赫斯 (HES) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen of the jury, and welcome to your second quarter Amerada Hess conference call. My name is Jean, I'll be your conference facilitator for today.

[Operator Instructions]

The conference call Is being recorded today Wednesday, July 28, 2004, and now i would like to turn the presentation over to your host for today's conference, Jay Wilson Vice President of Investor Relations, sir, over to you.

Good morning, everyone, and thank you for participating in our earnings conference call for the second quarter of 2004. With me today are John Hess, Chairman of the Board and Chief Executive Officer; John O'Connor President Worldwide Exploration and Production, and John Rielly, Senior Vice-President and Chief Financial Officer.

Certain forward looking information and other previously undisclosed items may be discussed during this call.

I will now turn the call over to John Hess.

Thank you, Jay, and welcome to our second quarter conference call.

I would like to make a few brief comments on our second quarter financial results and update you on some of our key development projects.

Net income from continuing operations for the second quarter was $281 million. Our refining and markets business posted outstanding quarterly earnings of $160 million. These results benefited from our world class [inaudible] joint venture refinery which ran near full capacity during the quarter, and experienced strong refining margins.

Exploration and production generated net income of $182 million for the second quarter. These results reflected solid production performance, improving unit costs, and strong oil and natural gas prices.

Worldwide oil and gas production averaged 349,000 barrels of oil equivalent per day for the first half of the year. As a result of this production performance, we are raising our full year 2004 production guidance to 340,000 barrels of oil equivalent per day from 325,000 barrels of oil equivalent per day. However, in the third quarter, we anticipate lower production versus the first half of the year, primarily as a result of normal north sea facilities maintenance. Regarding some of our key development projects, in the deep water Gulf of Mexico, the Llano field, in which we have a 50% interest, commenced production on April 30th, net production is in excess of 14,000 barrels of oil equivalent per day, which is somewhat above our initial expectation.

On Block A-18 in the Malaysia/Thailand JDA. The offshore pine line was completed during the second quarter, and construction of the onshore portion of the pipeline is on schedule to be completed by early 2005. It is estimated that first gas production will occur during the first half of 2005. In Equatorial Guinea, the plan of development for the northern block G field was submitted to the government on June 7th. As we have stated previously, first production is expected to occur some 30 months after receiving government approval.

I will now turn the call over to John Reilly who will provide more details on our financial results, after which we will be happen to take your questions

Thank you, John.

Hello, everyone. Our earnings release was issued this morning and it appears on our website. I will discuss our usual comparison of second quarter results to the first quarter.

Net income was $288 million in the second quarter of 2004, compared with $281 million in the first quarter.

Turning to exploration and production, income from continuing operations of exploration and production activities was $182 million in the second quarter of 2004, compared with income of $207 million in the first of 2004. Second quarter E&P earnings include an tax gain of $15 million from the sale of a non-producing property in Malaysia. It also includes an incremental provision of $6 million for severance and a reduction in leased office space in London. First quarter E&P earnings included a gain of $19 from the sale of an office building in Aberdeen, Scotland. Excluding these items E&P earnings were $173 million in the second quarter of 2004, and $188 million in the first quarter.

The components of this change on on after-tax basis are as follows: Average foreign natural gas prices were seasonally lower which reduced earnings by $15 million. Sales volumes were lower, reflecting the timing of liftings which reduced earnings by $13 million. The change in foreign currency translation, the pretax effect of which is recorded in nonoperating income, resulted in an increase in income of $15 million. Exploration expense was lower, which increased earnings by $8 million, all other items netted to a decrease in earnings of $10 million. For an overall decrease of $15 million in second quarter adjusted income. The effective income tax rate on exploration and production earnings in the first six months of 2004 was 46%.

The after-tax impact of crude oil and U.S. natural gas production hedges in the second quarter of 2004 was an opportunity cost of $124 million, or $5.52 per barrel of oil equivalent, compared with a cost of $73 million in the first quarter.

