Summary of HESS CORP - Yahoo! Finance

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 refined petroleum products and purchases, trades and markets refined petroleum products, natural gas and electricity. The Corporation reported a net loss of $59 million in the first quarter of 2009, compared with income of $759 million in the first quarter of 2008. In the first quarter of 2009, the Corporation also completed an offering of $1.25 billion of senior unsecured notes.
Exploration and Production: E&P reported a loss of $64 million for the first quarter of 2009, compared with income of $824 million in the first quarter of 2008. The decrease in earnings mainly reflects significantly lower average selling prices.
Worldwide crude oil and natural gas production was 390,000 barrels of oil equivalent per day (boepd) in the first quarter of 2009 compared with 391,000 boepd in the same period of 2008. At the end of the first quarter of 2009, oil and gas production commenced at the Shenzi Field in the deepwater Gulf of Mexico. Net production from the Shenzi Field is expected to reach approximately 20,000 boepd by the end of the year.
In the first quarter of 2009, the Corporation's average worldwide crude oil selling price, including the effect of hedging, was $34.42 per barrel compared with $83.28 per barrel in the first quarter of 2008. The Corporation's average worldwide natural gas selling price was $5.08 per thousand cubic feet (mcf) in the first quarter of 2009 compared with $7.06 per mcf in the first quarter of 2008.
During the first quarter of 2009, the Corporation's exploration activities continued in Brazil and Australia. The operator of the BM-S-22 license offshore Brazil (Hess 40%) filed a Notice of Discovery following completion of its first well, subsequently submitted a plan of evaluation with the government and, in March, commenced drilling a second well. In the Carnarvon Basin offshore Western Australia, the operator of the WA-404-P license (Hess 50%), reported a natural gas discovery. Also in the Carnarvon Basin, drilling on the WA-390-P license (Hess 100%) is scheduled to resume in the middle of the year and the Corporation expects to complete 5 to 6 additional wells before the end of 2009.
Marketing and Refining: M&R earnings were $102 million for the first quarter of 2009, compared with $16 million in the first quarter of 2008, primarily due to higher energy marketing margins and improved trading results, partially offset by lower refining and retail margins.
Results of Operations
The after-tax results by major operating activity were as follows (in millions, except per share data):

                                                            Three months ended
                                                                 March 31,
                                                            2009           2008
     Exploration and Production                           $     (64 )     $   824
     Marketing and Refining                                     102            16
     Corporate                                                  (49 )         (39 )
     Interest expense                                           (48 )         (42 )

     Net income (loss) attributable to Hess Corporation   $     (59 )     $   759

     Net income (loss) per share (diluted)                $    (.18 )     $  2.34

Table of Contents

                    PART I - FINANCIAL INFORMATION (CONT'D.)
   Results of Operations (continued)
   Items Affecting Comparability Between Periods
   The following table summarizes, on an after-tax basis, items of income
(expense) that are included in net income and affect comparability between
periods. The items in the table below are explained and the pre-tax amounts are
shown on pages 15 through 17.

                                                Three months ended
                                                     March 31,
                                                2009             2008
               Exploration and Production.   $       (13 )       $   -
               Corporate                             (16 )           -

               Total                         $       (29 )       $   -

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.
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
                                                                   March 31,
                                                               2009          2008
   Sales and other operating revenues*                      $    1,131      $ 2,607
   Non-operating income                                              8           47

   Total revenues and non-operating income                       1,139        2,654

   Cost and expenses
   Production expenses, including related taxes                    409          424
   Exploration expenses, including dry holes
   and lease impairment                                            193          152
   General, administrative and other expenses                       56           63
   Depreciation, depletion and amortization                        465          434

   Total costs and expenses                                      1,123        1,073

   Results of operations before income taxes                        16        1,581
   Provision for income taxes                                       80          757

   Results of operations attributable to Hess Corporation   $      (64 )    $   824

* Amounts differ from E&P operating revenues in Note 12 "Segment Information" primarily due to the exclusion of sales of hydrocarbons purchased from unrelated third parties.

