Hess Corp. : Hess Reports Estimated Results for the Fourth Quarter of 2013

Hess Corporation (NYSE:HES) today reported net income of $1,925 million for the quarter ended December 31, 2013. Adjusted earnings, which excludes items affecting comparability, were $319 million or $0.96 per common share compared with $409 million or $1.20 per share in the prior year quarter, reflecting a decrease of $97 million in adjusted downstream earnings, partially offset by a $5 million increase in adjusted Exploration and Production earnings. Subsequent to our interim update of operating data for the first two months of the fourth quarter, a third party operated pipeline in the Gulf of Mexico was shut down on December 18^th, which reduced our production and sales volumes by approximately 35,000 boepd through the end of the quarter and impacted fourth quarter after-tax income by an estimated $20 million.

After-tax income (loss) by major operating activity was as follows:

John Hess, Chief Executive Officer, said: "In March 2013, we announced a detailed plan to complete our transformation into a pure play E&P company, fully exit the downstream, strengthen financial flexibility, and increase cash returns to our shareholders. By any measure, our progress has been remarkable. We generated $7.8 billion in total proceeds from asset sales, paid down $2.4 billion of short term debt, funded our $1 billion cash flow deficit and added approximately $1 billion of cash to the balance sheet as a cushion against future commodity price volatility. We also began a $4 billion share repurchase program - purchasing $1.54billion through December 31 - and raised our annual dividend by 150 percent to $1 per share."

He continued: "We have entered 2014 with terrific momentum. Based on strong operational execution across our balanced portfolio, including the Bakken where we are increasing peak production guidance, we remain confident that we will deliver long-term, cash-generative growth by achieving 5 - 8 percent compound average production growth through 2017 from the 2012 pro forma."

Exploration and Production:
Exploration and Production earnings were $1,029 million in the fourth quarter of 2013, compared with $325 million in the fourth quarter of 2012. Adjusted earnings were $436 million in the fourth quarter of 2013 and $431 million in the fourth quarter of 2012.

Oil and gas production was 307,000 boepd in the fourth quarter of 2013 and 396,000 boepd in the year ago quarter. Asset sales lowered production by 72,000 boepd, while extended shutdowns caused by civil unrest in Libya reduced production by approximately 20,000 boepd versus the year-ago quarter. Unplanned downtime at non-operated facilities in the Gulf of Mexico, natural declines, and lower entitlement in Algeria also contributed to the reduced production. Partially offsetting these reductions, Valhall production was up 37,000 boepd and new production from the North Malay Basin added 5,000 boepd compared with the fourth quarter of last year. The Corporation's average worldwide crude oil selling price, including the effect of hedging, was $98.27 per barrel, up from $84.46 per barrel in the same quarter a year ago. The average worldwide natural gas selling price was $6.97 per mcf in the fourth quarter of 2013, up from $6.60 per mcf in the fourth quarter a year ago.

Excluding production from assets sold and classified as held-for-sale, pro forma production was 285,000 boepd in 2013 and 289,000 boepd in 2012. Pro forma production that also excludes Libya was 270,000 boepd in 2013 and 268,000 boepd in 2012. Excluding asset sales and Libya, the Corporation expects production to average between 305,000 boepd to 315,000 boepd in 2014, an increase of approximately 15 percent from pro forma production in 2013. The increased production in 2014 is driven by continued growth in the Bakken, a full year of production for Valhall post completion of the redevelopment project in 2013 and the start-up of the Tubular Bells Field in the Gulf of Mexico in the third quarter of 2014.

Oil and Gas Reserve Estimates:
Oil and gas proved reserves were 1,437 million boe at the end of 2013, compared with 1,553 million barrels at the end of 2012. During 2013, the Corporation added 148 million boe to proved reserves, primarily relating to the Bakken, and sold 139 million boe of proved reserves through asset dispositions. The additions, which are subject to final review, replaced approximately 118 percent of the Corporation's 2013 production, resulting in a year-end 2013 reserve life of 11.5 years.

