in Indonesia is planned to commence in mid-2009.

• The Corporation completed its initial four exploration well program on Block WA-390-P (Hess 100%) located in Australia's Northwest Shelf. Following the Glencoe and Briseis discoveries, the Corporation's Nimblefoot-1 exploration well encountered 93 feet of net gas pay in September. In October, the Corporation completed the fourth well, Warrior-1, which failed to find commercial quantities of hydrocarbons. The Corporation plans to integrate the results of this drilling campaign with recently acquired seismic data to determine its 2009 drilling program, which is currently expected to commence in the second half of the year.

• In the third quarter of 2008, the Corporation commenced drilling deepwater wells on Block 54 (Hess 100%) in Libya and Cape Three Points (Hess 100%) in Ghana. In October 2008, drilling of an exploration well commenced on the BMS 22 Block in the Santos Basin (Hess 40%) located offshore Brazil.

Marketing and Refining: M&R results generated income of $161 million in the third quarter of 2008, compared with income of $46 million in the third quarter of 2007, primarily reflecting higher refining and marketing margins.

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PART I - FINANCIAL INFORMATION (CONT'D.) Results of Operations
The after-tax results by major operating activity were as follows (in millions, except per share data):

Three months ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Exploration and Production $ 699 $ 414 $ 2,548 $ 1,259 Marketing and Refining 161 46 125 269 Corporate (42 ) (28 ) (114 ) (91 ) Interest expense (43 ) (37 ) (125 ) (115 )

Net income $ 775 $ 395 $ 2,434 $ 1,322

Net income per share (diluted) $ 2.37 $ 1.23 $ 7.47 $ 4.15

Items Affecting Comparability Between Periods The following table reflects the total after-tax impact of items affecting comparability of earnings between periods (in millions):

Three months ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Exploration and Production $ - $ (33 ) $ - $ (18 ) Marketing and Refining - - - - Corporate - - - - $ - $ (33 ) $ - $ (18 )

In the third quarter of 2007, the Corporation recorded charges totaling $33 million ($64 million before income taxes) for adjustments to prior meter readings at two offshore fields. During the second quarter of 2007, the Corporation recorded a net gain of $15 million ($21 million before income taxes) related to the sale of its interests in the Scott and Telford fields located in the United Kingdom North Sea.
In the discussion that follows, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings. Management believes that after-tax amounts are preferable to pre-tax amounts for explaining variances in earnings, since they show the entire effect of a transaction. After-tax amounts are determined by applying the appropriate income tax rate in each tax jurisdiction to pre-tax amounts.

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PART I - FINANCIAL INFORMATION (CONT'D.) Results of Operations (continued) Comparison of Results Exploration and Production Following is a summarized income statement of the Corporation's Exploration and Production operations (in millions): Three months ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Sales and other operating revenues(*) $ 2,661 $ 1,747 $ 8,343 $ 5,060 Non-operating income (expenses) (71 ) 30 (2 ) 52 Total revenues 2,590 1,777 8,341 5,112 Cost and expenses Production expenses, including related taxes 503 394 1,421 1,118 Exploration expenses, including dry holes and lease impairment 157 131 467 314 General, administrative and other expenses 84 64 220 183 Depreciation, depletion and amortization 479 345 1,375 991 Total costs and expenses 1,223 934 3,483 2,606 Results of operations before income taxes 1,367 843 4,858 2,506 Provision for income taxes 668 429 2,310 1,247 Results of operations $ 699 $ 414 $ 2,548 $ 1,259

(*) Amounts
differ from
E&P
operating
revenues in
Note 11
"Segment
Information"
primarily
due to the
exclusion of
sales of
hydrocarbons
purchased
from
unrelated
third
parties.

