Exploration & Production | Quarterly / Earnings Reports | Second Quarter (2Q) Update
Hess Progresses at Major Projects; Highlights $1.6B in Asset Sales
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Hess Corporation reported net income of $931 million for the quarter ended June 30, 2014. Adjusted net income, which excludes items affecting comparability, was $432 million or $1.38 per common share, compared with $520 million or $1.51 per share in the prior year quarter. The decrease in adjusted net income was primarily due to the impact on operating earnings of divesting E&P assets and downstream businesses.
John Hess, chief executive officer of Hess, said: "This was another quarter of strong performance and execution of our strategic plan. We continued to grow production and reduce well costs in the Bakken, progressed development of Tubular Bells in the Gulf of Mexico and North Malay Basin in the Gulf of Thailand, and completed asset sales totaling $1.6 billion. We are excited by the potential of our portfolio and confident that we have the strategy, operational capabilities and financial flexibility to deliver 5 to 8 percent annual production growth and generate free cash flow and strong, sustainable returns for our shareholders."
Second Quarter Highlights:
- Net income was $931 million compared to $1,431 million in the second quarter of 2013
- Adjusted net income was $432 million or $1.38 per share
- Oil and gas production was 319,000 barrels of oil equivalent per day (boepd) in the second quarter of 2014, compared with 341,000 boepd in the year-ago quarter. Pro forma production was 310,000 boepd in the second quarter of 2014, up 17 percent from 265,000 boepd in 2013
- Cash flow from operations before working capital changes was $1.3 billion
- Oil and gas production in the Bakken increased 25 percent from the year-ago quarter to 80,000 boepd, while well costs were reduced by 12 percent to an average of $7.4 million per operated well in the second quarter of 2014
- The Corporation completed asset sales totaling $1.6 billion comprising approximately $805 million for its Thailand assets, $485 million for 30,000 net acres in the Utica dry gas shale play and $320 million for the Newark, New Jersey power plant
- The Corporation announced the sale of its retail business for $2.9 billion and increased its authorized share repurchase program to $6.5 billion from $4 billion
- The Corporation returned an additional $845 million to shareholders during the quarter through share repurchases and dividends. This included repurchasing 8.3 million common shares for approximately $768 million, bringing total shares repurchased under the program to 40.2 million for a total cost of approximately $3.3 billion
Exploration and Production
Exploration and Production earnings were $1,057 million in the second quarter of 2014, compared with $1,533 million in the second quarter of 2013. Adjusted net income was $483 million in the second quarter of 2014 and $600 million in the second quarter of 2013.
Oil and gas production of 319,000 boepd was down from 341,000 boepd in the second quarter a year ago. Asset sales lowered production by 43,000 boepd, while extended shutdowns caused by civil unrest in Libya reduced production by approximately 24,000 boepd versus the year-ago quarter. Production from the Valhall Field offshore Norway was up 18,000 boepd from the prior year quarter, following completion of the Valhall Redevelopment Project in 2013. Higher production in the Bakken contributed an additional 16,000 boepd versus the year-ago quarter, while the North Malay Basin Early Production System, which commenced production in October 2013, contributed 7,000 boepd. The Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $101.70 per barrel, up from $97.89 per barrel in the same quarter a year ago. The average worldwide natural gas selling price was $6.35 per mcf in the second quarter of 2014, down from $6.44 per mcf in the second quarter a year ago.
Excluding production from assets sold and Libya, pro forma production was 310,000 boepd in the second quarter of 2014, an increase of 17 percent from 265,000 boepd in the second quarter of 2013. The Corporation expects pro forma production to average between 305,000 boepd and 315,000 boepd in 2014 driven by continued growth in the Bakken, higher production from the Valhall Field and the planned start-up of the Tubular Bells Field in the Gulf of Mexico in the third quarter of 2014.
2Q 2014 Operational Highlights
Hess has reported second quarter updates on its E&P sectors, which can be accessed below:
Hess Brings On 53 Bakken Wells; Reduces Well Costs
Hess Sees Results at Utica JV Project in 2Q
Offshore and International
Valhall (Offshore Norway): Net production averaged 31,000 boepd during the second quarter, compared with 13,000 boepd in the year-ago quarter. These results reflect completion of the Valhall Redevelopment Project in 2013, ongoing drilling and higher uptimes. Offshore work began in June on the Crestal Gas Lift Project (Phase 1) with hook-up and commissioning expected in the second quarter of 2015.
North Malay Basin (Offshore Malaysia): Production averaged 7,000 boepd in the second quarter of 2014 from the Early Production System. Progress continued on the full field development project in the second quarter with the Corporation signing the gas sales agreement with the Malaysian government and awarding a contract for the construction and installation of a central processing platform, a bridge-linked wellhead platform and three remote wellhead platforms.
Ghana (Offshore): The Corporation commenced drilling of a three well appraisal program in the second quarter of 2014. The first well in the program, Pecan #2A, was completed in June and the second well in the program, Pecan #3A, was also drilled and is currently undergoing production testing as planned. The third well in the program is expected to be drilled in the third quarter.
