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 net income of $341 million in the third quarter of 2009, compared with $775 million in the third quarter of 2008.
Exploration and Production: E&P reported income of $397 million for the third quarter of 2009, compared with income of $699 million in the third quarter of 2008. The decrease in earnings mainly reflects significantly lower average oil and gas selling prices. Reported E&P earnings for the third quarter of 2009 included after-tax income of $89 million related to the resolution of a U.S. royalty dispute.
In the third quarter of 2009, the Corporation's average worldwide crude oil selling price, including the effect of hedging, was $56.07 per barrel compared with $93.36 per barrel in the third quarter of 2008. The Corporation's average worldwide natural gas selling price was $4.60 per thousand cubic feet (mcf) in the third quarter of 2009 compared with $7.60 per mcf in the third quarter of 2008.
Worldwide crude oil and natural gas production was 420,000 barrels of oil equivalent per day (boepd) in the third quarter of 2009 compared with 361,000 boepd in the same period of 2008. This increase was largely due to production from the Shenzi Field together with Phase 2 production from Block A-18 of the Joint Development Area of Malaysia and Thailand (JDA). The Shenzi Field commenced production at the end of the first quarter of 2009 and net production averaged 38,000 boepd for the third quarter. For the full year of 2009, worldwide crude oil and natural gas production is expected to average between approximately 400,000 and 410,000 boepd.
Drilling continued in the Carnarvon Basin offshore Western Australia (WA-Block 390-P, Hess 100%) during the third quarter. The Corporation has now completed 9 wells and expects to drill the remaining 7 wells of the program by mid-2010.
Marketing and Refining: M&R results generated income of $38 million for the third quarter of 2009, compared with income of $161 million in the third quarter of 2008, primarily reflecting lower margins. M&R results included a benefit of $12 million due to an income tax adjustment relating to refining operations. 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,
                                                2009             2008            2009             2008
Exploration and Production                    $     397         $   699        $     548         $ 2,548
Marketing and Refining                               38             161              110             125
Corporate                                           (33 )           (42 )           (108 )          (114 )
Interest expense                                    (61 )           (43 )           (168 )          (125 )

Net income (loss) attributable to Hess
Corporation                                   $     341         $   775        $     382         $ 2,434

Net income (loss) per share (diluted)         $    1.05         $  2.37        $    1.17         $  7.47

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 (amounts in millions):

                                     Three Months Ended             Nine Months Ended
                                        September 30,                 September 30,
                                     2009             2008         2009             2008
     Exploration and Production   $        89         $   -     $        45         $   -
     Marketing and Refining                12             -              12             -
     Corporate                              -             -             (16 )           -

     Total                        $       101         $   -     $        41         $   -

The items in the table above are explained on pages 17 through 19. 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 E&P operations (in millions):

                                                  Three Months Ended                Nine Months Ended
                                                    September 30,                     September 30,
                                                 2009             2008             2009            2008
Sales and other operating revenues*           $    1,792         $ 2,661        $    4,622        $ 8,343
Other, net                                           145             (71 )             210             (2 )

Total revenues and non-operating income            1,937           2,590             4,832          8,341

Cost and expenses
Production expenses, including related
taxes                                                460             503             1,313          1,421
Exploration expenses, including dry
holes and lease impairment                           167             157               672            467
General, administrative and other
expenses                                              65              84               182            220
Depreciation, depletion and amortization             602             479             1,605          1,375

Total costs and expenses                           1,294           1,223             3,772          3,483

Results of operations before income
taxes                                                643           1,367             1,060          4,858
Provision for income taxes                           246             668               512          2,310

Results of operations attributable to
Hess Corporation                              $      397         $   699        $      548        $ 2,548

* 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)
After considering the items affecting comparability between periods in the table on page 17, the remaining changes in E&P earnings are primarily attributable to changes in selling prices, sales volumes, operating costs, depreciation, depletion and amortization, and exploration expenses as discussed below.
Selling prices: Lower average realized selling prices of crude oil and natural gas decreased E&P revenues by approximately $1,205 million and $4,250 million in the third quarter and first nine months of 2009, respectively, compared with the corresponding periods of 2008. The Corporation's average selling prices were as follows:

                                                    Three Months Ended                Nine Months Ended
                                                      September 30,                     September 30,
                                                  2009             2008             2009            2008
Average selling prices
Crude oil - per barrel (including hedging)
United States                                   $   63.79        $  116.14        $  56.02        $  109.39
Europe                                              47.34            83.23           42.80            90.69
Africa                                              54.97            91.72           44.98            89.66
Asia and other                                      67.49           105.58           56.63           106.09
Worldwide                                           56.07            93.36           47.09            93.62

Crude oil - per barrel (excluding hedging)
United States                                   $   63.79        $  116.14        $  56.02        $  109.39
Europe                                              47.34            83.23           42.80            90.69
Africa                                              67.27           108.49           56.59           106.91
Asia and other                                      67.49           105.58           56.63           106.09
Worldwide                                           61.42           102.80           52.35           102.03

Natural gas liquids - per barrel
United States                                   $   36.05        $   77.50        $  32.38        $   72.79
Europe                                              43.53            81.84           37.86            84.77
Asia and other                                      44.74                -           38.49                -
Worldwide                                           37.27            78.50           33.90            75.96

Natural gas - per mcf (including hedging)
United States                                   $    2.65        $    8.57        $   3.19        $    9.35
Europe                                               4.38            10.12            5.25             9.75
Asia and other                                       5.12             5.77            4.88             5.33
Worldwide                                            4.60             7.60            4.74             7.48

Natural gas - per mcf (excluding hedging)
United States                                   $    2.65        $    8.57        $   3.19        $    9.35
Europe                                               4.38            10.84            5.25            10.16
Asia and other                                       5.12             5.77            4.88             5.33
Worldwide                                            4.60             7.85            4.74             7.64

In October 2008, the Corporation closed its Brent crude oil cash flow hedges, covering 24,000 barrels per day from 2009 through 2012, by entering into offsetting contracts with the same counterparty. The deferred after tax loss as of the date the hedge positions were closed will be recorded in earnings as the contracts mature. The estimated annual after-tax loss from the closed positions will be approximately $335 million from 2009 through 2012. Crude oil hedges reduced E&P earnings by $84 million and $249 million in the third quarter and first nine months of 2009 ($134 million and $398 million before income taxes). 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).

Table of Contents

                    PART I - FINANCIAL INFORMATION (CONT'D.)
Results of Operations (continued)
Sales and production volumes: The Corporation's crude oil and natural gas
production was 420,000 boepd in the third quarter of 2009 compared with
361,000 boepd in the same period of 2008. Production in the first nine months of
2009 was 406,000 boepd compared with 382,000 boepd in the first nine months of
2008. The Corporation anticipates that its production for the full year of 2009
will average between approximately 400,000 and 410,000 boepd.
   The Corporation's net daily worldwide production by region was as follows (in
thousands):

                                            Three Months Ended           Nine Months Ended
                                               September 30,               September 30,
                                           2009            2008          2009           2008
 Crude oil (barrels per day)
 United States                                  73              31            54           34
 Europe                                         83              80            82           82
 Africa                                        124             121           125          123
 Asia and other                                 17              12            16           14

 Total                                         297             244           277          253


 Natural gas liquids (barrels per day)
 United States                                  12               9            10           10
 Europe                                          2               4             3            4
 Asia and other                                  -               -             1            -

 Total                                          14              13            14           14


 Natural gas (mcf per day)
 United States                                 105              76            92           84
 Europe                                        120             216           153          260
 Asia and other                                429             333           442          346

 Total                                         654             625           687          690

 Barrels of oil equivalent per day*            420             361           406          382

