赫斯 (HES) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Hess Corporation conference call. (OPERATOR INSTRUCTIONS) As a reminder this, conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Jay Wilson, vice president of Investor Relations. Please proceed.

Thank you, Katina.

Good morning, everyone, and thank you for participating in our third 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; John O'Connor, President, Worldwide Exploration and Production; and John Reilly, Senior Vice President and Chief Financial Officer.

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

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

I will make a few brief comments after which John Reilly will review our financial results. Net income for the third quarter of 2008 was $775 million, up from $395 million a year ago. Our results benefited from higher crude oil and natural gas selling prices and stronger refining and marketing margins, which more than offset the impact of higher upstream costs compared to those in the year-ago quarter.

For the third quarter of 2008, exploration production earned $699 million. Crude oil and natural gas averaged 361,000 barrels of oil equivalent per day, which was 1% above the year-ago period. Facilities down time associated with hurricanes Gustav and Ike in the Gulf of Mexico have the effect of reducing our third quarter production by an average of 11,000 barrels of oil equivalent per day.

In the deep water Gulf of Mexico, delays from the hurricanes and bringing back the operations of third party transportation infrastructure have curtailed full resumption of our production. We have thus far restored 4,000 barrels of oil equivalent per day and the remaining 30,000 barrels of oil equivalent per day is expected to be back onstream by January. Including the impact of the hurricanes, we expect that full year 2008 production will be approximately 380,000 barrels of oil equivalent per day, which is within the original range of our guidance. With regard to our field developments, we continue to make good progress.

JDA Phase II in the Gulf of Thailand and the Shensee Field in the deep water Gulf of Mexico, are on track to start in early 2009 and oil production from the Ujang Pung came field in Indonesia is on schedule to commence in mid 2009. With regard to exploration, we have successfully completed our initial four-well drilling campaign on permit WA 390 P in the northwest shelf of Australia, in which Hess has a 100% working interest. Following the GlenCO discoveries, we noticed in September that our third well, nimble foot 1, was also a deserve and had encountered 93 feet of net gas pay. In October, we completed operations on our fourth well, warrior 1, which had gas shows, but failed to find commercial quantities of hydrocarbons. While additional drilling is required to delineate the block, we are encouraged by the results of the drilling program to date. Earlier in the year, we acquired a 3D seismic survey over WA 390 P permit.

We will now integrate this data with the recent well results to remap the block and define our 2009 drilling campaign that is currently scheduled to resume in the second half of next year. In September, we spotted deep water exploration wells on block 54 in Libya and Cape Three Points in Ghana. Drilling operations are ongoing and we expect to have results from both wells during the fourth quarter. Hess has a 100% interest in block 54 and Cape Three Points. In Brazil, drilling operations recently commenced on block BMS 22, in which Hess has a 40% working interest. Results of this well are expected in the first quarter of 2009. Turning to marketing and refining, we reported a profit of $161 million for the third quarter of 2008.

Both our Hovensa joint venture refinery and our Port Redding, New Jersey facility posted higher earnings than a year ago, as refinery problems in the Gulf Coast following hurricanes Ike and Gustav resulted in higher refining margins. Marketing earnings were also higher than the year ago quarter, primarily as a result of improvement in margins. Retail marketing margins strengthened during the quarter, while fuel volumes on a per site basis were down 7%, reflecting weaker economic conditions. Year-over-year convenience store sales were flat, after being lower during the first half of this year. In energy marketing, sales volumes, fuel oil, natural gas and electricity oil grew versus last year.

Finally, we are facing a global financial crisis that has decreased the demand for energy resulting in significant decreases in crude oil and natural gas prices. Crude oil, which was priced at over $140 per barrel in July, is now in the $60 per barrel range. Based upon this uncertain economic environment, we will make an appropriate reduction in our 2009 capital and exploratory expenditures to maintain our financial strength.

I will now turn the call over to John Reilly.

Thanks, John.