Table of Contents

                    PART I - FINANCIAL INFORMATION (CONT'D.)
   Results of Operations (continued)
Selling prices: Lower average realized selling prices of crude oil and natural
gas decreased Exploration and Production revenues by approximately
$1,265 million in the first quarter of 2009 compared with the first quarter of
2008. The Corporation's average selling prices were as follows:

                                                         Three months ended
                                                             March 31,
                                                          2009         2008
         Average selling prices
         Crude oil - per barrel (including hedging)
         United States                                $   38.58      $ 92.59
         Europe                                           35.31        82.29
         Africa                                           31.15        78.83
         Asia and other                                   45.86        96.53
         Worldwide                                        34.42        83.28

         Crude oil - per barrel (excluding hedging)
         United States                                $   38.58      $ 92.59
         Europe                                           35.31        82.29
         Africa                                           44.20        93.52
         Asia and other                                   45.86        96.53
         Worldwide                                        40.19        89.62

         Natural gas liquids - per barrel
         United States                                $   29.03      $ 64.83
         Europe                                           36.76        76.50
         Worldwide                                        31.29        67.70

         Natural gas - per mcf (including hedging)
         United States                                $    4.03      $  8.53
         Europe                                            6.49         8.96
         Asia and other                                    4.70         5.01
         Worldwide                                         5.08         7.06

         Natural gas - per mcf (excluding hedging)
         United States                                $    4.03      $  8.53
         Europe                                            6.49         9.05
         Asia and other                                    4.70         5.01
         Worldwide                                         5.08         7.10

Hedging activities reduced earnings by $82 million ($131 million before income taxes) in the first quarter of 2009 compared with $95 million ($152 million before income taxes) in the first quarter of 2008. Sales and production volumes: The Corporation's crude oil and natural gas production was 390,000 boepd in the first quarter of 2009 compared with 391,000 boepd in the same period of 2008.

Table of Contents

PART I - FINANCIAL INFORMATION (CONT'D.) Results of Operations (continued)
The Corporation's net daily worldwide production by region was as follows (in thousands):

Three months ended March 31, 2009 2008 Crude oil (barrels per day)
United States 32 36 Europe 88 83 Africa 126 119 Asia and other 15 17

Total 261 255

Natural gas liquids (barrels per day) United States 9 11 Europe 4 4

Total 13 15

Natural gas (mcf per day)
United States 78 93 Europe 180 296 Asia and other 438 342

Total 696 731

Barrels of oil equivalent per day* 390 391

* Natural gas production is converted assuming six mcf equals one barrel.

United States: Crude oil and natural gas production in the United States was lower in the first quarter of 2009 primarily due to continued downtime resulting from hurricanes in 2008 and natural decline.
Europe: Crude oil production in Europe in the first quarter of 2009 was higher than the first quarter of 2008, largely due to increased production in Russia, partly offset by lower U.K. North Sea production as a result of production downtime and natural decline. Natural gas production in the first quarter of 2009 was lower than the first quarter of 2008, primarily due to decline at the Atlantic and Cromarty fields in the U.K. North Sea.
Africa: Higher crude oil production in Africa in the first quarter of 2009 was primarily due to higher Algeria production entitlement.
Asia and Other: The increase in natural gas production in Asia was principally due to Phase 2 gas sales from Block A-18 in the Joint Development Area of Malaysia and Thailand (JDA). These sales commenced in November 2008 upon commissioning of a third-party gas export pipeline to Thailand.
Sales Volumes: Lower crude oil and natural gas sales volumes decreased revenue by approximately $210 million in the first quarter of 2009 compared with the first quarter of 2008.
Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, decreased by $22 million in the first quarter of 2009 compared with the corresponding period of 2008. The decrease principally reflects lower price-driven production taxes; cessation of production at the Fife, Fergus, Flora and Angus fields; the favorable impact of foreign exchange rates; and cost savings initiatives. The depreciation, depletion and amortization expenses were comparable in each period, excluding the impact of the $26 million pre-tax charge ($13 million after-tax) for the impairment of the Atlantic and Cromarty fields in the U.K. North Sea in the first quarter of 2009.