The status of our hedges at June 30th was as follows: For the remainder of 2004, we have hedged 60% of our crude oil production, and 10% of our U.S. natural gas production,. For 2005, we have hedged 55 percent of our crude oil production, and we do not have any U.S. natural gas hedges in 2005. The average price for WTI related open hedge positions is $28.76 for the remainder of 2004, and $27.18 in 2005. The average price for Brent related open hedge positions is $26.33 for the remainder of 2004, and $26.16 in 2005. Approximately 18% of the corporation's crude oil hedges are WTI related, and the remainder are Brent. The average price for U.S. natural gas open hedge positions is $6.30. In addition to the hedges I just mentioned, we currently have 24,000 barrels per day of Brent related production hedges from 2006 through 2012. The average frees of these hedge positions is $26.20 per barrel. The after-tax deferred hedge loss at June 30th, 2004, amounted to $543 million. Of this amount, $116 million was realized, and 427 million was unrealized. Turning to refining and marketing. Refining and marketing earnings were $160 million in the second quarter of 2004, compared with $112 million in the first quarter. The corporation's share of Avenza's income was $97 million in the second quarter, compared with $51 million in the first quarter. R&M earnings include $6 million on interest on the Pedavasin note in the second quarter, and $7 million in the first quarter. The balance of Pedavasin note at June 30th was $303 million, and principal and interest payments are current.

During the second quarter of 2004, we began recording a noncash deferred tax provision in our refining and marketing earnings to reflect the utilization of recorded [inaudible] events in net operating loss and carry forwards. This provision amounted to $11 million. We anticipate that for the remainder of the year, deferred taxes will be provided on Avenza's earnings at a rate of approximately 15%. In 2005, it is expected that deferred taxes will be recorded at the Virgin Islands statutory rate of 38.5%. As of June 30th, the corporation still has approximately $320 million of net operating loss carry forwards available to offset our share of future Avenza taxable income.

The results of retail operations increased in the second quarter of 2004 compared with the first quarter, reflecting higher margins on gasoline. Earnings from energy marketing activities in the second quarter were seasonally lower than in the first quarter. After tax trading results amounted to income of $18 million in the second quarter of 2004 compared with $15 million in the first quarter.

Turning to corporate costs. Net corporate expenses were $24 million in the second quarter of 2004, and $2 million in the first quarter. The first quarter results included an income tax benefit of $13 million resulting from the completion of a prior year United States income tax audit. The remainder of the difference is largely due to the timing of corporate costs, including tax on foreign source income. Corporate expenses in the second half of the year are expected to be approximately $18 million per quarter.

Turning to cash flow. Net cash provide by operating activities in the second quarter, including an increase of $76 million from the changes in working capital, was $438 million. Other net cash relates was $27 million. The principal uses of cash were as follows: Capital expenditures amounted to $372 million, and we reduced debt by $39 million. We had a net increase in cash and short term investments in the second quarter of $54 million. At June 30th, we had $611 million of cash and short term investments on hand. The corporation's debt to capitalization ratio at June 30th was 41.1%. This concludes my remarks, we will be happy to answer any questions, I will turn the call over to the operator.

[Operator Instructions]

We'll take your first question today from Arjun Murti of Goldman Sachs. Please go ahead.

Thank you.

Two unrelated questions. Just first on the upstream cost structure, we were going into the year not looking for much improvement, maybe a little bit in '04 versus '03. In the first half, you seem to be at least a couple of bucks below where you were last year. Just wondered if you had any comments on the sustainability of that. I know there are some questions about seasonality of productions when the costs stay flat, but just wondering if you're actually doing a lot better on cost. And then secondly on the Seva production, it looks like your gross numbers must be up to 40,000 barrels a day, if I'm doing the net gross right, just you have any comments on how sustainable those are, You've clearly reversed the previous declines you had there.

Arjun, I'll take your cost question, and then I'll turn it over to John O'Connor.