Hello, everyone. In my remarks today, I will compare third quarter 2008 results to the second quarter. Net income for the third quarter of 2008 was $775 million compared with $900 million in the second quarter. Turning to exploration and production, income from exploration and production operations in the third quarter of 2008 was $699 million compared with $1,025,000,000 in the second quarter. The after-tax components of the decrease are as follows. Lower selling prices decreased earnings by $103 million.

Decreased sales volumes reduced earnings by $213 million. All other items net to a decrease in earnings of $10 million for an overall decrease in third quarter income of $326 million. In the third quarter of 2008, our ENP operations were underlifted compared with production, resulting in decreased income in the quarter of approximately $25 million. Turning to marketing and refining, the results of marketing and refining operations amounted to income of $161 million in the third quarter of 2008 compared with a loss of $52 million in the second quarter. Results of our refining operations amounted to income of $46 million in the third quarter of 2008 compared with $3 million in the second quarter.

The corporation's share of Hovensa's results after income taxes amounted to income of $32 million in the third quarter compared with a loss of $12 million in the second quarter, primarily reflecting higher margins. Port Redding earnings were $14 million in both the third and second quarters of 2008. Marketing results amounted to income of $110 million in the third quarter of 2008 compared with a loss of $40 million in the second quarter. Third quarter 2008 marketing results reflect higher margins in retail gasoline operations and energy marketing activities. Trading activities generated income of $5 million in the third quarter compared with a loss of $15 million in the second quarter.

Turning to corporate, net corporate expenses amounted to $42 million in the third quarter of 2008 compared with $33 million in the second quarter, principally reflecting losses on pension-related investments in the third quarter. Our after-tax interest expense was $43 million in the third quarter compared with $40 million in the second quarter. Turning to cash flow, net cash provided by operating activities in the third quarter, including a decrease of $211 million from changes in working capital was $1,205,000,000. The principal use of cash was capital expenditures of $1,277,000,000.

All other items amounted to a decrease in cash flow of $27 million, resulting in a net decrease in cash and cash equivalents in the third quarter of $99 million. At September 30, 2008, we had $1,380,000,000 of cash and cash equivalents. Our available revolving credit capacity was $2,683,000,000 at quarter end. Total debt was $3,932,000,000 at September 30, 2008 and $3,980,000,000 at December 31, 2007. The corporation's debt to capitalization ratio at September 30, 2008 was 24.3% compared with 28.9% at the end of 2007. Turning to other matters, as noted on Page 10 of our earnings release, subsequent to quarter end, the corporation closed its brink crude oil hedge positions by entering into offsetting contracts covering 24,000 barrels per day of production from 2009 through 2012 at a per-barrel price of $86.95 each year.

The fourth quarter 2008 hedges were not affected by these transactions and are still open. The deferred after-tax loss as of the date the positions were closed will be reflected in earnings as the contracts mature. The estimated annual after-tax loss from the closed positions will be approximately $335 million from 2009 through 2012. The pretax amounts will continue to be recorded as a reduction of revenue and allocated to the selling prices of our African production. This concludes my remarks. We will be happy to answer any questions.

I will now turn the call over to the operator.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Mark Flannery of Credit Suisse. Please proceed.

I've got two questions, very loosely related. First one was on CapEx. You mentioned that you'll make some appropriate adjustments to 2009 CapEx. I suspect you're not going to give me a number for 2009, but how -- can you help us think about that? What does that mean in terms of how you're approaching the '09 capital budget, either in terms of a lower oil price expectation or just, how should we think about that? And my second question is on press reports regarding new refinery solution.

