赫斯 (HES) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Hess Corporation fourth quarter 2008 earnings conference call. My name is, Latrice, and I will be your coordinator for today's meeting. 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 call. (Operator Instructions)

At this time I would like to turn the call over to your host for today's conference, Mr. Jay Wilson, Vice President Investor Relations. Please proceed, sir,.

Thank you very much. And good morning, everyone. Thank you for participating in our fourth 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, John O'Connor and John Rielly.

I will now turn the call over to John Hess.

Thank you, Jay. Welcome to our fourth conference call. I would like to discuss the current financial environment, review key achievements of 2008 and provide guidance for 2009. John O'Connor will then discuss our Exploration and Production and John Rielly will review our financial results.

We have been experiencing a severe global economic crisis that has greatly reduced the demand for energy and has led to a precipitous drop in crude oil and natural gas prices. We have responded to this reduction in our projected cash flow from operations by sizing our 2009 capital and exploratory expenditure budget to $3.2 billion, compared with $4.8 billion in 2008. The purpose of our investment program in 2009 is to maintain financial strength in this time of uncertainty while protecting our long-term growth options. As in previous years, the majority of our 2009 spending will be targeted to Exploration and Production, with $1.4 billion budgeted for production operations, $900 million for developments, and $800 million for exploration.

In 2009, we forecast that crude oil and natural gas production will average between 380,000 and 390,000 barrels of oil equivalent per day. We begin 2009 having delivered strong financial performance in 2008. Full year results benefited from strong commodity prices which were partially offset by higher industry costs. Corporate net income for the year was a record $2.36 billion. Exploration production earned $2.4 billion and Marketing and Refining earned $277 million. In 2008, we also strengthened our financial position with debt to capitalization improving to 24.3%, compared to 28.9% at the end of 2007.

With regard to operations, Exploration production achievements in 2008 included; growing proved reserves to 1.43 billion barrels of oil equivalent, replacing 171% of production, and an FD&A cost of about [$90] per barrel of oil equivalent and achieving our reserve life target of 10 years, marking the sixth consecutive year in which we lengthened our reserve life. During 2008 we advanced our field developments, Shenzi Field in the deepwater Gulf of Mexico and Pangkah Oil and LPG project in Indonesia. Both of which are on schedule to commence production in the second quarter of 2009. We also continue to make progress in our on-shore US Bakken Shale and Seminole ROZ projects.

In Exploration, we executed a successful program in 2008 which resulted in off-shore discoveries in Australia, Libya and Egypt. We conducted successful appraisal drilling on our Pony field in the deepwater Gulf of Mexico. Also during the year, we made significant additions to our Exploration anchorage, including the acquisition of 47 new blocks in the deepwater Gulf of Mexico, and the Semai V Block in Indonesia. With regard to Marketing and Refining, our 2008 financial results were similar to 2007. Refining results were negatively impacted by the significant decline in Refining margins. However, Marketing results were up compared to last year. In Retail Marketing, higher margins more than offset weaker gasoline sales.

In Energy Marketing, results reflected volume improvement and stronger margins. While we have taken prudent steps to appropriately size our capital and exploratory expenditures program for 2009 in response to the weak economic environment, we remain committed to our strategy of investing in exploration production to profitably grow our reserves and production on a sustainable basis. We are proud of our Organization's ability to deliver performance and remain confident that our future investment opportunities will create value for our shareholders.

I am very pleased that Greg Hill has joined us as President Worldwide Exploration & Production. He succeeds John O'Connor, who is retiring after more than seven years of outstanding leadership. Greg had a distinguished 25-year career at Shell where he most recently had been Executive Vice-President Asia-Pacific E&P. He also served in leadership roles in the United States and Europe. Greg brings global experience in operations excellence, technology, development projects and building world-class organizations through investment in people.

As this will be John O'Connor's final conference call, I want to express our deep appreciation for the extraordinary job he has done in building a global franchise in Exploration and Production. His vision to grow reserves and production on a sustainable and financially disciplined basis has built a strong foundation for the future. We are grateful to John for his many and valuable contributions over the years. He has been a great partner and friend, and we wish him health and happiness in his position in his well-deserved retirement.