Operational Highlights:
  Bakken (Onshore U.S.): In North Dakota, the Corporation holds approximately 645,000 net acres in the Bakken oil shale play. Net production from the Bakken averaged 68,000 boepd in the fourth quarter, which reflects the previously announced downtime associated with the Tioga Gas Plant expansion. Full year production averaged 67,000 boepd, an increase of 20 percent from 56,000 boepd for 2012. Hess brought 46 operated wells on production in the quarter and 168 wells for the full year, bringing the cumulative total to date to 722 wells. Drilling and completion costs per operated well averaged $8.1 million for the year, a reduction of 26 percent from $11.0 million per well in 2012. Infrastructure investments in 2013 included the Tioga gas plant expansion project, which is expected to be completed and operational in the first quarter of 2014.

In 2014, Hess plans to increase the rig count in the Bakken to 17 from 14 but is maintaining capital spending at $2.2 billion, which is consistent with 2013 capital spend. Production is expected to average between 80,000 boepd and 90,000 boepd in 2014, an increase of 19 percent to 34 percent from 2013.

The Corporation is increasing its peak net production guidance for the Bakken to 150,000 boepd in 2018 from prior guidance of 120,000 boepd in 2016, based upon performance to date and a current design of 9 wells for a typical 1,280 acre drilling unit. During 2014, the Corporation plans to pilot test tighter well spacing to determine whether there is additional upside in the estimates for future production and resources.

  Utica (Onshore U.S.): Eight wells were drilled, six wells were completed and eight wells were flow tested during the quarter. On our CONSOL joint venture acreage, five Hess operated wells were tested with an average rate of 1,810 boepd including 57 percent liquids. On the Hess 100 percent-owned acreage, three wells were tested at an average rate of 2,666 boepd including 10 percent liquids. For the year, 29 wells were drilled, 24 wells completed and 17 wells were tested across both the Corporation's 100 percent-owned and CONSOL joint venture acreage.

  Valhall (Offshore Norway): Net production averaged 37,000 boepd during the fourth quarter and 23,000 boepd for the full year. The Field was shut down from July 2012 through January 2013 to complete field redevelopment activities. Two new wells were brought on line in the fourth quarter.

  North Malay Basin (Offshore Malaysia): First gas at the early production system was achieved in October 2013 and production averaged 5,000 boepd in the fourth quarter.

  Kurdistan Region of Iraq (Onshore): The Corporation spud its first exploration well on the Shakrok block and plans to begin drilling an exploration well on the Dinarta block in Kurdistan in the first quarter 2014.

Capital and Exploratory Expenditures:
Capital and exploratory expenditures in the fourth quarter of 2013 were $1,544 million, of which $1,476 million related to Exploration and Production operations, including $571 million invested in the Bakken. Capital and exploratory expenditures for the fourth quarter of 2012 were $1,914 million, of which $1,887 million related to Exploration and Production operations, including $720 million for the Bakken. For the year, capital and exploratory expenditures were $6,315 million, which is down approximately 24 percent from 2012 and 7 percent below guidance, due in part to a delay of retail marketing's acquisition of its partner's interest in WilcoHess until the first quarter of 2014.

Asset Sales Program:
During the fourth quarter, the Corporation completed the sales of its energy marketing and terminals businesses and its Natuna A asset, offshore Indonesia. The Corporation also announced the sale of its interest in the Pangkah Field, offshore Indonesia, and closed the transaction in January 2014. During the first nine months of 2013, the Corporation sold its subsidiary in Russia and its interests in the Beryl area fields in the United Kingdom North Sea, the Azeri-Chirag-Guneshli fields offshore Azerbaijan, and the Eagle Ford shale assets in Texas. Total proceeds from these asset sales were approximately $7.8 billion. Sales processes continue for our Thailand assets, retail marketing and energy trading operations. In addition, the Corporation filed a preliminary Form 10 in January 2014 for a possible spin-off of its retail marketing business.

