赫斯 (HES) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter Hess Corporation earnings conference call. My name is Latosha and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Jay Wilson, Vice President of Investor Relations. Please proceed.

Thank you, Latosha. Good morning, everyone, and thank you for participating in our first-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.

As usual, 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. I'll now turn the call over to John Hess.

Thank you, Jay. Welcome to our first-quarter conference call. I will make a few brief comments after which John Rielly will review our financial results.

Net income for the first quarter of 2008 was $759 million. Our results benefited from higher crude oil and natural gas prices and production volumes which more than offset higher costs and weaker refining margins compared to those in the year ago quarter.

For the first quarter of 2008 Exploration and Production generated net income of $824 million. Crude oil and natural gas production averaged 391,000 barrels of oil equivalent per day which was 2% above the same period last year. Contributing to this growth were higher crude oil production from the Okume complex in Equatorial Guinea and natural gas production from the Ujung Pangkah field in Indonesia. Our full-year 2008 production forecast remains 380,000 to 390,000 barrels of oil equivalent per day.

With regard to our field developments, the JDA Phase 2 project in the Gulf of Thailand, in which Hess has a 50% working interest, is on track to start up this summer and we expect net production from the JDA to increase from approximately 120 million cubic feet per day to nearly 250 million cubic feet per day.

At the Shenzi development in the Deepwater Gulf of Mexico, in which Hess has a 28% working interest, the tension leg platform, TLP Hull, arrived at Kiewit Yard in Ingleside, Texas in February. Installation of the TLP and topsides is planned for this summer. Installation of subsea facilities is scheduled for the second half of 2008 followed by commissioning and first production in the first half of 2009.

In Indonesia commencement of oil production from our Ujung Pangkah field, in which Hess has a 25% working interest, is on schedule for the first half of 2009.

With regard to exploration, in March we announced the results of the Pony Number 2 well in the Deepwater Gulf of Mexico, in which Hess has a 100% working interest. The well encountered the objective sands in a down dip position in the water leg. During the first week in April we kicked off a sidetrack well which is designed to establish the location of the oil/water contact and should allow us to further refine the range of resource potential on the block.

We have recently set casing and the well is currently drilling near the first objective section. Results for the well are expected to be announced during the second quarter. Following completion of the Pony Number 2 sidetrack we will release the Ocean Baroness rig for one well slot to another operator.

At the end of the second quarter we expect to spud the first of four wells that will be drilled back-to-back on our 100% owned Block, WA390-P, in the northwest shelf of Australia.

In the third quarter we plan to drill a well on Block 54 offshore Libya in which we have a 100% working interest, and we also plan to participate in an exploratory well on Block BMS22 in the Santos Basin of Brazil in which we have a 40% working interest.

In the fourth quarter we expect to spud our first well on our K3 Points Block in Ghana in which we have a 100% working interest.

Turning to refining and marketing, net income was $16 million in the first quarter of 2008 which was below the year ago period due to sharply lower refining margins, particularly for gasoline and residual fuel oil. Retail marketing operations continued to be negatively impacted by rising wholesale prices in the first quarter.

Fuel volumes are up nearly 2% versus the year ago quarter; however, convenience store sales were lower by about 2% due to weaker economic conditions. Energy marketing was negatively impacted by milder weather in the first quarter of 2008 versus the same period last year. While fuel oil sales were down, natural gas and electricity sales continue to grow year-over-year. I will now turn the call over to John Rielly.

Thank you, John. Hello, everyone. In my remarks today I will compare first-quarter 2008 results to the fourth quarter of 2007. Net income for the first quarter of 2008 was $759 million compared with $510 million in the fourth quarter.

Turning to Exploration and Production, income from Exploration and Production operations in the first quarter of 2008 was $824 million compared with $583 million in the fourth quarter. Excluding the fourth-quarter impairment charge of $56 million, the after-tax components of the increase are as follows -- higher selling prices increased earnings by $122 million; the impact of sales volumes improved earnings by $23 million; lower costs, primarily exploration expenses, increased income by $42 million. All other items net to a decrease in earnings of $2 million for an overall increase in first-quarter income of $185 million.