Unit costs including exploration expenses were $16.28 in the second quarter, and $16.22 for the first half of the year, and as you said, that was a marked improvement over last year's costs. We are maintaining our guidance for full year unit costs as being comparable to our 2003 level. The unit cost in the second half of the year will increase as a result of lower production volumes due to the seasonal maintenance work in the north sea, which will also involve increased workovers, and we have higher exploration expense in the second half of the year due to a backended drilling program.

John, as far as Seva.

Yes, as far as Seva is concerned I think you're calculations are right Arjun. We have targeted an optimum platue off take production [inaudible] about 40,000 barrels a day, and we have achieved and have been running at that rate now for some time. It is sustainable. We have additional infield drilling locations planned, and we see that platue extending out for a number of years at around 40,000 barrel a day, which nets out about 28,000.

Yeah, I guess you -- the water injection seems to be working, as you thought.

Yeah, the reservor management plan is well implemented. We obviously have a very solid understanding of the of the subsurface and of the operational aspect of this field. So I would say that overall, both in terms of operations, and in terms of understanding the subsurface were right on plan, and obviously that helps our confidence with respect to making projections for future production from the field.

That's terrific. Thank you very much.

We'll take your next question from Paul Ting of UBS.

Good morning, gentlemen.

Good morning.

A couple of questions. First of all, the net cash position of $438 million in the second quarter, even if you adjust for the working capital effect that it was discussed earlier, still seems a little light compared to the second quarter of last year. Just wondering if you can give us some indication as far as to whether there are some other components at play. Secondarily, if you can give us some -- give us some -- [inaudible] to the production guidance for the rest of the year any color on any changes to your future longer term production guidance.

Paul, as far as the cash flow, when you're comparing back to the second quarter of 2003, one we had higher production in that -- in that period. Again, we're picking up some of the cash flow there on -- which would also include some of the discontinued operations. We also had some changes in our overall assets and liabilities there, which increased second quarter '03 numbers by about 195 million, and that's just in our changes in assets and liabilities. So that's really giving you some of the color on why the cash flow is up in 2003 versus the second quarter of 2004.

Okay. Very helpful.

Paul, as far as our production outlook is concerned, I think you'll see from the second quarter versus the first quarter in the comparison that some of our growth assets are now kicking in and beginning to deliver, and some of those trends we expect to see continuing, Algeria, for example, will continue to grow modestly. I think we've also done a significant amount of work in terms of operational up time such that we have managed to offset some of the historical declines in some of our fields. Llano obviously a significant contributor, and we expect that to continue at the pace it has shown over the past month or so. John Hess pointed out in his opening remarks that normal routine maintenance in the north sea is going take a big bite out of production in the third quarter. We're looking at probably an average for the quarter on the order of 317,000 barrels a day versus the current run rate, all other things being equal of about 350, so that's really what's going to impact the full year average. I think fourth quarter we'll be back up to something like 345, showing again the resilience of the production. In terms of new production coming on fourth quarter, of course we're looking to the VP [inaudible] production facilities coming onstream in December, and that will add some new production to us.

No changes to '05 and beyond?

We haven't forecasted '05 yet. We're still obviously working through asset by asset what our outlook will be for '05, so that will be something we'll be talking about later on in the year.

Thanks a lot guys, I appreciate it.

Thank you.

We'll take your next question from Paul Cheng of Lehman Brothers.

Good morning, guys.

Good morning, Paul, how are you?

Very good. Congratulations, very good quarter.

Thank you.

Several quick questions. Maybe this is for John Rielly. On the other revenue, we saw there's a pretty large number, $33 million. I presume of which 15 million is the foreign exchange gain, you still have about a remaining 18 million. Is it possible that you can speak for us how that 18 million the net impact on earning for both up stream and down stream, [inaudible] whatever that is being [inaudible]?

Paul, when we -- when I gave the change in the earnings from the first quarter to second quarter, and I said there was -- it was a $15 million effect from foreign exchange, the pretax effect of that number is up in nonoperating income in that $33 million number, so it really is making up the majority of that number.