After considering the items affecting comparability between periods, the remaining changes in Exploration and Production earnings are primarily attributable to changes in selling prices, sales volumes, operating costs, exploration expenses and income taxes, as discussed below.
Selling prices: Higher average realized selling prices of crude oil and natural gas increased Exploration and Production revenues by approximately $800 million and $2,950 million in the third quarter and first nine months of 2008, respectively, compared with the corresponding periods of 2007. The Corporation's average selling prices were as follows:

Three months ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Average selling prices Crude oil - per barrel (including hedging) United States $ 116.14 $ 73.20 $ 109.39 $ 62.88 Europe 83.23 62.06 90.69 56.95 Africa 91.72 64.38 89.66 57.72 Asia and other 105.58 70.69 106.09 66.59 Worldwide 93.36 65.26 93.62 58.82 Crude oil - per barrel (excluding hedging) United States $ 116.14 $ 73.20 $ 109.39 $ 62.88 Europe 83.23 62.06 90.69 56.95 Africa 108.49 73.49 106.91 66.47 Asia and other 105.58 70.69 106.09 66.59 Worldwide 102.80 69.85 102.03 62.66 Natural gas liquids - per barrel United States $ 77.50 $ 51.27 $ 72.79 $ 47.43 Europe 81.84 48.44 84.77 51.55 Worldwide 78.50 50.58 75.96 48.83

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PART I - FINANCIAL INFORMATION (CONT'D.) Results of Operations (continued)

Three months ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Natural gas - per Mcf (including hedging) United States $ 8.57 $ 5.80 $ 9.35 $ 6.75 Europe 10.12 6.09 9.75 5.03 Asia and other 5.77 4.69 5.33 4.55 Worldwide 7.60 5.38 7.48 5.08

Natural gas - per Mcf (excluding hedging) United States $ 8.57 $ 5.80 $ 9.35 $ 6.75 Europe 10.84 6.09 10.16 5.03 Asia and other 5.77 4.69 5.33 4.55 Worldwide 7.85 5.38 7.64 5.08

Crude oil and natural gas hedges reduced Exploration and Production earnings by $138 million and $377 million in the third quarter and first nine months of 2008, respectively ($224 million and $610 million before income taxes). Crude oil hedges reduced Exploration and Production earnings by $60 million and $155 million in the third quarter and first nine months of 2007, respectively ($101 million and $258 million before income taxes). See the Non-Trading section of "Market Risk Disclosures" on page 21 for additional activity related to these hedge positions after September 30, 2008.
Sales and production volumes: The Corporation's crude oil and natural gas production, on a barrel of oil equivalent basis, was 361,000 boepd in the third quarter of 2008 compared with 357,000 boepd in the same period of 2007. Production in the first nine months of 2008 was 382,000 boepd compared with 372,000 boepd in the first nine months of 2007. Facilities downtime associated with hurricanes in the Gulf of Mexico reduced third quarter production by an average of approximately 11,000 boepd. Delays from the hurricanes in bringing back the operations of third-party transportation infrastructure will also reduce fourth quarter production. The Corporation anticipates that its production for the full year of 2008 will average approximately 380,000 boepd and that production impacted by the hurricanes will be fully restored by January 2009.
The Corporation's net daily worldwide production by region was as follows (in thousands):

Three months ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Crude oil (barrels per day) United States 31 31 34 31 Europe 80 83 82 96 Africa 121 123 123 112 Asia and other 12 20 14 20 Total 244 257 253 259 Natural gas liquids (barrels per day) United States 9 11 10 10 Europe 4 3 4 5 Total 13 14 14 15 Natural gas (Mcf per day) United States 76 87 84 87 Europe 216 188 260 249 Asia and other 333 241 346 254 Total 625 516 690 590 Barrels of oil equivalent per day (*) 361 357 382 372

(*) Natural gas production is converted assuming six Mcf equals one barrel.