In the first quarter of 2008 our E&P operations were over lifted compared with production resulting in increased income in the quarter of approximately $15 million. The Exploration and Production effective income tax rate for the first quarter of 2008 was 48%, within the expected full-year range of 47% to 51%.

Turning to Marketing and Refining, Marketing and Refining earnings were $16 million in the first quarter of 2008 compared with $31 million in the fourth quarter. Fourth-quarter 2007 results included an after-tax gain of $24 million from liquidating LIFO inventories. Results of refining operations amounted to a loss of $3 million in the first quarter of 2008 compared with income of $27 million in the fourth quarter.

The Corporation's share of HOVENSA's results after income taxes amounted to a loss of $6 million in the first quarter compared with income of $12 million in the fourth quarter, primarily reflecting lower margins. During the first quarter the Corporation received a distribution from HOVENSA of $25 million.

Port Reading earnings were $2 million in the first quarter of 2008 compared with $14 million in the fourth quarter. Marketing earnings were $32 million in the first quarter of 2008 compared with $19 million in the fourth quarter. First-quarter 2008 marketing results include seasonally higher margins and sales volumes of natural gas. Trading activities generated after-tax losses of $13 million and $15 million in the first quarter of 2008 and fourth quarter of 2007, respectively.

Turning to corporate, net corporate expenses amounted to $39 million in the first quarter of 2008 compared with $59 million in the fourth quarter. The fourth-quarter 2007 results included an after-tax charge related to MTBE litigation of $25 million. Our after-tax interest expense was $42 million in the first quarter compared with $45 million in the fourth quarter, principally reflecting lower average debt.

Turning to cash flow, net cash provided by operating activities in the first quarter, including a decrease of $92 million from changes in working capital, was $1.176 billion. The principal use of cash was capital expenditures of $849 million; all other items amounted to a decrease in cash flow of $32 million resulting in a net increase in cash and cash equivalents in the first quarter of $295 million.

At March 31, 2008 we had $902 million of cash and cash equivalents. Our available revolving credit capacity was $2.693 billion at quarter end. Total debt was $3.960 billion at March 31, 2008 and $3.980 billion at December 31, 2007. The Corporation's debt to capitalization ratio at March 31, 2008 was 26.9% compared with 28.9% at the end of 2007.

This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

(OPERATOR INSTRUCTIONS). Doug Leggate, Citi.

Thank you. Good morning, gentlemen. My question is on the unit costs if you take the disclosure you guys gave on DD&A on cash operating costs, both down quite a bit from the fourth quarter. And I'm curious as to why that might be and if you could update, John Rielly, please, the guidance for the balance of this year and perhaps similarly on the tax rate guidance for this year which was also the low end of your guidance range on the upstream.

Sure, there are no changes on our guidance actually for the unit costs or for the tax rate. Typically in the first quarter when our production is running full out and we really haven't entered the maintenance season our unit costs are lower in the first quarter and it's not unusual, it happened actually the last two years, that our unit costs kind of come in under our guidance range for the year. And it will build just because production will be reduced as we move into the maintenance season in the second and third quarters and then the fixed costs gets spread over lower barrels.

So again, just to reiterate, our guidance for cash costs are $14 to $15 for the range, DD&A $12.50 to $13.50 for an overall range of $26.50 to $28.50 and we do see ourselves for the full year coming in that range. Same thing on the tax side, which there's nothing unusual from the tax rates, what we just have is a change in the mix of production. So if you're moving from the fourth to the first you have a little more EG production at the 25% tax rate.

And also, if you remember, in the fourth quarter the JDA was shut down for Phase 2 construction. So now we've got a full quarter running on JDA at the 0% tax rate, we just happened to lower it. But again, our guidance for the year -- it was 47 to 51 and we don't see any change in that.

That was great. Thanks, John.

Arjun Murti, Goldman Sachs.

In light of the sharply higher oil prices and natural gas prices, just wondered if you had any update on how you're thinking about capital spending and incremental use of free cash flow this year?