Liquidity:
Net cash provided by operating activities was $1,550 million in the fourth quarter of 2013, compared with $1,570 million in the same quarter of 2012. At December 31, 2013, cash and cash equivalents totaled $1,814 million, compared with $642 million at December 31, 2012. Total debt of $5,798 million at December 31, 2013 was down 29 percent from $8,111 million at December 31, 2012. The Corporation's debt to capitalization ratio at December 31, 2013 was 19.0 percent, compared with 27.7 percent at the end of 2012.

Returning Capital to Shareholders:
In the fourth quarter, the Corporation purchased approximately 12.8 million shares of common stock at a cost of approximately $1.0 billion under the Corporation's authorized $4 billion share repurchase program, bringing total shares purchased in 2013 to approximately 19.3 million shares, or approximately 5.5 percent of outstanding fully diluted shares, at a cost of approximately $1.54 billion for an average cost of $79.65. Beginning in the third quarter of 2013, the Corporation increased its quarterly dividend 150 percent to 25 cents per common share.

Downstream Businesses:
The downstream businesses reported income of $1,011 million in the fourth quarter of 2013, compared with $159 million in the same period in 2012. Excluding items affecting comparability, results were a loss of $9 million in the fourth quarter of 2013 and income of $88 million in the fourth quarter of 2012. The decrease in earnings was primarily the result of exiting operations during the quarter.

The divested downstream businesses were reported as discontinued operations in the consolidated financial statements. Effective as of year end 2013, retail marketing and the energy trading joint venture have been reported as continuing operations for all periods presented in the consolidated financial statements due to the potential spin-off of retail marketing and the lengthy marketing processes. The retail marketing and energy trading joint venture will be classified as discontinued operations when the businesses are divested.

Items Affecting Comparability of Earnings:
The following table reflects the total after-tax income (expense) of items affecting comparability of earnings between periods:

  Exploration and Production: In the fourth quarter, the Corporation announced the sale of its Indonesian assets for total after-tax proceeds of $1.3 billion. The sale was executed in two separate transactions with the sale of Natuna A completing in December 2013 and the sale of Pangkah closing in January 2014. Based on the negotiated allocation of sales proceeds between the two transactions, fourth quarter 2013 results include an after-tax gain on the sale of Natuna of $343 million ($388 million pre-tax) and an after-tax asset impairment charge of $187 million ($289 million pre-tax) to adjust the carrying value of the Pangkah asset to its fair value at December 31, 2013. In the fourth quarter, Denmark enacted changes to the hydrocarbon income tax law which required that the Corporation record an additional deferred tax asset of $674 million. The new law resulted in a combination of changes to tax rates, revisions to the amount of uplift allowed on capital expenditures and special transition rules, which will result in a higher effective tax rate in future years. Due to continued civil unrest in Libya, the Corporation recorded an after-tax charge of $163 million ($260 million pre-tax) to write-off previously capitalized exploration wells in offshore Area 54. The Corporation also recorded after-tax charges of $23 million ($38 million pre-tax) to write off its Marcellus leasehold costs and $51 million for employee severance, income taxes and other exit related costs, which include closure of the London office in the quarter.

  Corporate and Interest: Fourth quarter results include after-tax charges of $7 million ($11 million pre-tax) for severance and other exit costs.

  Downstream Businesses: Results for the fourth quarter include after-tax gains from the divestitures of energy marketing of $464 million ($761 million pre-tax) and the terminals network of $531 million ($739 million pre-tax). In addition, the Corporation recorded after-tax income of $134 million ($232 million pre-tax) in the quarter resulting from liquidation of LIFO inventories. Severance, exit related costs and other charges totaled $109 million after income taxes ($164 million pre-tax).

Reconciliation of U.S. GAAP to Non-GAAP measures:
The following table reconciles reported net income attributable to Hess Corporation and adjusted earnings:

The following table reconciles reported cash provided by operating activities to cash flow from operations before changes in working capital:

Hess Corporation will review fourth quarter financial and operating results and other matters on a webcast at 10 a.m. today. For details about the event, refer to the Investor Relations section of our website at www.hess.com.

Hess Corporation is a leading global independent energy company engaged in the exploration and production of crude oil and natural gas. More information on Hess Corporation is available at www.hess.com.