Okay, Mark. I'll start with your first question and you're right. I mean we're still in the middle of our 2009 budget process, and we will give everyone an update on our January conference call going over our fourth quarter earnings and set up our budget for next year. But there's no question that the global financial crisis has clearly impacted the performance of the economy and it's led to significant decreases in commodity prices. So as a result, we are looking at a lower price environment going into 2009 and as a result, we will be reducing our 2009 capital and exploratory program to live within our means. But having said that, I mean we'll still be focusing on the growth projects that we have. We're in a fortunate position that Shensee, the project that will be starting production in 2009, we'll be completing that project. Pangkah oil will be completing this year and mid-2009 and start up on production, we'll obviously be completing that. JDA Phase II actually is completed on our end. we're just waiting for the buyers to complete the hookup of the gas pipeline. So we do have some of our growth projects. They will be funded as part of our program. So we have flexibility in our portfolio to maintain growth, maybe at the lower end of our ranges here going forward. But we do have that flexibility in the program and what we'll do is go through our normal process. We're ranking all our discretionary projects as they rank according to economic returns. We'll pick the highest ranked projects and there will be some then that we either maybe need to pull out more, depending on what happens in prices in 2009, or could bring back in, as we see what happens with commodity prices.

Great.

And then as for your next question, I'll turn it to John Hess.

Yeah, St. Lucia, Mark, while we have the option to build a refinery in St. Lucia, we currently have no plans to do so. I will be very definitive about that answer.

What is the option, then?

We just have the option to build a refinery there when we think the economic conditions are right and as strategically it made sense, we have that option. We've had that option going back to the '70s when we did the concession agreement. And that concession agreement has been extended. So that's the option, but at the same time, I want to be very clear here. We have no current plans to build a refinery in St. Lucia.

Okay. Thank you very much.

Your next question comes from the line of Arjun Murti representing Goldman Sachs. Please proceed.

Thank you. John, just a follow-up on the hedging closeout. Just curious from an accounting standpoint. I think when others have done this, I think they have tended to take the charge all in one quarter. Sounds like yours will be spread out. Why is that? Then I guess the related question is I assume this gets rid of the issue of at times having to post letters to credit. And maybe you might have said it in your prepared remarks. If you did, I apologize. But just could you review your revolving credit capacity, what's borrowed, what's outstanding, and that kind of thing as well. Thank you.

Sure. And just to go over the various background of it, I mean we like stability in times of uncertainty in the credit markets. So with the recent drop in crude oil prices, it seemed like a good time to close out the positions by entering into offsetting contracts. The hedge positions were not a significant amount of our production, but the liability was significant and we needed to manage it, as you said, with letters of credit. So now that we have entered into these offsetting contracts, we've locked in that liability. It will benefit our financial flexibility going forward by limiting our exposure to any increased margin requirements. And so by entering the offsetting contracts, which also gets into the accounting, there's no change to the payment terms and therefore the contracts will continue to be paid monthly through 2012 and by entering into these offsetting contracts, what we have done, to get into a little accounting techinal framework, but we've de-designated the contracts. They end up just going through, and since the probable transactions will still happen, meaning the production will still happen, you defer that and take those losses in as the contracts mature. So, again, from our standpoint, we just thought it was a prudent measure in these uncertain times to lock in that liability. And then as for our credit facility, our liquidity's strong. We have the majority of our 3 billion revolving credit facility available to us. And as I said in my prepared remarks, that's about 2.7 billion was available as of September 30. The line doesn't mature until 2012, and also just to add on, we have very minimal near-term debt maturities, less than 200 million over the next two years. So we feel we're in a good position now to operate in these difficult credit markets.

That's really helpful. Just to follow up, and I appreciate your comment on the offsetting transactions, why the accounting runs the way it does. I thought I would never ask this, but are the counter parties the same on both sides of the transaction, the original hedge and now the offsetting transaction, or do you have some counter party uncertainty in terms of letters of creditor anything else of that nature?

No, we wouldn't do that. There's one counter party on the side of the original hedges and we entered with the same counter party.

That's terrific. And then just one final one, in the 380 full year guidance, did that contemplate the Gulf of Mexico production coming back progressively, or do you assume it's out for the full quarter? Any additional color on that?

It's -- Arjun, it's going to be a gradual approach. We think we'll get about 10,000 to 15,000 barrels a day between now and the middle of November. And the residual 15,000 barrels a day probably ought to be year end, early January event.