Sure. I hate to sound like a broken record, but there's really no change also on our view, on what we're doing with cash flow and where we see our capital expenditures at this point. As you know, we were successful at the Gulf of Mexico lease sale. Not all of the licenses have been awarded at this point but we were excited by that. We did have a placeholder in our capital expenditure budget for that. Where we see early in the year we don't have any change in guidance we'll certainly update you on the second-quarter conference call on where we see capital expenditures going.

As far as use of our cash flow, it really is the same strategy -- we're focused on our developments. We will be reinvesting in the E&P operations. That's where we look to fund it. If we have some excess cash flow during the year, what we'll do is, again the same strategy, we'll look potentially to reduce debt during the year, but I don't see -- if I was giving you guidance right now, I don't see our debt coming down and, again, the focus will be keeping the cash flow ready for our E&P operations and investing in the future.

Got you. And given the plethora of your exploration activities and development programs, probably shouldn't be looking for a big new stock buyback program, it will be maybe not pay down debt, but cash can build up a little bit in anticipation of future spending?

That's a fair assumption, Arjun.

That's great. And I think -- I was going to guess the answer here. Any change to your production guidance for the year?

No, the production guidance is the same, as I mentioned in my comments.

Thank you.

Erik Mielke, Merrill Lynch.

Good morning, gentlemen. A similar question from us. On the European gas market we've seen from some of your peers that reported they had very strong results in Europe. I'm just wondering if you could comment on what you saw in the quarter and how it affects the outlook for the operations that you have in that part of the world?

You're correct, we saw the same obviously improvement specifically in the UK gas market and obviously we received the benefit of that. What you would say from an operational standpoint, I would say normally we are producing, we'll have the maintenance season and we'll get the benefit of higher prices.

The only thing that would be a little different that we're looking at right now is, if you remember, the Cromarty field was shut in for the summer last year and with these strong UK gas prices we will probably look to produce Cromarty through the summer.

Thanks.

Paul Sankey, Deutsche Bank.

Good morning, gentlemen. A follow-up to Arjun's question, which just for the sake of asking I'll ask, is any potential for acquisitions from you guys over the next year or so?

As is our company practice, we don't comment on acquisitions or divestments. Obviously we're always looking to upgrade the portfolio, but right now we're focused on the organic opportunities we have before us.

Thanks. I don't think you mentioned Tubular Bells, is there any update there?

No particular update, Paul. I think that probably BP will be the best source of commentary both on Tubular Bells and on another discovery that they recently announced in an offsetting block. So I can see some potential for joint development in that area, but, as I said, better off leaving commentary to BP, the operator.

Okay, John. And can you, just finally from you, on the rig situation at Pony, could you just update us on where that is right now? Thanks.

Yes, sure. In terms of rig usage, I think as John said in his opening remarks on completion of the current sidetrack, the current sidetrack should certainly be finished in the next 45 days. The rig would be released with one of the rigs [lost] to an operator in the Gulf of Mexico which is a trade to provide us with a rig in West Africa to enable us to drill the well offshore Ghana. At the completion of that particular trade we get the Baroness back and we'll have the potential to drill either on Pony or on another location depending on the results of the sidetrack.

Thanks, John. I appreciate that answer. A final one from me on the downstream. It seems that the Hovensa FTC is running at very low levels. Can you just comment, if that's the case, what the outlook for 2Q is and any other general observations you have on the gasoline market. And I'll leave it there. Thank you.

With the weakness in the gasoline to optimize economics it's better to run for yield than volume and that's why you saw the lower rates in the first quarter, there were economic incentives to optimize the refinery that way. And in the second quarter -- let's see how the second quarter turns out before we jump the gun in terms of what the predictions will be. The gasoline market comes up, the volumes may come up some. If the gasoline market stays where it is it's likely to assume that we're going to run for yield as opposed to volume.

Thank you very much.

Mark Gilman, Benchmark.

Good morning. I've got a couple simple things. John Hess, did you say 25% interest in the Pangkah oil rim?