I will now turn the call over to John O'Connor.

Thank you very much, John.

In 2008, crude oil and natural gas production averaged 381,000 barrels of oil equivalent a day, which is up 1% versus 2007. Production was underpinned by strong performance at the Hess operated equipment complex in we Equatorial Guinea, and the commencement of Phase II natural gas sales at the Malaysia-Thailand JDA in November. On the other hand, the hurricanes in the Gulf of Mexico had the effect of reducing our full year 2008 production by 7,000 barrels of oil equivalent per day.

While we thus far restored some 18,000 barrels of oil equivalent per day, as a result of third-party transportation issues, we still have about 15,000 barrels of oil equivalent per day shut in. These remaining volumes are expected to be brought back online by the end of the first quarter. 2008 was another year of improved sustainability for E&P. We added proved reserves of 244 million barrels of oil equivalent, which resulted in year-end reserves being up 8% for the rest of 2007. We also achieved our reserve life target, which was established six years ago, of 10 years. Turning to Exploration, we conducted an active drilling program in 2008 with encouraging results.

In the Northwest Shelf of Australia, we drilled four exploration wells on our 100% owned WA-390-P license, which resulted in three discoveries. We planned to drill an additional five exploration wells during the second half of 2009. In addition, Woodside, the operator of WA-404-P license, in which Hess has a 50% interest, will commence the three well program in February. In Libya, we made a potentially significant discovery of our 100% owned area 54 license located in the Gulf of Sidre. We plan now to acquire 3-D seismic and drill at least one appraisal well during the second half of 2009. In Egypt, we announced a discovery on our deepwater West Med block, in which Hess has 55% interest and is the operator. Further exploratory drilling is planned for the fourth quarter 2009. In Ghana, the Ankobra number one well in our Cape Three Points South block was a dry hole.

However, we remain encouraged by the potential in the area, and we recently acquired 3-D seismic over the western half of the block. In 2009 we will process and interpret this seismic data, with preliminary plans to drill another well in 2010. I'm sure that many of you saw that ExxonMobil, the operator of block BM-S-22 in Brazil, filed a Notice of Discovery with the regulators on January 16th. We're encouraged by the presence of hydrocarbons in the Azulao well. Logging operations are complete, and the well will now be drilled to its target depth. Following completion of operations as allowed, the operator plans to drill a second well on the block. 2008 marks another year of real progress for the Company's Exploration and Production business.

Despite the significant decline in commodity prices experienced in the fourth quarter, our performance objectives for the year will match or exceed it. Promising new exploration acreage was acquired, development projects were progressed on schedule, and we achieved record earnings. As this will be my 29th and final conference call with Hess, I want to take the opportunity to say that it's been a fantastic seven-plus years, during which our business has been substantially transformed. I'm proud of everyone in our organization for the contributions they have made to our Company's success. And I'm also especially pleased that Greg Hill has chosen to join us to continue strengthening the business.

Now I'll hand the call over over to John Rielly.

Thanks, John. Hello, everyone. In my remarks today, I will compare fourth quarter 2008 results to the third quarter, and I will provide additional 2009 guidance.

Fourth quarter 2008 consolidated results amounted to a net loss of $74 million, compared with income of $775 million in the third quarter. Turning to Exploration and Production; Exploration and Production operations in the fourth quarter of 2008 had a loss of $125 million, compared with income of $699 million in the third quarter. The fourth quarter results were impacted by significant declines in commodity prices, volatility in foreign exchange rates, hurricane downtime and incremental costs, asset impairments and a net tax charge. In our earnings release we have treated the asset impairments and hurricane costs as special items. Now I will discuss the other factors giving rise to the fourth quarter loss and the variance from third quarter earnings.