That's great. Thank you very much.

Thank you.

Your next question comes from the line of Paul Sankey, representing Deutsche Bank. Please proceed.

Hi, everyone.

Hi, Paul.

You've outlined how strong you are financially, really, but at the same time saying you'll live within your means. So to go back to this CapEx question, can you just address how low you'll go, will you absolutely stay within your means, if we stay, for example, at $64 a barrel, or for example, in terms of your rig commitments, and if you could talk a little bit more about that, would you be prepared to really maintain your programs at above your means measure, given that you are financially strong?

Yeah, Paul, very good question. And this is always a matter of degree in how you get the balance right. Obviously the specifics that you're looking for and others are looking for will give you on the January conference call. But right now just to help you understand how we think about it, we will make appropriate reductions in our capital and exploratory spending in 2009 to reflect the decrease in prices and obviously they are moving around. But we will do it in such a way that we maintain our financial strength and flexibility while still protecting our growth options. And we will, be as prudent as we can be getting that balance right.

I think it's fair to say you are a bit short rigs, I mean you're certainly not long.

I think that's the point. I think that's implicit in John Hess' answer, Paul. We had always talked about having essentially a minimum muss program to drill the oil caps between the fourth quarter of this year through the 2009 period. We were still within a constrained capital environment be able to fund the rig commitments that we have. I would add that in the event that things change more favorably, it might be a benign environment in terms of picking up occasional rigs of opportunity. We will help program capable of pursuing those should the opportunity arise.

Great, thanks. One separate question, but related to cash is pension funding. Can you talk a little bit about whether there's going to be any issues that we might expect going forward? Thank you.

Sure. If you looked at our 2007 10-K, on our, call it our qualified pension plans, when you looked at as compared to our cumulative benefit obligation, we were actually over 100% funded on those plans. We do have a supplemental plan, and on that plan, we were just under 75% funded. So in 2007 and 2008, we've been funding the plans at around a level of $80 million. So, yes, with asset values decreasing as a result of the market declines, clearly we'll be less funded. But we were in a good position before, so, yes, I could see some increases in contributions, but, from a significant standpoint, it won't be material to our cash needs.

Yeah, feels like it will be $20 million type number, seeming that the market stays where it is.

That would not be unreasonable.

Okay, great. Thanks a lot. And finally John, John Hess, you mentioned volume's down 7%. I'm getting down 3% in the release in terms of the sales that you announced. Could you just clarify the difference I'm getting between what looked like a 3% decline. I think you mentioned in your comments you would have 7% same-store sales. Thanks.

Yeah, the same-store sales that we're talking about is for the, I just want to make sure our numbers are the same ones that we're talking about. In terms of site versus site, it's -- I believe the third quarter's about 7%. The northeast is actually a little less than that and place that actually closer to 9% same-site sales on gasoline volumes we're talking about here is Florida which is a little higher than that which is reflecting problems and the real estate problems they have in the state. When you add it all up, it's about 7% in terms of the third quarter and in terms of convenience store, while our store sales are about flat, if you look at same-store sales, they are actually down quarter versus quarter year ago about 2%. So, that's a whole dollar number that we show in the press release. Overall, there's a message here, consumers cutting back on spending, even more at our sites in the gasoline and a little less in the C-store.

Your next question comes from the line of Paul Cheng representing Barclay's Capital. Please proceed.

Thank you. Hi, gentlemen. John, at the end of September, third quarter, at the end of September, are you neutral or underneath?

Sure. So for the whole year if you looked at our production for nine months, our total volumes are actually pretty much the same, sales volume versus production. Now, when you do look at it compared to country by country, there are some countries that are underlifted and some countries that are overlifted. It's very difficult to give guidance going forward about where the lifts are and what countries will end up overlifted in the fourth quarter. From a general standpoint for the nine months for this year, Libya's been overlifted and the UK is underlifted. That's our general for the nine months. In the quarter itself, what had happened was Denmark, Norway and the UK were the basic countries that were driving the underlift and the $25 million reduction in income.

