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HES > SEC Filings for HES > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for HESS CORP


7-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

In March 2013, Hess Corporation (the Corporation) announced an asset sales program that includes divesting its oil and gas properties in Indonesia and Thailand and its downstream businesses to continue its transformation into a pure play exploration and production (E&P) company. The downstream businesses to be divested include the Corporation's terminal, retail, energy marketing and energy trading operations. In February 2013, the Corporation ceased refining at its Port Reading facility, completing its exit from all refining operations. In July 2013, the Corporation announced an agreement to sell its energy marketing business, and the sale closed in November 2013. In October 2013, the Corporation also announced an agreement to sell its United States (U.S.) East Coast terminal network and St. Lucia terminal. This sale is subject to regulatory approvals and is expected to close in the fourth quarter of 2013.

Other actions announced by the Corporation in March 2013 included repaying debt, establishing a cash cushion and returning capital to shareholders. During the third quarter of 2013, the Corporation increased its quarterly dividend 150% to 25 cents per common share and repurchased approximately 6,530,000 common shares at a cost of approximately $500 million under its authorized $4 billion share repurchase program.

The Corporation sold several other oil and gas assets to focus its E&P portfolio on lower risk and higher growth assets. During 2012 and the first half of 2013, the Corporation completed the sale of its interests in the Beryl, Bittern and Schiehallion fields in the United Kingdom North Sea, the Azeri-Chirag-Guneshli (ACG) fields offshore Azerbaijan in the Caspian Sea, the Snohvit Field offshore Norway, the Eagle Ford Shale play in Texas as well as its subsidiary, Samara-Nafta, located in the Volga-Urals region of Russia.

As a result of the Corporation's transformation into a pure play E&P company, the Corporation now has one operating segment, E&P, and a Corporate and Other segment, which is primarily comprised of corporate and interest expenses. The results of the terminal, retail, energy marketing, energy trading and Port Reading refining operations (the "downstream businesses") have been classified as discontinued operations for all periods presented.

Third Quarter Results

The Corporation reported net income of $420 million in the third quarter of 2013, compared with $557 million in the third quarter of 2012. Excluding items affecting comparability of earnings between periods on page 27, earnings for the third quarter of 2013 and 2012 were $405 million and $495 million, respectively.

Exploration and Production

E&P earnings were $455 million in the third quarter of 2013 compared with $608 million in the third quarter of 2012. Excluding items affecting comparability of earnings, E&P net income was $458 million in the third quarter of 2013 and $546 million in the same period of 2012. In the third quarter of 2013, the Corporation's average worldwide crude oil selling price, including the effects of hedging, was $104.95 per barrel up from $86.69 per barrel in the third quarter of 2012. The Corporation's average worldwide natural gas selling price was $6.52 per thousand cubic feet (mcf) in the third quarter of 2013, up from $5.88 per mcf in the third quarter of 2012.

The Corporation's crude oil and natural gas production was 310,000 barrels of oil equivalent per day (boepd) and 347,000 boepd in the third quarter and first nine months of 2013, respectively, and 402,000 boepd and 409,000 boepd for the same periods in 2012. The comparative pro forma production of the E&P portfolio excluding the assets sold in 2012 and in the first nine months of 2013, as well as those classified as held for sale at September 30, 2013, would have been 281,000 boepd and 288,000 boepd for the third quarter and first nine months of 2013, respectively, and 283,000 boepd and 289,000 boepd for the same periods in 2012.

The Corporation's updated production guidance assumes no further contribution from Libya for the remainder of 2013 due to civil unrest in the country. In addition, maintenance at the Auger platform kept the Llano Field offshore U.S. shut in during the month of October. As a result, the Corporation expects fourth quarter 2013 production to be approximately 320,000 boepd. Therefore, the Corporation's full year 2013 E&P production is expected to be at the lower end of the guidance range of 340,000 boepd to 355,000 boepd. This guidance reflects a downward revision from the beginning of the year forecast of 375,000 boepd to 390,000 boepd, primarily due to the earlier than anticipated sale of the Corporation's Russian subsidiary and lower production in Libya due to civil unrest.


PART I - FINANCIAL INFORMATION (CONT'D.)