Excluding the special items of $26 million, the after-tax components of the decrease in earnings are as follows. Lower selling prices decreased earnings by $655 million. Higher sales volumes increased earnings by $22 million. Increased exploration expense reduced earnings by $68 million. Higher foreign currency losses decreased earnings by $74 million. A net income tax charge reduced earnings by $20 million. All other items net to a decrease in earnings of $3 million, or an overall decrease in fourth quarter adjusted income of $798 million. As indicated in the earnings release, fourth quarter production was reduced by 19,000 barrels of oil equivalent per day as a result of hurricane activity in the Gulf of Mexico.

We estimate the after-tax opportunity cost of this reduced production was lower fourth quarter income of approximately $45 million. The increased foreign currency loss in the fourth quarter reflects the effect of the exchange rate volatility on a remeasure of assets, liabilities and foreign currency contracts by certain foreign businesses. As indicated in the press release, in the fourth quarter of 2008, the Corporation had a net income tax charge of $20 million. This charge principally reflects the reduction of deferred tax assets in Algeria due to a lower statutory tax rate associated with falling oil prices. The overall Exploration and Production effective income tax rate for the full year of 2008 was 49%.

Turning to Marketing and Refining; the results of Marketing and Refining operations amounted to income of $152 million in the fourth quarter of 2008, compared with $161 million in the third quarter. Results of Refining operations amounted to income of $27 million in the fourth quarter of 2008, compared with $46 million in the third quarter. The Corporation's share of HOVENSA'S results after income taxes, amounted to income of $13 million in the fourth quarter, compared with $32 million in the third quarter, primarily reflecting lower margins. Port Reading earnings were $14 million in the fourth and third quarters. Marketing earnings amounted to $138 million in the fourth quarter 2008, compared with $110 million in the third quarter. Fourth quarter 2008 Marketing results principally reflect higher margins in retail gasoline operations.

Trading activities generated a loss of $13 million in the fourth quarter, compared with income of $5 million in the third quarter. Turning to Corporate, in the net Corporate expenses amounted to $59 million in the fourth quarter of 2008, including after-tax losses of $14 million on pension related investments, compared with net Corporate expenses of 14 - - I'm sorry - - of $42 million in the third quarter. For the full year of 2008, net Corporate expenses were $173 million. After-tax interest expense was $42 million in the fourth quarter, compared with $43 million in the third quarter. For the full year of 2008, after-tax interest expense was $167 million. Turning to cash flow; net cash provided by operating activities in the fourth quarter, including a decrease in $97 million from changes in working capital, was $495 million. Principal use of cash was capital expenditures of $1.156 billion.

All other items amounted to an net increase in cash flow of $189 million, resulting in a net decrease in cash and cash equivalent in the fourth quarter of $472 million. At December 31, 2008, we had $908 million of cash and cash equivalents. Our available revolving credit capacity was $2.474 billion. Total debt was $3.955 billion December 31, 2008, and $3.980 billion at December 31, 2007. The Corporation's debt to capitalization ratio at December 31, 2008 was 24.3%, compared with 28.9% at the end of 2007. Turning to 2009 guidance, in addition to the 2009 production and capital expenditure guidance that John has referred to, I would like to provide further information on certain 2009 financial metrics. Our E&P cash operating costs are expected to be in the range of $15 to $16 per barrel of oil equivalent produced.

Depreciation, depletion and amortization charges are expected to be in the range of $13 to $14 per barrel for a total production unit cost of $28 to $30 per barrel. In our projections for 2009, we are not anticipating any changes in statutory tax rates. However, for the full year of 2009, we currently expect our E&P effective tax rate to be in the range of 57% to 61%. The increase from our 2008 effective rate largely reflects the impact of Libyan taxes in a lower commodity price environment. Excluding Libya, the E&P effective rate was 40% in 2008 and is expected to be in the range of 40% to 44% in 2009.

Concerning our crude oil hedge positions, as noted in the third quarter earnings release, the Corporation closed its Brent crude oil hedges by entering into off-setting contracts covering 24,000 barrels per day of production from 2009 through 2012. The deferred after-tax loss as of the date positions were closed will be recorded 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 pre-tax amounts will continue to be recorded as a reduction of revenue and allocated to the selling prices of our African production. Net Corporate expenses in 2009 are estimated to be in the range of $165 million to $175 million. After-tax interest expense in 2009 is anticipated to be in the range of $190 million to $200 million. This concludes my remarks.