Okay, great. John, in the O and M side, is there any inventory gain in the result, given the rapid decline in oil prices?

No, there is none. There's no liquidation LIFO, none been taken out.

I think this will be for John O'Connor. John, you are talking about Ghana and BMS 22 currently drilling. Can you tell us what's is the TD you expect to reach and where are we?

Ghana is about 15,000 feet TD, Paul, and it will certainly TD, my expectation is in the next 45 days. Brazil, the TD is about 18,000 feet. It's really just in the top hull section right now. Probably will be 10,000 feet within the next 48 hours and casing to be set, so as we said in John Hess' remarks, that we expect to TD that well in February.

Okay. So that means that Ghana actually there's a possibility maybe in December that by the end of December, you may be able to announce something?

I would hope so, absolutely.

And I know you are in the early stage, just drilled four wells in Australia, three assessed. Anything you can share in terms of -- so far you have been able to identify there?

Obviously we're very encouraged by what we've seen in these wells, Paul. It is a very, very sizable block and we have acquired and are processing 3D seismic over the block and it's going to be necessary to take the results of the 3D data and the drilling results from the wells, integrate all of that information technically and it's probably going to be into the second quarter before we would be in a position to realistically determine what the ultimate resource will be. And at the end of the day, it's going to require us to drill more wells in order to confirm what the estimate resource on the block will be. But we're very, very pleased at the discoveries we've made so far.

So you think by the second quarter of next year, you may be able to come up with some estimate, and then you will continue to go on some additional drilling program to firm up on that estimate?

I don't think we would talk about anything at that time, Paul, because there's so much dependent on drilling.

And how many more wells that you foresee yourself that need to drill in order for you to come to the point that you feel pretty comfortable -- serve?

As you know, we have remaining commitment of some 12 wells and we'll start that drilling program in the middle of 2009. I think that it is more than likely that each of those wells will be required in order to give us the sort of confidence we would have in publicly discussing the results on the block. So my guess is we'll wait till the end of the program before we talk about it.

Okay. That's fair. Maybe this is either for John, maybe for John Rielly. 2009, I know everyone is talking about that, can you tell us what maybe, is there a number you can share, what is the minimum you have to spend in your CapEx program that based on order commitment that you have already in or that you are already in the middle of trying to finish the project. Is there a number you can share, the minimum spending level?

No, there's no set number we can share from our budget. I guess I would like to reiterate that we do have flexibility in that program. So there's a number of discretionary projects that we have that we can potentially then defer, because as we try to live within our means next year and we can still fund obviously all our key growth projects and all key appraisal drilling, be it, if it is, let's hope Brazil, Libya, Ghana, that will not be a problem in the program. So we have flexibility in it. We will adjust it to live within our means and then we'll give you more information on the January conference call.

Okay. Final one, on the hedge position, I just want to confirm, that it's locked in at 86.45?

86.95.

86.95, that's brand, right?

Yes, it is.

And I think from accounting standpoint -- will be the same as what we are seeing today with the exception in the prices being -- not going to fluctuate based on the spot price?

You're exactly right.

Okay, perfect. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Mark Gilman representing The Benchmark Company. Please proceed.

Guys, good morning. Just staying with that hedge question for a sec, John, I'm trying to understand the cash situation. Did you outlay the cash in October, or will the cash be laid out in accordance with the same type of schedule you mentioned in terms of the earnings impact?

Yes, exactly. It's on a monthly basis, so all we did was enter into offsetting contracts at the market. So no cash was put out at that time and the cash will be paid as the contracts mature.

Okay. Just back to the capital thing for a sec. Exploration is always a bit of a wild card in capital budgets and I guess I'm wondering whether it is likely to bear the brunt of any reductions in 2009.