Overview (continued)

The following is an update of E&P activities during the third quarter of 2013:

In North Dakota, net production from the Bakken oil shale play averaged 71,000 boepd for the third quarter of 2013, an increase of approximately 14% from 62,000 boepd in the third quarter of 2012. In the fourth quarter, downtime is planned to complete the expansion of the Tioga Gas Plant. This downtime is incorporated into the Corporation's full year 2013 Bakken production guidance, which remains 64,000 boepd to 70,000 boepd. During the third quarter, 50 operated wells were brought on production, bringing the total to 122 wells for the first nine months of 2013. Drilling and completion costs per operated well averaged $7.8 million in the third quarter of 2013, an improvement of 18% or $1.7 million per well, versus the third quarter of 2012.

At the Valhall Field in Norway (Hess 64%) net production averaged 37,000 boepd in the third quarter of 2013, compared with 7,000 boepd in the same period last year, following the completion of a redevelopment project earlier in the year. Full year 2013 net production for Valhall is expected to be at the lower end of the guidance range of 24,000 boepd to 28,000 boepd.

Due to the continuing civil unrest in Libya, and the shutdown of the Es Sider terminal, net production at the Waha Field averaged 11,000 boepd in the third quarter of 2013, compared with 23,000 boepd in the same period last year.

In the North Malay Basin, the five well development drilling program which commenced in June 2013 was completed ahead of schedule and the rig has been demobilized. The project achieved first production on the Early Production System in October 2013. Progress has continued on the full field development where first gas is anticipated by 2017.

The Corporation completed drilling the third production well at the Tubular Bells Field and continued facilities construction. First oil from this development in the deepwater Gulf of Mexico is anticipated during the third quarter of 2014.

In the Utica shale play, seven wells were drilled, eight wells were completed and one well was flow tested. On the Corporation's 100% owned acreage, the Porterfield C 1H-17 well, in Belmont County, tested at a rate of 3,421 boepd including 21% liquids. For the first nine months of 2013, 21 wells have been drilled, 18 wells were completed and nine wells have been tested across both the Corporation's 100% owned and CONSOL joint venture acreage.

The Corporation spud its first exploration well on the Shakrok block in the Kurdistan Region of Iraq. The Corporation has a 64% working interest in this block and is the operator. This well is expected to be completed in the first quarter of 2014. A second exploration well in Kurdistan, which will be on the Dinarta block, is due to be spud in December 2013.

Discontinued Operations - Downstream Businesses

Due to the Corporation's plan to divest its downstream businesses, the results of these businesses are shown as discontinued operations and all comparative periods have been recast to reflect this change. Earnings of the downstream businesses were $54 million in the third quarter of 2013, compared with $53 million in the same period in 2012. Third quarter 2013 results included after-tax income totaling $23 million resulting from the net impact of a gain on the liquidation of last-in, first-out (LIFO) inventories, largely offset by non-cash mark-to-market adjustments in energy marketing, employee severance, Port Reading refinery shutdown costs and other charges. In July 2013, the Corporation announced an agreement to sell its energy marketing business and the sale closed in November 2013 for cash proceeds of $1.2 billion before post-closing adjustments. In October 2013, the Corporation also announced an agreement to sell its U.S. East Coast terminal network and St. Lucia terminal for $850 million before post-closing adjustments. This transaction is subject to regulatory approval and is expected to close in the fourth quarter of 2013.


                    PART I - FINANCIAL INFORMATION (CONT'D.)



Results of Operations

The after-tax earnings (losses) by major operating activity are summarized
below:




                                                    Three Months Ended                      Nine Months Ended
                                                      September 30,                           September 30,
                                                 2013                2012                2013                2012
                                                             (In millions, except per share amounts)
Exploration and Production                  $          455      $          608      $        3,274      $        1,887
Corporate and Other                                    (89 )              (104 )              (312 )              (313 )

Continuing operations                                  366                 504               2,962               1,574
Discontinued operations - Downstream
businesses                                              54                  53                 165                  77

Net income attributable to Hess
Corporation                                 $          420      $          557      $        3,127      $        1,651


Net income attributable to Hess
Corporation per share (diluted):
Continuing operations                       $         1.07      $         1.48      $         8.63      $         4.63
Discontinued operations - Downstream
businesses                                            0.16                0.16                0.48                0.22

Net income per share                        $         1.23      $         1.64      $         9.11      $         4.85

Items Affecting Comparability of Earnings Between Periods

The following table summarizes, on an after-tax basis, items of income (expense)
that are included in net income and affect comparability of earnings between
periods. The items in the table below are explained and the pre-tax amounts are
shown on pages 33 to 35.




