Exploration & Production | Quarterly / Earnings Reports | First Quarter (1Q) Update
Hess Talks Curtailed Bakken Production, Utica Sale in Q1
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Hess Corporation reported net income of $386 million for the quarter ended March 31, 2014.
Adjusted earnings, which exclude items affecting comparability, were $446 million or $1.38 per common share, compared with $669 million or $1.95 per share in the prior year quarter. The decrease in adjusted earnings was primarily due to the impact on operating earnings related to divesting E&P assets and downstream businesses.
John Hess, Chief Executive Officer of Hess, said: "Our results this quarter demonstrate continued execution of our plan to drive cash-generative growth and sustainable returns for our shareholders through a focused portfolio of world-class E&P assets. In the first quarter, our growth assets performed well, with higher production from Valhall and North Malay Basin. In addition, current Bakken production levels are in excess of 80,000 barrels of oil equivalent per day following completion of the Tioga gas plant expansion. Tubular Bells is on track for first oil in the third quarter and well results from the Utica shale play are encouraging. Overall, we remain very enthusiastic about the prospects for our company in 2014 and beyond."
Exploration and Production
Exploration and Production earnings were $508 million in the first quarter of 2014, compared with $1,286 million in the first quarter of 2013. Adjusted earnings were $514 million in the first quarter of 2014 and $698 million in the first quarter of 2013.
Oil and gas production was 318,000 boepd in the first quarter of 2014 and 389,000 in the year-ago quarter. Asset sales lowered production by 77,000 boepd, while extended shutdowns caused by civil unrest in Libya reduced production by approximately 23,000 boepd versus the year-ago quarter. Production from the Valhall Field offshore Norway was 37,000 boepd, an increase of 32,000 boepd from the prior year quarter, which was impacted by a redevelopment project. The Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $99.17 per barrel, up from $94.50 per barrel in the same quarter a year ago. The average worldwide natural gas selling price was $7.03 per mcf in the first quarter of 2014, up from $6.62 per mcf in the first quarter a year ago.
Excluding production from Libya and assets sold and classified as held-for-sale, pro forma production was 297,000 boepd in the first quarter of 2014, an increase of 11 percent from 268,000 boepd in the first quarter of 2013. The Corporation still expects production, excluding Libya and asset sales, 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 post completion of the redevelopment project in 2013, and the planned start-up of the Tubular Bells Field in the Gulf of Mexico in the third quarter of 2014.
Operational Highlights
Bakken (Onshore U.S.): Production in the Bakken was curtailed in the first quarter, primarily due to the shutdown of the Tioga gas plant to complete the expansion project. The Corporation’s net production averaged 63,000 boepd. Hess brought 30 operated wells on production in the quarter, and drilling and completion costs per operated well averaged $7.5 million. The Tioga gas plant expansion project was completed in the first quarter of 2014 with start-up operations commencing in late March. The gas plant is now operational and Bakken production levels are in excess of 80,000 boepd.
Utica (Onshore U.S.): In the first quarter of 2014, the Corporation reached an agreement to sell approximately 74,000 net acres of its 100 percent owned dry gas acreage position. During the quarter, eight wells were drilled on the Corporation’s Utica joint venture acreage.
Valhall (Offshore Norway): Net production averaged 37,000 boepd during the first quarter of 2014, compared with 5,000 boepd in the year-ago quarter following completion of a redevelopment project in 2013.
North Malay Basin (Offshore Malaysia): Production averaged 7,000 boepd in the first quarter of 2014. Progress continues on the full field development where the Corporation expects to award contracts on the Central Processing Platform in the second quarter.
Kurdistan Region of Iraq (Onshore): The Corporation’s first exploration well on the Shakrok block is progressing with production test results expected in the second quarter. On the Dinarta block, the rig has been mobilized and drilling is expected to commence in the second quarter of 2014.
Ghana (Offshore): In April 2014, the Corporation signed a farmdown agreement to reduce its working interest from 90 percent to 50 percent. This agreement is subject to approval by the Ghanaian government. The Corporation plans to drill three appraisal wells, commencing in the second quarter of 2014.