You're right in your observations, but I don't think that it will necessarily be the one area that would take the brunt of the cuts, Mark. We're still frankly working our way through each piece of the business and as John Reilly said earlier, we want to protect the most profitable investment opportunities which we have many and at the same time, we want to have a balanced approach for the future so that we continue with an exploration program that will determine the strength of our developments of production into the future.

John, would I be correct in characterizing the Seminole and the - in terms of the margin, is there any productions you might implement?

Not necessarily, it's not quite as easy as that frankly. The Seminole was basically the work's essentially complete there. We'll complete in the middle of 2009, so this is a development where the bulk of the investment has been made and it's a profitable project even at today's prices, so we would obviously continue and finish out that project. We might be prepared to tweak it, compared with some more bullish perspectives we had at higher commodity prices, but we'll certainly continue with our program there. I think we can come up with a very attractive balanced program that will fit our pistol and will protect most of the opportunity set that we have, which is a robust opportunity set.

All right. John O'Connor, can you comment at all about the Amos discovery and potential commerciality?

We're always happy, Mark, as you know to have a discovery of any shape or size. This is really peripheral to our portfolio quite frankly and I'm not sure what the plans are for the operator. For other people who may be listening in, this is an offset operator, made a discovery, then the discovery extend over into a -- where we had equity in the North Sea and it's been encouraging result so far.

Okay, and one final one on the downstream side. It appears that FCC utilization rates at Hovensa have been fairly low all year. I'm wondering, is this an operational issue or is this a discretionary economic plan?

More of it is discretionary economic, Mark.

So you are--

-- operational issues, but some of it's, economics effective capacity utilization, but there were also some issues in terms of maintenance that affected it as well.

Okay, guys. Thank you.

Your final question will come from the line of Sarah Hunt representing Alpine. Please proceed.

Good afternoon, or good morning, gentlemen. I think most of my questions have been answered because I think the biggest struggle for us right now is trying to figure out what is going to happen to CapEx budgets and I'm sure with the way oil prices have been swinging wildly, it's one of your issues as well. But I guess, and I know you would rather talk about some of this in January, but is there some oil price that you're thinking of where things go back to what you would originally have thought about or has, regardless of where the oil price goes in the short-term, has the credit issues and everything else really changed your mind about the way you want to spend next year?

These are uncertain times and oil prices have gone down a material amount. It's prudent for us to reduce in an appropriate way our CapEx and our exploratory spend for 2009 to maintain our financial strength and flexibility, while still protecting our growth options. And the specifics of what that program, is we will give you on the January call.

Okay, and I guess if you don't mind, I would just follow that up with, is there any concern that, given what's going on in credit markets and for governments around the world, that you think that Brazil would change some of its current schemes on blocks that are already being worked on, or is that something that you feel comfortable with the way the government's going to treat that at the moment?

Well,in talks with government officials, we've been assured that the block that we have, where we have a 40% interest, that the terms that the government has with us will be honored. I think some of the information that's coming out from government officials about potentially going to a different contractual setup, be it production sharing agreements or otherwise have to do with the unlicensed block, not the licensed block we are in.

Okay. I just wanted to clarify. That's what I thought, but I just wanted to clarify it.

That's the way we understand it.

Okay.

Gentlemen, you have a follow-up question from the line of Mark Gilman representing The Benchmark Company. Please proceed.

John O'Connor, on the northwestern shelf, can you indicate at this point whether the second half '09 drilling program is going to test additional prospects on the block, or is it going to be focused on appraising the discoveries you've made?

No, it will be predominantly additional prospects, Mark.

Okay, and also just, John O'Connor, one more. European natural gas volumes in the quarter in particular were quite a bit softer than what we though. Is that demand oriented, which I'm skeptical of, or are we seeing declines?

No, I think it's the usual third quarter seasonality kicking in, so it's both seasonality with respect to demand and also that a heavy maintenance and turnaround activities in the North Sea.

Okay, John. Thank you.

Sure.

Ladies and gentlemen, this concludes the question and answer session. Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.