Tubular Bells (Offshore U.S.): The offshore hook-up and final commissioning activities continued in the second quarter and first oil from the field is expected in September 2014. The drilling of a fourth production well also commenced in the second quarter.
Stampede (Offshore U.S.): During the second quarter, the Corporation received U.S. government approval to unitize Blocks 468, 512, and the eastern half of 511. The Stampede development project continues to progress, and project sanction is expected later this year.
Capital and Exploratory Expenditures
Capital and exploratory expenditures in the second quarter of 2014 were $1,256 million, down from $1,586 million in the prior year quarter.
Asset Sales
During the second quarter, the Corporation completed the sale of its assets in Thailand for approximately $805 million after working capital and other adjustments, based on an effective date of July 1, 2013. In addition, the Corporation completed the sale of approximately 30,000 additional net acres of Utica dry gas acreage, including related wells and facilities, for total proceeds of $485 million and the sale of its 50 percent interest in a joint venture that is constructing an electric generating facility in Newark, New Jersey for cash proceeds of $320 million. Finally, in May, the Corporation announced that it had agreed to sell its retail business for a total of $2.874 billion, comprising $2.6 billion in cash plus $274 million for retail gasoline station leases. The Corporation’s divestiture process continues for its energy trading business.
Liquidity
Net cash provided by operating activities was $946 million in the second quarter of 2014, down from $1,247 million in the same quarter of 2013, primarily reflecting the impact of the asset divestiture program. At June 30, 2014, cash and cash equivalents totaled $2,240 million, compared with $1,814 million at December 31, 2013. Total debt was $6,077 million at June 30, 2014 compared with $5,798 million at December 31, 2013. In June, the Corporation issued $600 million of fixed-rate notes comprising $300 million of 3-year bonds with a coupon of 1.3 percent and $300 million of 10-year bonds with a coupon of 3.5 percent. Proceeds from the debt offerings were primarily used to refinance $250 million of matured debt obligations and retire various lease obligations relating to retail gasoline stations. The Corporation’s debt to capitalization ratio at June 30, 2014 was 20.0 percent, up from 19.0 percent at the end of 2013.
Returning Capital to Shareholders
In conjunction with the announcement of the Corporation’s sale of its retail business, the existing share repurchase program was increased to $6.5 billion from $4 billion. In the second quarter of 2014, the Corporation repurchased approximately 8.3 million shares of common stock at a cost of approximately $768 million for an average cost per share of $91.85. Since initiation of the buyback program in August 2013, total shares repurchased through June 30, 2014 were approximately 40.2 million shares at a total cost of approximately $3.3 billion for an average cost per share of $82.09. The total shares repurchased through June 30, 2014 represent approximately 12 percent of fully diluted shares at the commencement of the repurchase program.
Dividends paid to shareholders amounted to $156 million in the first half of 2014 and $69 million in the first half of 2013.
Downstream Businesses
The downstream businesses reported losses of $35 million in the second quarter of 2014, compared with income of $26 million in the same period in 2013. Adjusted net income was $31 million in the second quarter of 2014, down from $47 million in the second quarter of 2013 primarily due to the divestiture of the energy marketing and terminal businesses in the fourth quarter of 2013.
The divested downstream businesses have been reported as discontinued operations in the consolidated financial statements. Effective as of the second quarter of 2014, retail marketing has been reported as discontinued operations for all periods presented in the consolidated financial statements due to the agreed sale of the business in May. The energy trading joint venture will be classified as discontinued operations when the business is divested.
Exploration and Production
Second quarter 2014 Exploration and Production results included an after-tax gain of $706 million ($706 million pre-tax) from the sale of the Corporation’s assets in Thailand. This nontaxable sale caused the Corporation’s effective income tax rate in the quarter to be substantially lower than normal. In addition, the Corporation recognized an after-tax gain of $35 million ($62 million pre-tax) from the sale of acreage and related wells in the Utica. These gains were partially offset by an after-tax charge of $105 million ($169 million pre-tax) to write-off a previously capitalized exploration well in the western half of Block 469 in the Gulf of Mexico, since the block will not be part of the unitized Stampede Development Project. In addition, the Corporation recorded net after-tax charges totaling $62 million ($132 million pre-tax) primarily to write-off leasehold acreage in the Paris Basin of France, the Shakrok Block in Kurdistan, and its interest in a natural gas exploration project, offshore Sabah, Malaysia.
Corporate and Interest
Second quarter 2014 results included after-tax charges of $9 million ($15 million pre-tax) for severance, exit related costs and other charges.
Downstream Businesses
Second quarter 2014 results included an after-tax charge of $72 million ($115 million pre-tax) related to the early buyout of leased retail gasoline stations acquired in the quarter in connection with the Corporation’s divestiture of its retail business. Severance, exit related costs and other charges totaled $18 million after-tax ($29 million pre-tax). These charges were partially offset by an after-tax gain of $24 million ($39 million pre-tax) resulting from the liquidation of last-in, first-out (LIFO) inventories.
Hess 2Q