                                                     Three Months Ended                     Nine Months Ended
                                                       September 30,                          September 30,
                                                  2013                2012               2013                2012
                                                                           (In millions)
Exploration and Production                   $           (3 )    $           62     $        1,518      $           62
Corporate and Other                                      (5 )                 -                (17 )                 -

Total items affecting comparability of
earnings from continuing operations                      (8 )                62              1,501                  62
Discontinued operations - Downstream
businesses                                               23                   -                 32                   -

Total items affecting comparability of
earnings between periods                     $           15      $           62     $        1,533      $           62

In the following discussion and elsewhere in this report, 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 a preferable method of explaining variances in earnings, since they show the entire effect of a transaction rather than only the pre-tax amount. After-tax amounts are determined by applying the income tax rate in each tax jurisdiction to pre-tax amounts.


                    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 E&P operations:




                                                     Three Months Ended                     Nine Months Ended
                                                       September 30,                          September 30,
                                                  2013                2012               2013                2012
                                                                           (In millions)
Sales and other operating revenues           $        2,706      $        3,072     $        9,183      $        9,292
Gains (losses) on asset sales                            (8 )               376              1,791                 412
Other, net                                               (3 )                44                (56 )                72

Total revenues and non-operating income               2,695               3,492             10,918               9,776

Costs and Expenses
Cost of products sold (excluding items
shown separately below)                                 374                 359              1,391                 961
Operating costs and expenses                            475                 568              1,570               1,653
Production and severance taxes                           84                 144                311                 409
Exploration expenses, including dry holes
and lease impairment                                    154                 259                573                 708
General and administrative expenses                      96                  79                268                 223
Depreciation, depletion and amortization                676                 725              1,961               2,127
Asset impairments                                         -                 208                  -                 267

Total costs and expenses                              1,859               2,342              6,074               6,348

Results of operations before income taxes               836               1,150              4,844               3,428
Provision for income taxes                              381                 536              1,394               1,526

Net income                                              455                 614              3,450               1,902
Less: Net income attributable to
noncontrolling interests                                  -                   6                176                  15

Net income attributable to Hess
Corporation                                  $          455      $          608     $        3,274      $        1,887

After considering the E&P items affecting comparability of earnings between periods in the table on page 33, the remaining changes in E&P earnings are primarily attributable to changes in selling prices, production and sales volumes, cost of products sold, cash operating costs, depreciation, depletion and amortization, exploration expenses and income taxes as described below.

Selling prices: Higher average realized selling prices, primarily for crude oil and including the effects of hedging, increased E&P revenues in the third quarter and the first nine months of 2013, compared with the corresponding periods in 2012.


                    PART I - FINANCIAL INFORMATION (CONT'D.)



Results of Operations (continued)



The Corporation's average selling prices were as follows:




                                                     Three Months Ended                     Nine Months Ended
                                                        September 30,                         September 30,
                                                   2013               2012               2013               2012
Crude oil - per barrel (including hedging)
United States
Onshore                                       $        96.01     $        82.81     $        91.87     $        84.55
Offshore                                              106.66             101.02             106.99             102.54
Total United States                                    99.80              90.17              97.97              92.53

Europe                                                113.18              75.08              79.60              77.13
Africa                                                110.71              90.78             108.57              89.56
Asia                                                  104.27             102.85             107.77             107.88
Worldwide                                             104.95              86.69              98.55              87.71

Crude oil - per barrel (excluding hedging)
United States
Onshore                                       $        95.98     $        83.34     $        91.64     $        85.62
Offshore                                              106.56             101.99             106.18             105.53
Total United States                                    99.75              90.87              97.51              94.46

Europe                                                112.51              75.36              79.01              78.18
Africa                                                110.95             110.33             107.81             111.28
Asia                                                  104.27             103.20             107.77             109.92
Worldwide                                             104.88              92.35              97.99              94.58

Natural gas liquids - per barrel
United States
Onshore                                       $        44.59     $        41.34     $        42.35     $        45.53
Offshore                                               32.14              32.51              28.84              37.72
Total United States                                    41.03              38.35              37.50              42.60

Europe                                                 58.67              56.82              57.02              75.67
Asia                                                   70.05              64.67              71.70              75.95
Worldwide                                              43.67              41.71              39.46              49.05

Natural gas - per mcf
United States
Onshore                                       $         2.91     $         2.06     $         2.99     $         1.83
Offshore                                                2.56               2.31               2.79               1.83
Total United States                                     2.78               2.18               2.89               1.83

Europe                                                 12.13               9.15              10.62               9.56
Asia and other                                          7.19               6.56               7.46               6.64
Worldwide                                               6.52               5.88               6.53               6.01

In the first quarter of 2013, the Corporation entered into Brent crude oil hedges using fixed-price swap contracts to hedge the variability of forecasted future cash flows from 90,000 barrels of oil per day (bopd) of crude oil sales volumes for the remainder of the calendar year at an average price of approximately $109.70 per barrel. In 2012, the Corporation had entered into Brent crude oil hedges using fixed-price swap contracts to hedge 120,000 bopd of crude oil sales volumes for the full year at an average price of $107.70 per barrel. In 2012, the Corporation also realized hedge losses from previously closed Brent crude oil hedges that covered 24,000 bopd during the year.