I see. So the 15 after tax or pretax is more like what, about 20?

Exactly

Okay. Excellent. Then secondly, is there any major turn around that we should expect in the second half of the year for your down stream operation?

No, Paul, there isn't.

Okay. And, John, when we're looking at the JDA, and maybe I catch it wrong, I think that earlier that said the first guess now you're expecting in the first half of '05. That seems to be a bit earlier than previously, right? Previously it was expecting in the second half.

You're right, Paul, now that the offshore pipe has been installed and connected to the platform, the offshore pipe lay is completed, the onshore is underway, and with the progress in construction today, more incident importantly indications buyers they've said the first half of '05 is what their target is.

Okay, and then finally me on the EG northern block G development, you are ready to submit the application to the government. Wondering if you can share with us in a little bit more detail in terms of what kind of production capacity we may be talking about from the new development.

Yeah, Paul. We did submit that on time as projected, first week of June. Very well received by all the authorities in government. both in ministry and in the national oil company. As you know, we have been working with their representatives through the preparation of that development plan. It's currently undergoing normal scrutiny and evaluation of the government, but the feedback we've had has been very positive, so we're very pleased with that. I would expect that we will receive the green light to proceed with that development relatively shortly and so I expect to get that soon. What I would prefer do is pending receipt of the green light from the government, that once we've gotten that go ahead, we'll be in a position to fully discuss what the development looks like. At this stage, I think it's premature until we've got the government go ahead.

Okay and John since I got you here, is there any update about Libya that you can share with us?

Negotiations continue. I think so long as they are continuing, it would be miss leading to put out any commentary on it because it would be [inaudible] interpreted or miss interpreted in a variety of ways by a variety of interested parties. I think the discussions are going well, I think they are cordial, and I think both sides are getting to know one another better as a result of the process. I think it's a good process and they are progressing at about the pace I would expect.

Okay, thank you.

We'll take your next question from Fred Leuffer of Bear Stearns.

Good morning. John Rielly, could you give me the DD&A and G&A costs attributable to the upstream, so I can try to get at this unit cost, and also can you provide us with realizations for oil and gas on the unhedged portion, foreign and U.S.?

As far as unit costs for the second quarter, $16.28 as I said. D&A was $7.08 of that number, G&A was $1.08.

Okay. And I think we have the rest of the numbers from the release. How about the unhedged portion of oil and gas realization?

I don't have -- I do'nt have those numbers. The prices that are in the press release reflect obviously the effects of hedging and the differentials in the market, so what happened in our price from quarter to quarter, there were lower hedge price realizations in the second quarter as compared to the first, and our differentials did widen as a result of market conditions and the timing and mix of crude lifting.

John, that's really what I'm trying to get at is in the differentials. If you have a number on that, I'll take that.

The exact number, I don't have right now. It was about a dollar change in the U.S., and about 80 cents on the foreign side that they're were widening. And again a lot of that just had to do with the sweet sour spread, and more of the crude on the market that the margin is more sour.

Right. Maybe I'll do a follow-up try to get the exact numbers. Thank.

Sure.

I will take your next question from the line of Mark Flannery of CSFB.

Hi, yes, I've got two questions. Hello, what is the expiration charge, [inaudible] in the second quarter your guiding to roughly the same amount for the full year. Would you say still an exploration charge of 300 to 350 for the year is what you're expecting?

Yeah, I would say, Mark, it's going to be closer to the 300 than the 350. I would narrow the range for you if you would like to about 300 to 320 at this stage. Obviously dependent on drilling outcome.

Okay. And the second question is while obviously we don't want to comment on too much of the details of northern Block G, when would you expect the government to come back with any broad -- obviously knowing the situation, the broad timing of when you expect approvals, and then when would you expect to be drilling after the approval? I may have missed that in the early part of the call?