75%.

That's what I thought. I guess I must have misheard, sorry about that.

I may have misspoken and if I did I apologize.

Okay. John Rielly, did you say zero tax on the JDA, is that a function of equity accounting?

No, it's not. It's just that there is a tax holiday for the first eight years of production on the JDA, then it goes up to 10% after a number of year and then it ultimately ends up at a 20% rate, that's just the contract.

0% for eight years and then 10% up to how much?

And then it goes to 20%.

How long at 10%, John?

Seven years at 10%.

Okay. John O'Connor, do you have prestacked depth migration on BMS22?

I don't know the answer to that, Mark, but we can find out and let you know.

Okay. I would appreciate it. On AIOC, there's a rate of return threshold, looks like you hit it in the first quarter, is that true?

Correct and it was part of our guidance again. So our production is 380 to 390 for the year. So our rate of return thresholds and the triggers associated with it were part of our estimate for the year. And so that is 380 to 390 encompasses that.

Okay. Is the decision, John Rielly, that you've talked about vis-a-vis Cromarty and producing this summer linked in any way to the decision to establish some forward sales hedges on UK gas?

It was really -- you could look at it that way, Mark. But what we saw was some favorable pricing there in the UK. So we just locked in -- it was only a portion actually of the Cromarty field production that we locked in. But again, where we see prices right now, we just see that it's very favorable pricing regime so we will produce that through the summer.

Okay, and it's hedged against what, NBP?

Yes, it is, correct.

Okay. And just one final one if I could. The rationale on the lease acquisitions, John O'Connor, in the Gulf of Mexico sale recently, what were you thinking? What were you shooting for?

We have been doing an increasingly -- amount of work, obviously as you know, in the Gulf of Mexico. The result of that work is to identify attractive exploration prospects. We had gone fairly extensively if not financially aggressively in the October lease sale and this time we've tried to combine both the value and opportunity to capture at this lease sale. So it's just a combination of the consequences of a lot of work we've been doing, data we've been acquiring, increased knowledge base and looking to the future with 10-year leases to continue to maintain a solid inventory of good exploration prospectivity in the Gulf of Mexico.

Lower Miocene or lower tertiary focus, John?

It turned out that in terms of acquisition the acquisitions were probably more in the lower tertiary than the lower Miocene, that's probably appropriate given the time scope.

Okay. Thanks a lot, guys.

Paul Cheng, Lehman Brothers.

Good morning, guys. John -- I think this probably is for John Rielly. At the end of the first quarter from an inventory standpoint are you underneath, over, or balanced?

We are balanced right now. We came into the year balanced and we just had a slight over lift, as I mentioned in my script. But again, from your modeling it out, I would just say that we're balanced and look to model in our expected production.

Excellent. The other two questions would be for John O'Connor. John, any kind of peak drill target that you can share that would relate to the BMS22 Australia and Ghana?

Not in any meaningful way, Paul. Certainly not for BMS22, because it depends on what you ascribe to the individual wells distinct from the prospect and there's more to that than I care to go into right now, nor that is helpful. Ghana I think is a similar situation in that there are a number of prospects on the block and the block potential is the more material issue than the prospect to be drilled initially.

And Australia, actually coincidently and perhaps strangely, is similarly a sequence of a number of prospects, which in aggregate I think we've reported as lying in the range of 5 TCF to 20 TCF on block -- very large block, but the prospects will be significantly smaller than that, Paul.

On the BMS22, have you guys -- or you and your partner operator Exxon -- have you guys decided which well to drill yet or that is still contemplating? Because I presume that there's more than one prospect there?

There is indeed more than one prospect there and there's more than one partner there. We have partners in both Exxon and Petrobras. And the group has technical meetings decided indeed on the first two wells to be drilled on the block.

So it is already decided? And are the two wells going to be drilled one right after the other, or they're just going to have some -- I think now you're saying that in the third quarter you're going to drill on the BMS22 and if -- I think currently you assume probably within six months (inaudible). Should we assume that the rig is going to right there then move to the next prospect or that is going to take some time?