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

United States: Crude oil production in the United States was higher in the third quarter and first nine months of 2009 compared to the corresponding periods in 2008, primarily due to the Shenzi Field which commenced production at the end of the first quarter of 2009. Crude oil and natural gas production in the Gulf of Mexico totaling approximately 10,000 boepd was shut-in during the third quarter of 2008 due to the impact of hurricanes.
Europe: Crude oil production in Europe in the third quarter and first nine months of 2009 was comparable to the same periods in 2008, as higher production in Russia was offset by lower production in the U.K. North Sea. Natural gas production was lower in the third quarter and first nine months of 2009 compared to the same periods in 2008, primarily due to decline at the Atlantic and Cromarty fields, which are nearing the end of their productive lives.
Asia and other: The increase in natural gas production in the third quarter and first nine months of 2009 compared to the corresponding periods in 2008 was principally due to Phase 2 gas sales from the JDA, which commenced production in November 2008.
Sales volumes: Higher crude oil sales volumes increased revenue by approximately $335 million in the third quarter and $530 million in the first nine months of 2009, compared with the corresponding periods of 2008. During the third quarter of 2009, the Corporation's sales volumes were under lifted compared to production while year-to-date sales volumes approximated total production volumes.

Table of Contents

PART I - FINANCIAL INFORMATION (CONT'D.) Results of Operations (continued)
Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, decreased by $62 million and $165 million in the third quarter and first nine months of 2009 compared with the corresponding periods of 2008, excluding the impact of items affecting comparability discussed below. These decreases were principally due to lower price related production taxes.
Depreciation, depletion and amortization expenses increased by $123 million and $179 million in the third quarter and first nine months of 2009 compared with the corresponding periods of 2008, excluding the impact of items affecting comparability discussed below. These increases were primarily due to the commencement of production in the Shenzi Field at the end of the first quarter 2009 and the ramp up of production at the JDA with Phase 2 gas. Rates per barrel also increased due to the mix of production from assets with varying per barrel rates, including the Shenzi Field.
Excluding the impact of items affecting comparability discussed below, E&P total production unit costs (cash operating costs plus depreciation, depletion, and amortization) are anticipated to be in the range of $27 to $29 per barrel of oil equivalent (boe).
Exploration expenses: Exploration expenses were higher in the third quarter and the first nine months of 2009 compared with the same periods in 2008 principally reflecting higher dry hole expense and lease impairment partially offset by lower seismic costs.
Income taxes: The effective income tax rate for E&P operations in the first nine months of 2009 was 49% compared with 48% in the first nine months of 2008. The effective income tax rate for E&P operations for the full year of 2009 is expected to be in the range of 47% to 49%.
Foreign exchange: The after-tax foreign currency gains related to E&P activities were $4 million in the third quarter of 2009 compared with losses of $8 million in the third quarter of 2008. The after-tax foreign currency loss in the nine months ended September 30, 2009 was $1 million compared with a gain of $3 million for the nine months ended September 30, 2008.
Reported E&P earnings include the following items affecting comparability of earnings between periods, after-tax (in millions):

                                                   Three Months Ended                  Nine Months Ended
                                                     September 30,                       September 30,
                                                 2009               2008             2009               2008
Royalty dispute resolution                    $       89          $      -        $        89          $     -
Reductions in carrying values of assets                -                 -                (44 )              -

Total                                         $       89          $      -        $        45          $     -

In early October 2009, the U.S. Supreme Court decided it would not review the decision of the 5th Circuit Court of Appeals against the U.S. Minerals Management Service relating to royalty relief under the Deep Water Royalty Relief Act of 1995. As a result, the Corporation recognized an after-tax gain of $89 million in the third quarter of 2009 to reverse all previously recorded royalties covering the periods from 2003 to 2009. The pre-tax gain of $143 million is reported in Other, net within the Statement of Consolidated Income. Approximately $7 million of the after-tax gain related to 2009.

