Hess CEO Discusses Q4 2010 Earnings Call Transcript

Hess (HES)

Q4 2010 Earnings Call

January 26, 2011 10:00 am ET

Executives

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

John Hess - Chairman of the Board and Chief Executive Officer

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

Jay Wilson - Vice President of Investor Relations

Analysts

Edward Westlake - Crédit Suisse AG

Jeffrey Dietert - Simmons & Company

Evan Calio - Morgan Stanley

John Patrick Moore

Pavel Molchanov - Raymond James & Associates

Mark Gilman - The Benchmark Company, LLC

John Herrlin - Merrill Lynch

Sven Del Pozzo - John S. Herold

Paul Cheng

Arjun Murti - Goldman Sachs Group Inc.

Douglas Leggate - BofA Merrill Lynch

Paul Sankey - Deutsche Bank AG

Blake Fernandez - Howard Weil Incorporated

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Hess Corporation Fourth Quarter 2010 Earnings Conference Call. My name is Fab, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to Mr. Jay Wilson, Vice President, Investor Relations. Please proceed.

Jay Wilson

Thank you, Fab. Good morning, everyone, and thank you for participating in our fourth quarter earnings conference call. 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. As usual, with me today are John Hess, Chairman of the Board and Chief Executive Officer; Greg Hill, President, Worldwide Exploration and Production; and John Rielly, Senior Vice President and Chief Financial Officer. I'll now turn the call over to John Hess.

John Hess

Thank you, Jay. Welcome to our fourth quarter conference call. I would like to review key achievements for 2010 and provide some guidance for 2011. Greg Hill will then discuss our exploration production business, and John Rielly will go through our financial results.

Corporate net income for the full year 2010 was $2.1 billion. Exploration and Production earned $2.7 billion, and Marketing and Refining loss, $231 million. Our improved results reflect higher crude oil production and selling prices and increased retail and energy marketing earnings, which more than offset the impact of weaker refining results. Included in our financial results is a provision of $289 million to reduce the carrying value of our interest in the HOVENSA joint venture refinery to $158 million. This write-down, which reflects our outlook for continued weakness in refining margins, reduces our share of the HOVENSA joint venture refinery to less than 1% of Hess' capital employed. In 2011, our company's capital and exploratory expenditures are budgeted to be $5.6 billion. Substantially, all of our spending will be targeted to exploration production, with $3.1 billion for production, $1.6 billion for developments and $900 million for exploration. We expect to fund our capital program from internally generated cash flow. With regards to Exploration and Production, in 2010, we replaced 176% of production at an FD&A cost of about $23 per barrel. At year-end, our proved reserves stood at 1.54 billion barrels of oil equivalent, and our reserve life was 9.9 years. In 2010, we increased our crude oil and natural gas production to 418,000 barrels of oil equivalent per day from 408,000 barrels of oil equivalent per day in 2009. In 2011, we forecast crude oil and natural gas production will average between 415,000 and 425,000 barrels of oil equivalent per day. This forecast includes a net reduction of about 16,000 barrels of oil equivalent per day, resulting from the previously announced sale of non-core natural gas assets in the U.K. North Sea, which is expected now to close in the first quarter. Last year, we expanded our portfolio of unconventional resources. In the Bakken oil shale play in North Dakota, we completed the acquisitions of America Oil & Gas and TRZ Energy and commenced the expansion of key infrastructure. In addition, we acquired acreage in the Eagle Ford in South Texas and formed a partnership with Toreador Resources to explore the unconventional oil potential of the Paris Basin in France. In Norway, we increased our interest in the Valhall field to 64% from 28% via strategic asset trade with Shell and an acquisition from Total. In the Gulf of Mexico, we doubled our working interest in the Tubular Bells field to 40% and took over as operator. In 2011, we will be working with our partners to move this project towards sanction.

With regard to Marketing and Refining, our full year 2010 financial results were lower than 2009. Our HOVENSA joint venture refinery was negatively impacted by the continued weak margin environment, higher year-over-year fuel costs and unplanned downtime. In addition, both HOVENSA and our Port Redding New Jersey facility completed FCC turnarounds in 2010. This morning, HOVENSA announced that it would reduce crude oil distillation capacity to 350,000 barrels per day from 500,000 barrels per day by shutting down older, less efficient units. We expect this action will reduce HOVENSA's operating costs and capital expenditures and make it a more competitive and efficient refinery, producing a greater percentage of high-margin products.

In Retail Marketing, 2010 convenience store sales were up by more than 4%, while average fuel volumes per station were down by 1%. In Energy Marketing, we generated stronger earnings primarily as a result of improved margins in our natural gas and electricity businesses. Our financial position remains strong. Our debt-to-capitalization ratio at year-end was 24.9%, essentially unchanged from 2009. In 2010 August, we issued $1.25 billion of 30-year notes. Proceeds were used for the acquisitions of an additional 8% stake in the Valhall field from Total and TRZ Energy. In December, we issued 8.6 million shares of stock to complete the acquisition of American Oil & Gas. Our company made significant progress in 2010 in increasing our reserves and production and building our position in unconventional resources. We are committed to maintaining a strong balance sheet so that we will be able to fund our portfolio of attractive investment opportunities to generate long-term profitable growth for our shareholders. I will now turn the call over to Greg Hill.

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