No, I think that the best way of describing our assessment of our conversations with government is that that approval can be expected shortly, which will be really a very positive and quick review by the government authorities, recognizing that we only submitted the plans on the 7th of June, but I do think it will be quite shortly. Now, we're not planning to drill development wells until 2005.

Right.

2005-2006, actually, to be more accurate.

I will take your next question from the line of Jennifer Rowland from J.P. Morgan.

Good morning I have a question on your drilling plans for this year. I wondering if you could comment on the activity in the Gulf of Mexico, and particularly the Shenzi appraisal well, I think you had planned to drill in the second quarter and also the Whembly well, whether there's been spud.

Yeah, happy to do that Jennifer, your right. Operations are still continuing on the Shenzi Number 3 well, and we'll be there, I would guess, for another 6 to 8 weeks, probably all told. Currently, we're preparing to side track the well and go to bypass Coring, and we'll -- after that is complete, we'll probably side track to intersect the perspective section at a different level. Following completion of that well, the rig will move straight away to drill the number 4 well in Shenzi, so that's very encouraging that we have a continuous drilling program on that very important prospect. As far as Whembly is concerned, we are awaiting the rig to spud that location. Timing right now is probably the back end of September.

Okay. Great. Thank you.

Sure.

We'll take your next question from the line of Jay Saunders of Deutsche Bank.

Thanks. I just haven't had a chance to ask you guys in detail about Hess L&G. I guess this will be for John Hess. What is in that? Is it just Fall River? You putting money into that now? Is there plans for expanding through trading I guess, can you just give a little detail on what your plans are there?

Happy to do that, that's the joint venture that we set up in June, partnership between ourselves and potent and partners to give us the capability to participate in the L&G value chain at a low cost basis. There are several components to that joint venture. First of all is the management and leadership headed by Gordon Shearr, who used to be head of Cabot L&G and some other people who have a lot of commercial experience in L&G, and their mandate from the joint venture is to participate in the chain, and first and foremost develop some L&G sites. Fall River is obviously one of them. They are looking at other opportunities, as well. Both on the East Coast and the Gulf Coast, as other ways of participating in the growing L&G business. So it's a work in progress, and obviously Fall River is the first priority of the efforts of that group.

Is it fifty-fifty? Is there any money in that yet from you guys?

Nothing substantial. It's really the front end of development costs.

Okay. Thanks.

I will take your next question from Mr. Mark Gilman of Benchmark. Please go ahead.

Guys good morning. I had a couple of unrelated questions. The first of which to John Riley. Don't quite understand why you're providing deferred taxes on Avenza earnings, with still sizable NOLs going forward. Could you clarify that?

Sure, Mark. For book purposes, we recorded some of the NOLs of Avenza on our books, so we realized some of them, but there was a decent portion of them that you want to say was unrealized because of the historical operating performance. However, as a result of recent excellent operating performance we are utilizing AVenza's NOLs quicker than we had anticipated, and so what we basically are doing -- used up the amount of unrealized NOLs, and so now what's happening is we are beginning to utilize the recorded NOLs that we have on our balance sheet, therefore as those are used up, we begin recording a noncash deferred tax on Avenza's earnings even though to your point we will not be paying cash taxes in the near team, and we still have the $320 million of NOL 's to offset future Avenza income, and that's our share.

John, also in your portfolio, interest expense in the quarter rose versus the first quarter, yet debt is down, and cash seems higher. I don't quite understand. Can you clarify that for me

Yes, It's just less capitalized interest on the developments.

Capitalized interest number?

Was a total 16 million in the first quarter and it was 13 million in the second quarter.

Okay. With respect to the drilling program, can you discuss, John O'Connor, timing of any tubular bells appraisal, and what drilling plans are with respect to the Malaysian block this year, and in particular what Malaysian block was sold pursuant to the gain on assets there.