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PART I - FINANCIAL INFORMATION (CONT'D.) Results of Operations (continued)
As a result of cost reduction initiatives as well as lower commodity prices, Exploration and Production cash operating costs for full year 2009 are expected to be reduced by $1 to a range of $14 to $15 per boe. Total unit costs for full year 2009 are now anticipated to be in the range of $27 to $29 per boe. Exploration expenses: Exploration expenses were higher in the first quarter of 2009 compared with the first quarter of 2008. The increase principally reflects higher dry hole expense and increased lease amortization, partly offset by lower seismic studies.
Income Taxes: E&P recorded income tax expense of $80 million on pre-tax income of $16 million in the first quarter of 2009, primarily reflecting the impact of Libyan taxes in a lower commodity price environment together with the mix of income and losses from countries with varying tax rates. In the current lower commodity price environment, it is difficult to forecast the overall E&P effective tax rate for 2009. For E&P operations in the United States and the realized Brent crude oil hedge losses, an effective tax rate of approximately 38% is expected. The combined statutory tax rate in Libya is 94%. For the remainder of international E&P operations, the effective tax rate in 2009 is estimated to be in the range of 40% to 44%.
Foreign Exchange: The after-tax foreign currency loss relating to Exploration and Production activities was $6 million in the first quarter of 2009 compared with a gain of $11 million in the first quarter of 2008.
The Corporation's future Exploration and Production earnings may be impacted by external factors, such as political risk, volatility in the selling prices of crude oil and natural gas, reserve and production changes, industry cost inflation, exploration expenses, the effects of weather and changes in foreign exchange and income tax rates.
Marketing and Refining
Earnings from Marketing and Refining activities amounted to $102 million in the first quarter of 2009 compared with $16 million in the corresponding period of 2008. 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 a loss of $18 million in the first quarter of 2009 compared with a loss of $3 million in the first quarter of 2008. The Corporation's share of HOVENSA's results, after income taxes, amounted to a loss of $25 million in the first quarter of 2009 compared with a loss of $6 million in the first quarter of 2008, reflecting lower refining margins. In February 2009, the remaining principal balance of $15 million on the Corporation's note receivable from PDVSA was fully repaid. Port Reading's earnings were $7 million in the first quarter of 2009 compared with $2 million in the first quarter of 2008, reflecting improved margins.
The following table summarizes refinery capacity and utilization rates:

                                        Refinery            Refinery utilization
                                        capacity                Three months
                                      (thousands of           ended March 31,
                                    barrels per day)         2009           2008
         HOVENSA
         Crude                                   500           82.0 %        89.1 %
         Fluid catalytic cracker                 150           71.4 %        74.3 %
         Coker                                    58           80.5 %        91.5 %
         Port Reading                             70           88.2 %        87.1 %

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PART I - FINANCIAL INFORMATION (CONT'D.) Results of Operations (continued)
Marketing: Marketing earnings, which consist principally of the results of energy marketing and retail gasoline operations, were $101 million in the first quarter of 2009 compared with $32 million in the same period of 2008, principally reflecting higher energy marketing margins and volumes. Total refined product sales volumes increased to 501,000 barrels per day in the first quarter of 2009 from 495,000 barrels per day in the first quarter of 2008.
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 of the trading partnership, amounted to a gain of $19 million in the first quarter of 2009 compared with a loss of $13 million in the first quarter of 2008.
The Corporation's future Marketing and Refining earnings may be impacted by volatility in margins, competitive industry conditions, government regulatory changes, credit risk and supply and demand factors, including the effects of weather.
Corporate
The following table summarizes corporate expenses (in millions):

                                                               Three months ended
                                                                    March 31,
                                                              2009            2008
 Corporate expenses (excluding the item described below)    $      58       $      58
 Income tax benefits                                              (25 )           (19 )

                                                                   33              39
 Items affecting comparability between periods, after-tax          16               -

 Net Corporate expenses                                     $      49       $      39

In the first quarter of 2009, a charge of $16 million ($25 million before income taxes) was recorded relating to retirement benefits and employee severance costs. The pre-tax amount of this charge is included in general and administrative expenses. As a result of these cost saving initiatives, after-tax corporate expenses in 2009 are now estimated to be in the range of $155 to $165 million, excluding items affecting comparability.

   Interest
   Interest expense was as follows (in millions):

                                                     Three months ended
                                                         March 31,
                                                    2009             2008
           Total interest incurred                $      78         $   68
           Less: capitalized interest                     1              1

           Interest expense before income taxes          77             67
           Less: income taxes                            29             25

           After-tax interest expense             $      48         $   42

The increase in interest incurred in 2009 principally reflects higher average debt resulting from the Corporation's $1.25 billion debt offering, as disclosed in Note 5, Long-Term Debt.