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

(Operator Instructions) And our first question comes from the line of Mark Flannery with Credit Suisse. Please proceed.

Thank you. First, I'll say congratulations and thanks a lot to John O'Connor. You have a lot to be proud of there, John, and we're going to miss you.

Secondly, I have a question about costs. John Rielly just gave us some guidance on the cash operating costs. But with regard to - - let's assume a $45 world and a world of $5 US natural gas prices. Are you - - confident that the Corporation can post a net profit in 2009? I think that net loss in the fourth quarter has raised a few eyebrows. Is there anything you can do, maybe to get costs down further than the guidance that you've given us today?

What we have, Mark, in our projections right now for cost is - - as you know, we have contracts that you enter into, and you fill those contracts, especially in the first six months of the year, as these contracts come in. We'll execute those contracts and we will incur those costs. As you're talking about a $45 world or a $5 natural gas price world, obviously then industry costs will come down over time. And so those costs will then filter through our operating costs.

Now as trying to give projections of exactly when that will happen, I can't give it to you exactly which quarter and as to when that will start to filter through. But if there's a $45 price world, we can be profitable in a $45 price world. As you can see from our results that we gave, - - obviously there's lower commodity prices right now. We had to take a look at our whole portfolio to see if there was any impairments in that portfolio. You can see we had small impairments in two fields, and both of those fields were at the end of their life, actually, both ceasing production in 2009. o at these lower prices, our portfolio is resilient and is profitable at these lower prices. Now the other facts that you have to add in then are exploration expenses. So are you going to be successful with your wells or not? But again, if you're just talking about the portfolio and producing assets, they can be profitable at these prices.

Okay. Thank you very much.

And our next question comes from the line of Robert Kessler with Simmons & Company. Please proceed.

Good morning, and congrats on your retirement, John O'Connor. A couple of questions. Firstly on reserve editions, I'm just curious how much might be in there for Bakken? And I don't imagine it was a very large number. But just curious nonetheless, given the combination of year end pricing and costs. And then related to that, what your rough number might be for the WTI equivalent price that would be needed for Bakken to be reasonably economic in the long term for Hess. And then, unrelated to that, in exploration. Just curious, on exploration expense in the fourth quarter, what, if any, might have been included for lease-hold impairments?

I'll take the second one first. There's nothing in the exploration expense related to lease-hold impairments. The only impairments that are in the earnings in the fourth quarter are the two assets that I mentioned. In that special line of 26 million, there's after-tax 17 million related to the impairments of two assets. So there's nothing in the exploration expense line that is - - it's just primarily the Ghana wealth that we spoke about. And then we also had the Australia exploration costs that we spoke about on the last call, but it's all the fourth quarter portion of that being included in the exploration expense.

Okay. Then real quick, on Australia, other than the dry hole component, what was in there for Australian exploration expense?

It's just the dry hole component.

Okay. Got you.

Robert, this is John. Thanks to both you and Mark for your good wishes. The Bakken contributed about 13% of the total net reserve at the end of the year. That's a consequence of both performance as well as drilling. So we've been very pleased with our experiences in the Bakken.

Obviously shifted downwards in the Bakken in terms of drilling activity at this time because we were really ramped up and blowing and going during 2008. So we actually welcomed the opportunity to take a more studied approach to the Bakken. With respect to profitability, Bakken is profitable right now , and I expect that in this environment, as we've seen John Reilly mention, pressures on contractors and suppliers to reduce costs, that we will continue to be profitable, even to should crude

Good to hear. Thank you very much.

And our next question comes from the line of Erik Mielke with Merrill Lynch. Please proceed.

Good morning. I would of course like to echo the earlier comments on best wishes to John O'Connor.

Staying with the questions on reserve bookings, can you confirm that the numbers you've created include the reflected year end pricing. And if so, can you quantify both the (inaudible) and year end pricing? And then I have a follow-up question.

Yes, Erik. Thank you very much. I can confirm that the reserves do include the impact of price effects. The net effects between the positives and negatives, we felt, of course, price effects it in both directions, was a net plus of 77 million barrels.