Table of Contents

PART I - FINANCIAL INFORMATION (CONT'D.) Results of Operations (continued)
In the second quarter of 2009, after-tax charges of $31 million ($51 million before income taxes) were recorded to reduce the carrying values of production equipment in the U.K. North Sea and materials inventory in Equatorial Guinea and the United States. In the first quarter of 2009, the Corporation recorded an after-tax charge of $13 million ($26 million before income taxes) to reduce the carrying values of two short-lived fields in the U.K. North Sea. The pre-tax amount of the reductions in carrying value of production equipment and the short-lived fields was reported in Depreciation, depletion and amortization and the majority of the reduction in carrying values of inventory of $25 million was reported in Production expenses in the Statement of Consolidated Income.
The Corporation's future E&P 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
M&R activities generated income of $38 million and $110 million in the third quarter and first nine months of 2009 compared with $161 million and $125 million for the corresponding periods 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 $15 million and $59 million in the third quarter and first nine months of 2009 compared with income of $46 million in both the third quarter and first nine months of 2008, excluding the impact of the item affecting comparability discussed below. The Corporation's share of HOVENSA's losses, after income taxes, was $30 million in the third quarter of 2009 and $101 million in the first nine months of 2009 compared with income of $32 million and $14 million in the corresponding periods of 2008, principally reflecting lower refining margins. Port Reading's after tax earnings were $16 million and $43 million in the third quarter and first nine months of 2009, compared with $14 million and $30 million in the corresponding periods of 2008.
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)        2009         2008          2009         2008
 HOVENSA
 Crude                                    500        76.9 %       91.3 %        82.4 %      91.5 %
 Fluid catalytic cracker                  150        82.9 %       72.8 %        75.2 %      73.4 %
 Coker                                     58        78.9 %      105.4 %        83.6 %      98.8 %
 Port Reading                              70        92.2 %       92.4 %        91.1 %      90.3 %

In the third quarter of 2009, M&R results included a benefit of $12 million due to an income tax adjustment. This amount is included in the table of items affecting comparability between periods on page 14.

Table of Contents

                    PART I - FINANCIAL INFORMATION (CONT'D.)
Results of Operations (continued)
Marketing: Marketing operations, which consist principally of energy marketing
and retail gasoline operations, generated earnings of $35 million in the third
quarter of 2009 compared with $110 million in the third quarter of 2008. The
decrease was primarily due to lower margins and lower refined product volumes.
Marketing operations had earnings of $123 million in the first nine months of
2009 compared with earnings of $102 million in the first nine months of 2008.
   The following table summarizes marketing sales volumes:

                                                  Three Months Ended                Nine Months Ended
                                                    September 30,                     September 30,
                                                 2009             2008             2009            2008
Refined products (thousands of barrels
per day)                                             443             460               466            470
Natural gas (thousands of mcf per day)             1,800           1,600             2,100          1,900
Electricity (megawatts round the clock)            5,200           3,400             4,400          3,200

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 income of $6 million in the third quarter and $34 million in the first nine months of 2009 compared with income of $5 million in the third quarter and a loss of $23 million in the first nine months of 2008.
Marketing expenses decreased in the third quarter and first nine months of 2009 compared with the corresponding periods of 2008, principally reflecting lower retail credit card fees.
The Corporation's future M&R earnings may be impacted by external factors, such as 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                Nine Months Ended
                                                     September 30,                    September 30,
                                                2009              2008             2009             2008
Corporate expenses                            $     (52 )       $     (61 )      $    (169 )       $ (167 )
Income tax benefits                                  19                19               61             53

                                                    (33 )             (42 )           (108 )         (114 )

Items affecting comparability between
periods, after-tax                                    -                 -              (16 )            -

Net corporate expenses                        $     (33 )       $     (42 )      $     (92 )       $ (114 )

After-tax corporate expenses were lower in the third quarter and first nine months of 2009 compared with the same periods of 2008, mainly due to higher income from pension related investments and lower costs as a result of cost saving initiatives, partly offset by higher bank facility fees. In the first nine months of 2009, a charge of $25 million before income taxes ($16 million after-tax) relating to retirement benefits and employee severance costs, was recorded in General and administrative expenses. In the fourth quarter of 2009, the Corporation will record a pre-tax charge of approximately $15 million ($10 million after-tax) for pension plan settlements relating to the retirements referred to above.

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