Hess (HES)

Q4 2011 Earnings Call

January 25, 2012 10:00 am ET

Executives

John P. Rielly - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Jay R. Wilson - Vice President of Investor Relations

John B. Hess - Chairman of the Board and Chief Executive Officer

Gregory P. Hill - Executive Vice President, President of Worldwide Exploration & Production and Director

Analysts

Katherine Lucas Minyard - JP Morgan Chase & Co, Research Division

Evan Calio - Morgan Stanley, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

John P. Herrlin - Societe Generale Cross Asset Research

Edward Westlake - Crédit Suisse AG, Research Division

Blake Fernandez - Howard Weil Incorporated, Research Division

Mark Gilman - The Benchmark Company, LLC, Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Faisel Khan - Citigroup Inc, Research Division

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Hess Corporation Earnings Conference Call. My name is Erica, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Jay Wilson, Vice President, Investor Relations. Please proceed.

Jay R. Wilson

Thank you, Erica. Good morning, everyone. And thank you for participating in our fourth quarter earnings conference call. Our earnings release was issued this morning and appears on our website, www.hess.com.

Today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements.

With me today are John Hess, Chairman of the Board and Chief Executive Officer; Greg Hill, President, Worldwide Exploration and Production; John Rielly, Senior Vice President and Chief Financial Officer.

I will now turn the call over to John Hess.

John B. Hess

Thank you, Jay. Welcome to our fourth quarter conference call. I would like to review key achievements for 2011, and provide some guidance for 2012. Greg Hill will, then, discuss our Exploration and Production business, and John Rielly will review our financial results.

Corporate net income for the full year 2011 was $1.7 billion. Exploration and Production earned $2.7 billion, and Marketing and Refining lost $584 million. Compared to 2010, our results reflected lower crude oil and natural gas sales volumes, weaker refining results and the impact of higher crude oil selling prices. Included in our fourth quarter 2011 financial results is an after-tax charge of $525 million related to the closure of the HOVENSA joint venture refinery, which was announced last week.

In 2012, our company's capital and exploratory expenditures are budgeted at $6.8 billion with substantially all dedicated to Exploration and Production. Over the past several years, we have significantly increased our commitment to unconventionals to generate more predictable growth in reserves and production. 2012, we plan to invest $2.5 billion or nearly 40% of our projected spend in unconventionals. In addition, we plan to invest $1.6 billion for production, $1.8 billion for developments and $800 million for exploration.

We expect to fund the majority of our 2012 capital program from internally generated cash flow and asset sales. To protect our cash flow, we have hedged 120,000 barrels of oil per day or approximately 45% of our forecasted oil production for the calendar year 2012 at an average Brent price of $107.70 per barrel.

In the fourth quarter, we agreed to sell our 3% interest in the Snohvit LNG project in Norway to Statoil for $170 million. This transaction will reduce our 2012 production by approximately 3,000 barrels of oil equivalent per day and is expected to close on January 31.

With regard to Exploration and Production, in 2011, we replaced 147% of production at an FD&A cost of approximately $36 per barrel. At year end, our proved reserves stood at 1.573 billion barrels of oil equivalent, and our reserve life was 11.4 years. Including last year's results, our 5-year average reserve replacement ratio was 153%, and our average FD&A cost is about $23 per barrel of oil equivalent.

In 2011, our crude oil and natural gas production was 370,000 barrels of oil equivalent per day, an 11% decrease compared to the 418,000 barrels of oil equivalent per day we averaged in 2010. Most of last year's production issues were due to short-term setbacks, including weather-related delays in North Dakota, the temporary shut-in of the Llano 3 well in the Deepwater Gulf of Mexico, a fire at the Valhall Field in Norway and civil unrest in Libya. We continue to make progress in restoring these lost production volumes.

In 2012, we forecast crude oil and natural gas production to average between 370,000 and 390,000 barrels of oil equivalent per day. This projection includes the sale of Snohvit, but excludes the impact of any other potential asset sales and any production that may result from the restoration of our operations in Libya.

Our sustainable long-term growth target for production and reserves remains 3% to 5% per year. However, if 2012 were used as a base, which includes some residual effects from the production issues we experienced in 2011, we would project growth through 2017 to be in the range of 4% to 7% per year.

Last year, we continue to grow our portfolio of unconventional resources. In the Bakken oil shale play in North Dakota, we generated strong growth throughout the second half of the year and exited 2011 at a peak net rate of approximately 50,000 barrels of oil equivalent per day. We maintain our 60,000 barrels of oil equivalent per day forecast for the Bakken in 2012. We also plan to continue the appraisal of our acreage in the Eagle Ford Shale in Texas and the Utica Shale in Ohio.

Regarding developments, in the third quarter of 2011, we sanctioned the Tubular Bells project in the Deepwater Gulf of Mexico. Hess has a 57% interest in the field and is the operator. In 2012, we will work with our partner, Chevron, to advance the project, and we anticipate first production in 2014.

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