Tubular Bells (Offshore U.S.): The host facilities (SPAR Hull and Topsides) were completed and installed in the first quarter. The offshore hook-up and final commissioning is underway with first production anticipated in the third quarter of 2014.
Capital and Exploratory Expenditures
Capital and exploratory expenditures in the first quarter of 2014 were $1,522 million, of which $1,208 million related to Exploration and Production operations. The Corporation’s capital expenditures included $290 million related to the acquisition of its partners’ 56 percent interest in WilcoHess, a retail gasoline joint venture. Capital and exploratory expenditures for the first quarter of 2013 were $1,631 million, of which $1,613 million related to Exploration and Production operations.
Asset Sales
During the first quarter, the Corporation completed the sale of its interest in the Pangkah Field, offshore Indonesia, for cash proceeds of approximately $650 million. The Corporation also reached an agreement to sell approximately 74,000 acres of its dry gas position in the Utica Shale for $924 million. Approximately 47,000 acres were sold in March 2014 for proceeds of approximately $590 million, and the sale of the remaining dry gas acres is expected to be completed in the second half of the year. In April, the Corporation announced that it had completed the sale of its assets in Thailand for proceeds of approximately $1 billion, effective July 1, 2013. The Corporation also signed an agreement in April, with completion expected mid-year, to sell its 50 percent interest in a joint venture that is constructing an electric generating facility in Newark, New Jersey for approximately $330 million. Divestiture processes continue for the Corporation’s retail marketing and energy trading businesses.
Liquidity
Net cash provided by operating activities was $1,158 million in the first quarter of 2014, compared with $819 million in the same quarter of 2013. At March 31, 2014, cash and cash equivalents totaled $1,288 million, compared with $1,814 million at December 31, 2013. Total debt was $5,576 million at March 31, 2014 compared with $5,798 million at December 31, 2013. The Corporation’s debt to capitalization ratio at March 31, 2014 was 18.7 percent, down from 19.0 percent at the end of 2013.
Returning Capital to Shareholders
In the first quarter of 2014, the Corporation purchased approximately 12.6 million shares of common stock at a cost of approximately $1.0 billion for an average cost per share of $79.33, under the Corporation’s authorized $4 billion share repurchase program. Since initiation of the buyback program in August 2013, total shares repurchased through March 31, 2014 were approximately 31.9 million shares at a total cost of approximately $2.54 billion for an average cost per share of $79.53. The total shares purchased through March 31, 2014 represent approximately 9 percent of fully diluted shares at the commencement of the repurchase program. The Corporation’s fully diluted shares were 316.4 million at March 31, 2014.
Downstream Businesses
The downstream businesses reported losses of $33 million in the first quarter of 2014, compared with income of $99 million in the same period in 2013. Adjusted earnings were $13 million in the first quarter of 2014 and $69 million in the first quarter of 2013. The decrease in adjusted earnings was primarily the result of the divestiture of the energy marketing and terminal businesses in the fourth quarter of 2013 and the wind down of operations.
Exploration and Production: First quarter 2014 Exploration and Production results included an after-tax charge of $6 million for employee severance ($6 million pre-tax).
Corporate and Interest: First quarter results included after-tax charges of $8 million ($12 million pre-tax) for severance and other exit costs.
Downstream Businesses: First quarter results included an after-tax gain of $24 million ($39 million pre-tax) resulting from the required remeasurement of the Corporation’s original 44 percent investment in WilcoHess at fair value following acquisition of the remaining interest in the venture. The Corporation also recorded after-tax income of $16 million ($25 million pre-tax) resulting from the liquidation of last-in, first-out (LIFO) inventories. These gains were offset by an after-tax charge of $52 million ($84 million pre-tax) to reduce to fair value the Corporation’s investment in the Bayonne Energy Center joint venture (Hess 50 percent) and $34 million after income taxes ($53 million pre-tax) for exit costs, severance and other charges.