At this stage I would assume that they're pretty much back-to-back, Paul.

Okay. A final question. John, on Pony Number 2 sidetrack, what are you expecting to find or hoping to find there from that well?

I would definitely hope to find enough data to establish the oil/water contact in the three target sands, Paul.

Okay. Is it checking on the up dip or down dip -- I mean, what's the sidetrack --

The sidetrack is up dip, it's being drilled at about an angle of somewhere between 30 and 36 degrees from the vertical. The previous well is a straight hole vertical and this one is being drilled up dip.

And how long is the TD that you're going to drill?

I'm sorry?

How far it extended out on the sidetrack (inaudible)?

I think it's something like 1,500 feet. I don't have that number to hand actually.

I see, okay. Very good. Thank you.

You're welcome, Paul.

Robert Kessler, Simmons & Co.

Congratulations on what I thought were overall good results. I hate to pick on the only or one of the few weak spots, but just looking at trading, second quarter in a row of a fairly sizable net loss. Any thoughts given there with respect to sort of derisking the book or any attribution for the net loss?

Basically, as you've seen, our trading activity represents a small part of our business. It's been consistently profitable on an annual basis. We basically remain comfortable with the strategy, the place it has in our portfolio. And again, from a guidance standpoint I'd typically just give out about $20 million per year and that's what we'll look to try to attain from our trading activities.

Any particular reason for the loss this quarter?

No, it's a diverse portfolio. It's spread across the energy commodity, so there's nothing in particular there.

Okay. Thanks very much.

Mark Flannery, Credit Suisse.

I have two questions. One is could you update us on what's going on in the Bakken and what your plans are there? Any changes given recent news and noise and whatever in that area? And the second question is on Pony, let's just for a moment assume that you get everything you want out of the sidetrack, you release the Ocean Baroness to another well spot, can you then sort of run us through in an ideal world what the next three or four steps would be at Pony?

Good morning, Mark. Let me start with the second first and deal with Pony. If the results of the sidetrack are as we hope and expect, we would probably have, depending on precisely the results, sufficient information to firm up a development scheme. Whether that development scheme would be stand-alone or would be in conjunction with partners to the South depends on the result of the sidetrack. But in any event, by the end of the year I think we would come close to being in a position to advocate a development scenario.

So that's pretty much the way we see the thing going forward. We've done quite a lot of work in the subsurface rock mechanics, in fluids, in process concept, selection of design over the past year or so, so it's not as though we're starting now to move forward. A lot of that work has been done and we're awaiting, if you will, calibration from the sidetrack well and indeed the data from the previously drilled straight hole, Pony Number 2, sidetrack Number 2. So does that take care of the Pony question?

Yes, that's great.

Okay. On the Bakken we currently have net 410,000 acres or so. We're still in the business of acquiring more acreage provided it makes economic sense. We have 50 operated wells in the Bakken. We expect production in 2008 to be around 8,000 barrels a day. We're running six rigs, by the end of the year we'll go up to eight and by 2009 we'll go up to 10.

Individual well rates with rates being the average of the first 30 days of production range from about 100 barrels a day to 400 barrels a day. We see some variation in the reservoir quality in an aerial sense, we're doing a lot of work to model the subsurface, to understand the geology better, and we're also continuing to do work to optimize completion practices, particularly fracing technology.

Great. Is there any event or anything you might learn this year that would lead you or could lead you to add another couple of rigs in '09, or is it just sort of steady as she goes?

That's a very good question. To be honest with you, the limitation is more around having skilled people to operate and to act in support of the operation in North Dakota than it is anything else. And investments in North Dakota will be up significantly this year versus last year. So we are ramping up the pace, but we're trying to do it in a prudent manner. If we are fortunate and if we found the people I think there would definitely be a push to add more drilling capacity.

Great. Thank you very much.

I show no further questions in the queue. I would now like to turn the call over to management for any closing remarks.

We appreciate everybody's attendance on the call and we look forward to your attendance on the next call. Thank you very much.

This concludes the presentation. You may now disconnect. Good day.