Yeah, I'm happy to do that Mark. Tubular Bells is operated by BT with 50% and we have 20%. Following the successful wildcat which confirmed 190 feet of net payment [inaudible]., the prospect was transferred MBP to their development group. They are reprocessing the seismic, and that work is still ongoing, as and you know that is sort of a sex he to nine-month type undertaking, so our expectation is that the operators will come forward with a proposal for an appraisal well sometime in 2005, so that's the situation with Tubular, and we're looking forward obviously to participating in the next well on the structure. As far as southeast Asia is concerned, we drilled block F in Malaysia deep water in the second quarter. A well called [inaudible], the well drilled dry, we found no commercial hydrocarbon, so we have expensed that in second quarter. The Saba block 302, we have a two well program plant for the fourth quarter, so we'll be spudding that beginning in the fourth quarter, so we'll see how that goes. And the final question you asked was a block we had offshore [inaudible] Asia called Chendor where we had a number of wells that we -- and again discovered hydrocarbon, we believed that they were more suitable for other companies to develop then for ourselves in light of the portfolio improvements we've got underway, so that was in the second quarter.

Okay. Thank you very much, guys, appreciate it.

I will take your next question from the line of Ted Islett of Bear Stearns. Please go ahead, sir.

Hello? Hello? Can you hear me.

Yes, we can.

Sorry about that. I sounded mute there for a minute. Congratulations on your very good quarter, first of all, and second can you give us any additional guidance around the capital spending program for next year, and that's my first question.

No, right now we're formulating our plans for next year. Obviously, developments speak for a large part of the expenditures, subject to government of Equatorial Guinea's approval of our plan in development, which obviously John O'Connor expects and we expect shortly. We have all of these commands on capital being shaped, and we want to get through our budget process with that information input before we would give guidance on next year's capital expenditures

So do you think you would give that guidance when you get the approval, or would it probably be later?

No, it would be after that. We have our budget process at the end of the year and it would be subsequent to that.

Okay, and my second question is can you give any more guidance on likely dividends out of Avenza?

Okay, in terms of Avenza, our gross distribution of $175 million to the joint venture owners. Obviously half ourselves, half Petavasa is under consideration, and it will be subject to Avenza approval which we expect in August.

Okay, and would that be a one time distribution, on would the idea be to continue

Well, I think we take this one step at a time. That's all we're going to talk about for now.

Okay. Thank you.

We'll take your last question from the line of Mark Diddle from Barkly [inaudible]. Pleased go ahead.

Good morning. Just a quick question on the guidance for the GDA production for 2005. Are there any changes to that, John O'Connor?

I think that at this stage all we would be prepared to say is that fresh gas may be at the first half of the year as distinct to the second half of the year, which we previously talked about. You will probably be aware that the gas plant which is required to make the gas ultimately meet sales specifications is not scheduled for completion until the second half of 2005, so there are a number of moving parts here, and until we have advanced further in our commercial discusses with the buyers, I think it's premature to speculate on volumes in 2005.

Okay. And just one follow blow up question on the cash balances. Are there any goals for paying down additional debt through the balance of the year with that cash?

Our, you know, first priority is to obviously to execute our developments, the 12 developments, one of which is on Llano we talked about, the others of which a combination of some production developments along with new developments. They should add about 100,000 barrels a day of new oil production equivalent basis starting in '06, which obviously [inaudible] an impact on our unit costs at that time, that's our first, second, and third priority to execute those in a timely manner, in a financially disciplined execution manner, so that's where the cash is going to be called, and focused, really, for this year and next. We do have a desire to have strong investment grade debt, and obviously that is a priority for us. We are in strong financial position to execute our developments, and while we're in the investment mode the development projects goring to command the capital, so after that, obviously we'll look at further reducing our debt at that time, and also be looking at future developments. So all of these things are things that, you know, will we'll be putting attention to for the next 12 months.

Okay. Thank you.

That's it? ?

Thank you very much for being on our conference call, and we look forward to keeping you up dated on the company's progress, and look forward to the call next quarter, thank you.

Ladies and gentlemen, thank you for joining on the conference call. You may now disconnect.