PART I - FINANCIAL INFORMATION (CONT'D.)

Results of Operations (continued)

Realized gains from E&P hedging activities increased Sales and other operating revenues by $2 million and $36 million for the three and nine months ended September 30, 2013, respectively ($1 million and $23 million after-taxes, respectively). Realized losses from E&P hedging activities decreased Sales and other operating revenues by $148 million and $533 million for the three and nine months ended September 30, 2012, respectively ($94 million and $334 million after-taxes, respectively). At September 30, 2013, the after-tax deferred gains in Accumulated other comprehensive income (loss) related to Brent crude oil hedges were $1 million, which will be reclassified into earnings during the remainder of 2013 as the hedged crude oil sales are recognized in earnings. The ineffectiveness from Brent crude oil hedges, recognized immediately in Sales and other operating revenues, resulted in losses of $17 million and $2 million for the three months ended September 30, 2013 and 2012, respectively, and a gain of $1 million and a loss of $10 million for the nine months ended September 30, 2013 and 2012, respectively.

Production and sales volumes: The Corporation's crude oil and natural gas production was 310,000 boepd and 347,000 boepd in the third quarter and first nine months of 2013, respectively, and 402,000 boepd and 409,000 boepd for the same periods in 2012. The Corporation's updated production guidance assumes no further contribution from Libya for the remainder of 2013 due to civil unrest in the country. In addition, maintenance at the Auger platform kept the Llano Field shut in during the month of October 2013. As a result, the Corporation expects fourth quarter 2013 production to be approximately 320,000 boepd, and therefore, its full year 2013 E&P production is expected to be at the lower end of the guidance range of 340,000 boepd to 355,000 boepd. This guidance reflects a downward revision from the beginning of the year forecast of 375,000 boepd to 390,000 boepd, primarily due to the earlier than anticipated sale of the Corporation's Russian subsidiary and lower production in Libya due to civil unrest.

The Corporation's net average daily worldwide production by region was as follows:

                                                      Three Months Ended                     Nine Months Ended
                                                         September 30,                         September 30,
                                                    2013               2012               2013               2012
                                                                           (In thousands)
Crude oil - barrels per day
United States
Bakken                                                     57                 52                 54                 45
Other Onshore                                               9                 13                 11                 13

Total Onshore                                              66                 65                 65                 58
Offshore                                                   37                 44                 44                 46

Total United States                                       103                109                109                104


Europe                                                     38                 80                 46                 91
Africa                                                     57                 75                 69                 75
Asia                                                        9                 17                 11                 17

Total                                                     207                281                235                287


Natural gas liquids - barrels per day
United States
Bakken                                                      7                  5                  6                  4
Other Onshore                                               4                  6                  4                  5

Total Onshore                                              11                 11                 10                  9
Offshore                                                    4                  5                  6                  6

Total United States                                        15                 16                 16                 15


Europe                                                      1                  2                  1                  3
Asia                                                        1                  1                  1                  1

Total                                                      17                 19                 18                 19


                    PART I - FINANCIAL INFORMATION (CONT'D.)



Results of Operations (continued)




                                                      Three Months Ended                     Nine Months Ended
                                                         September 30,                         September 30,
                                                    2013               2012               2013               2012
                                                                           (In thousands)
Natural gas - mcf per day
United States
Bakken                                                     44                 35                 39                 25
Other Onshore                                              24                 28                 26                 26

Total Onshore                                              68                 63                 65                 51
Offshore                                                   42                 53                 63                 61

Total United States                                       110                116                128                112


Europe                                                     29                 36                 19                 50
Asia and other                                            380                462                418                459

Total                                                     519                614                565                621

Barrels of oil equivalent per day*                        310                402                347                409

* Reflects natural gas production converted on the basis of relative energy content (six mcf equals one barrel). Barrel of oil equivalence does not necessarily result in price equivalence as the equivalent price of natural gas on a barrel of oil equivalent basis has been substantially lower than the corresponding price for crude oil over the recent past. See the average selling prices in the table on page 29.

. . .

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