Table of Contents

                    PART I - FINANCIAL INFORMATION (CONT'D.)
   Results of Operations (continued)
   Sales and Other Operating Revenues
   Sales and other operating revenues decreased in the first quarter of 2009
compared with the corresponding period of 2008, primarily due to lower crude
oil, natural gas and refined product selling prices. The decrease in cost of
products sold principally reflects lower prices of refined products and
purchased natural gas.
   Liquidity and Capital Resources
   The following table sets forth certain relevant measures of the Corporation's
liquidity and capital resources (in millions, except ratios):

                                               March 31,         December 31,
                                                 2009                2008
        Cash and cash equivalents           $         1,157     $          908
        Current portion of long-term debt               135                143
        Total debt                                    4,328              3,955
        Total equity                                 12,131             12,391
        Debt to capitalization ratio*                  26.3 %             24.2 %

* Total debt as a percentage of the sum of total debt plus total equity.

   Cash Flows
   The following table sets forth a summary of the Corporation's cash flows (in
millions):

                                                       Three months ended
                                                            March 31,
                                                       2009           2008
         Net cash provided by (used in):
         Operating activities                        $     625       $ 1,183
         Investing activities                             (690 )        (835 )
         Financing activities                              314           (53 )

         Net increase in cash and cash equivalents   $     249       $   295

Operating Activities: Net cash provided by operating activities decreased in the first quarter of 2009 compared with 2008, principally reflecting decreased earnings. In the first quarter of 2008, the Corporation received a cash distribution of $25 million from HOVENSA.
Investing Activities: The following table summarizes the Corporation's capital expenditures (in millions):

                                                   Three months ended
                                                        March 31,
                                                  2009            2008
            Exploration and Production          $     658       $     817
            Marketing, Refining and Corporate          46              32

            Total                               $     704       $     849

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PART I - FINANCIAL INFORMATION (CONT'D.) Liquidity and Capital Resources (continued) Financing Activities: In the first quarter of 2009, net borrowings increased by $373 million. In February 2009, the Corporation issued $250 million of 5 year senior unsecured notes with a coupon of 7% and $1 billion of 10 year senior unsecured notes with a coupon of 8.125%. The majority of the proceeds were used to repay outstanding borrowings. Dividends paid were $65 million in the first quarter of 2009 compared with $64 million in the first quarter of 2008. Additional proceeds from financing activities totaled $6 million in the first quarter of 2009 and $31 million in the same period of 2008, primarily due to the exercise of stock options.
Future Capital Requirements and Resources The Corporation anticipates investing a total of approximately $3.2 billion in capital and exploratory expenditures during 2009, of which $3.1 billion relates to Exploration and Production operations. The Corporation has the ability to fund its 2009 operations, including capital expenditures, dividends, pension contributions and required debt repayments, with existing cash on-hand, cash flow from operations and its available credit facilities. Crude oil and natural gas prices are volatile and difficult to predict. In addition, unplanned increases in the Corporation's capital expenditure program could occur. The Corporation will take steps as necessary to protect its financial flexibility and may pursue other sources of liquidity, including the issuance of debt securities, the issuance of equity securities, and/or asset sales.
The table below summarizes the capacity, usage, and remaining availability of the Corporation's borrowing and letter of credit facilities at March 31, 2009 (in millions):

                             Expiration                                              Letters of                                Remaining
                                Date           Capacity         Borrowings          Credit Issued          Total Used          Capacity
Revolving credit            May 2012*
facility                                      $    3,000        $         -        $           594        $        594        $     2,406
Asset backed credit         October 2009
facility                                             500                  -                    500                 500                  -
Committed lines             Various**              1,812                  -                  1,708               1,708                104
Uncommitted lines           Various**              1,647                  -                  1,647               1,647                  -

Total                                         $    6,959        $         -        $         4,449        $      4,449        $     2,510

* $75 million expires in May 2011.

** Committed
and
uncommitted
lines have
expiration
dates
ranging
primarily
from 2009
through
2010.

The Corporation maintains a $3.0 billion syndicated, revolving credit facility, of which $2,925 million is committed through May 2012. This facility can be used for borrowings and letters of credit. At March 31, 2009, available capacity under the facility was $2,406 million.
The Corporation has a 364-day asset-backed credit facility securitized by certain accounts receivable from its Marketing and Refining operations. Under the terms of this financing arrangement, the Corporation has the ability to borrow or issue letters of credit up to $500 million, subject to the availability of sufficient levels of eligible receivables. At March 31, 2009, . . .