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PART I - FINANCIAL INFORMATION (CONT'D.) Results of Operations (continued)
United States: Crude oil production in the United States was higher in the first nine months of 2008, principally due to production from new wells in North Dakota and the deepwater Gulf of Mexico. In the third quarter of 2008, this increased production was offset by the impacts of hurricanes in the Gulf of Mexico.
Europe: Crude oil production in Europe in the third quarter and first nine months of 2008 was lower than the comparable periods of 2007, due to temporary shut-ins at two North Sea fields, cessation of production at the Fife Field and natural decline. These decreases were partially offset by increased production in Russia. Natural gas production in the third quarter and first nine months of 2008 was higher than in the same periods of 2007, principally reflecting increased production from the Cromarty Field in the United Kingdom, which was shut-in for a portion of 2007 in response to market conditions, partially offset by natural decline. In addition, third quarter 2008 natural gas nominations at certain fields were higher because a third-party pipeline was shut down in the third quarter of 2007.
Africa: Higher crude oil production in the first nine months of 2008 was principally due to the continued development of the Okume Complex in Equatorial Guinea, partially offset by a lower entitlement to Algerian production.
Asia and other: Crude oil production in Asia was lower in the third quarter and first nine months of 2008, reflecting a reduced entitlement to production in Azerbaijan and production interruptions. Natural gas production increased in the third quarter of 2008 principally due to increased production from Block A-18 of the Joint Development Area of Malaysia and Thailand (JDA). In the third quarter of 2007, operations at Block A-18 of the JDA were impacted by a planned shut-down in order to install facilities required for phase 2 gas sales. In the first nine months of 2008 production also increased as a result of production from the Pangkah Field in Indonesia, which commenced in April 2007.
Sales volumes: Higher crude oil sales volumes increased revenue by approximately $50 million in the third quarter and $260 million in the first nine months of 2008 compared with the corresponding periods of 2007. Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, increased by $129 million and $340 million in the third quarter and first nine months of 2008, respectively, compared with the corresponding periods of 2007. The increases principally reflect higher production volumes, increased production taxes (due to higher realized selling prices), higher costs of services and materials and increased employee related costs. Depreciation, depletion and amortization charges were higher in 2008 reflecting higher production volumes and per barrel rates.
Exploration expenses: Exploration expenses were higher in the third quarter and first nine months of 2008 compared with the corresponding periods of 2007, reflecting higher dry hole costs and increased costs of seismic studies. Income Taxes: The effective income tax rate for Exploration and Production operations in the first nine months of 2008 was 48% compared with 50% in the first nine months of 2007. The effective income tax rate for Exploration and Production operations for the full year of 2008 is expected to be in the range of 47% to 51%.
Other: The after-tax foreign currency loss related to Exploration and Production activities was $8 million in the third quarter of 2008 compared with income of $1 million in the third quarter of 2007. The after-tax foreign currency gain was $3 million for the nine months ended September 30, 2008 and a loss of $8 million for the nine months ended September 30, 2007.

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PART I - FINANCIAL INFORMATION (CONT'D.) Results of Operations (continued)
The Corporation's future Exploration and Production earnings may be impacted by external factors, such as volatility in the selling prices of crude oil and natural gas, reserve and production changes, industry cost inflation, exploration expenses, changes in foreign exchange and income tax rates, political risk and the effects of weather. Marketing and Refining
Marketing and Refining income amounted to $161 million and $125 million in the third quarter and first nine months of 2008, respectively, compared with $46 million and $269 million in the third quarter and first nine months of 2007. The Corporation's downstream operations include HOVENSA L.L.C. (HOVENSA), a 50% owned refining joint venture with a subsidiary of Petroleos de Venezuela S.A. (PDVSA), which is accounted for using the equity method. Additional Marketing and Refining activities include a fluid catalytic cracking facility in Port Reading, New Jersey, as well as retail gasoline stations, energy marketing and trading operations.
Refining: Refining operations generated income of $46 million in the third quarter and first nine months of 2008 compared with income of $25 million in the third quarter and $166 million in the first nine months of 2007. The Corporation's share of HOVENSA's income, after income taxes, was $32 million in the third quarter of 2008 compared with $12 million in the third quarter of 2007. The Corporation's share of HOVENSA's income, after income taxes, was $14 million in the first nine months of 2008 compared with $96 million in 2007, principally reflecting lower refining margins.
At September 30, 2008, the remaining balance of the PDVSA note was $30 million, which is scheduled to be fully repaid by February 2009. Interest income on the PDVSA note, after income taxes, was $2 million in the first nine months of 2008 compared with $5 million in the first nine months of 2007, reflecting a lower outstanding balance.
Port Reading's after tax earnings were $14 million and $30 million in the third quarter and first nine months of 2008, respectively, compared with $10 million and $62 million in the corresponding periods of 2007, also reflecting lower margins.
The following table summarizes refinery capacity and utilization rates:

Refinery utilization Refinery Three months ended Nine months ended capacity September 30, September 30, (thousands of barrels per day) 2008 2007 2008 2007 HOVENSA Crude 500 91.3 % 91.9 % 91.5 % 88.4 % Fluid catalytic cracker 150 72.8 % 82.4 % 73.4 % 87.8 % Coker 58 105.4 % 92.6 % 98.8 % 78.1 % Port Reading 70 * 92.4 % 93.8 % 90.3 % 92.2 %

* Refinery utilization in 2007 is based on a capacity of 65,000 barrels per day.

Marketing: Marketing operations, which consist principally of energy marketing and retail gasoline operations, generated earnings of $110 million in the third quarter of 2008 compared with $21 million in the third quarter of 2007. The increase was primarily due to increased margins in retail gasoline operations and energy marketing activities. Marketing operations had earnings of $102 million in the first nine months of 2008 compared with earnings of $64 million in the first nine months of 2007. Total refined product sales volumes were 470,000 barrels per day in the first nine months of 2008 compared with 447,000 barrels per day in the first nine months of 2007.

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PART I - FINANCIAL INFORMATION (CONT'D.) Results of Operations (continued)
Trading: The Corporation has a 50% voting interest in a consolidated partnership that trades energy commodities and energy derivatives. The Corporation also takes trading positions for its own account. The Corporation's after-tax results from trading activities, including its share of the results from the trading partnership, amounted to earnings of $5 million in the third quarter and a loss of $23 million in the first nine months of 2008 compared with breakeven results in the third quarter of 2007 and income of $39 million in the first nine months of 2007.
Marketing expenses increased in the third quarter and first nine months of 2008 compared with the corresponding periods of 2007, principally reflecting growth in energy marketing activities, higher credit card fees in retail gasoline operations and increased transportation costs.
The Corporation's future Marketing and Refining earnings may be impacted by volatility in marketing and refining margins, competitive industry conditions, government regulatory changes, credit risk and supply and demand factors, including the effects of weather.
Corporate
After-tax corporate expenses were $42 million in the third quarter of 2008 compared with $28 million in the third quarter of 2007. After-tax corporate expenses were $114 million in the first nine months of 2008 compared with $91 million in the first nine months of 2007. The increases principally reflect higher employee related expenses, losses on pension related investments and higher professional fees.
Interest
Interest expense was as follows (in millions):

Three months ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Total interest incurred $ 70 $ 77 $ 204 $ 234 Less: capitalized interest 2 18 4 49 Interest expense before income taxes 68 59 200 185 Less: income taxes 25 22 75 70 After-tax interest expense $ 43 $ 37 $ 125 $ 115

The decrease in interest incurred in the first nine months of 2008 principally reflects lower average debt. The decrease in capitalized interest in 2008 reflects the completion of several development projects in 2007. Sales and Other Operating Revenues
Sales and other operating revenues increased by 53% in the third quarter and 52% in the first nine months of 2008 compared with the corresponding periods of 2007, primarily due to higher crude oil and refined product selling prices and increased sales of electricity. The increase in cost of goods sold principally reflects higher refined product costs and increased purchases of electricity.

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PART I - FINANCIAL INFORMATION (CONT'D.) Liquidity and Capital Resources
The following table sets forth certain relevant measures of the Corporation's liquidity and capital resources (in millions, except ratios):

September 30, December 31, 2008 2007 Cash and cash equivalents $ 1,380 $ 607 Current portion of long-term debt 39 62 Total debt 3,932 3,980 Stockholders' equity 12,231 9,774 Debt to capitalization ratio(*) 24.3 % 28.9 %

(*) Total debt as
a percentage
of the sum of
total debt
plus
stockholders'
equity.

Cash Flows The following table sets forth a summary of the Corporation's cash flows (in millions): Nine months ended September 30, 2008 2007 Net cash provided by (used in): Operating activities $ 4,072 $ 2,701 Investing activities (3,232 ) (2,686 ) Financing activities (67 ) 167 Net increase in cash and cash equivalents $ 773 $ 182

. . .