Okay. Thank you. And this is for (inaudible). On the depreciation - - unit depreciation in India, you guided for $13 to $14 for 2009. If I get my numbers right for the fourth quarter, I get about $17 in international and about $15 in the US. Can you help me reconcile the fourth quarter with the 2009 outlook?

Yes. In the fourth quarter, for the impairments that I spoke about, the pre-tax effect of the impairments are in the DD&A line. So you'll need to exclude that. And that's $31 million there. So even when you take that out, the DD&A rate is still higher than what my guidance was for the full year. But it's difficult again when you look at quarter and quarter and you get into mix issues that happen in the quarter. Obviously, with some of our US production down, some of our higher international production, higher DD&A rates being in there. So again, from a guidance standpoint, we feel good for $13 to $14 for the full year. And the fourth quarter was just affected by mix of production and then the pre-tax effect of the impairment.

Okay. Thank you.

Erik, can I just amplify the answer I gave you? The 77 that I told you about is with respect to the increase on PSC contracts on price. The offset is 16 negative is due to price in tax royalty ratio. And so the net effect of the two things is an add of 60.

And our next question comes from the line of Arjun Murti from Goldman Sachs. Please proceed.

Thank you. My congratulations and best wishes as well to John O'Connor. And clearly, just a tremendous effort over the years. I, too, appreciate all the help and discussions we've had over the years. The question is for John.

You mentioned the Brazil well had finished logging, you were going to start drilling again. Please remind us what total debt is, how long you think it might be to get there, and the presence of hydrocarbons in the Exxon filing. Can you confirm or not whether that was outside of the target horizons or within the target zones you're looking for here? Thank you.

Let me start, Arjun, at the backend of the question. Certainly the hydrocarbons as indicated were picked up in target intervals, intervals that were targeted. With respect to TD of the well , there's about another thousand meters to go, and bottom hole assembly is back into the hole, headed towards bottom. There will be some conditioning to do. And then I think I have to say that the drilling operations have gone extremely well on this well. And so I would expect two or three days to get to TD and then presumably to be logging that TD.

I'm sorry. Just two or three more days to get to TD?

I would think so, yes. About a thousand meters to go to get down to total depth. Now, as you know, things can change along the way. But - - and this is not coming from the operator, so I'm winging it here. But I do know it's about a thousand meters to the program TD. And assuming that's the case and recognizing how effectively the operator has drilled the well thus far, I would say it's about three days of drilling. There's substantial logging at the end of that obviously, too.

Yes. That's terrific. Thank you. To I guess any of the Johns, the debt levels are at now much healthier levels. Can you just maybe talk about what your comfort is on things like debt to cap and debt? You have taken on the CapEx, and depending on the oil price, we are probably not too far from cash flow. But how you're thinking about - - do you want to maintain within cash flow, or would you be willing to lever up the Company a little bit?

Very good question. As you know, our goal is to live within our means, to fund our investment program. As prices fell precipitously in the fourth quarter and with a weak economic environment that we're in, we sized our capital and exploratory expenditure program accordingly at $3.2 billion. As the year unfolds, if we have to make further adjustments, we have the financial flexibility to do so. And - - depending on prices, depending upon some of these costs rolling off, - - we will continue to have the objective to maintain our financial strength. So - - we really want to stay strong investment grade and keep our balance sheet strong, and yet, at the same time, protect our growth options. So we will stay flexible as the year unfolds, and we have further flexibility to make adjustments, if warranted.

- - I mean, it's obviously very early days in Brazil. I suppose the thought process is, let's see what you have. If it does turn out to be a good discovery and one does have development someday. It is going to be a year or two at least away before you have to spend any consequential income or capital. And we'll just see what oil price environment we're in, what kind of cash you have at that point before one considers what you may, or may not have to do, from a financing standpoint. Is that fair?

Yes. It's a high class opportunity and as you know, we have some other exploratory successes that we're appraising now. There will also be future development opportunities, but obviously in today's price environment and financial environment, we will be prudent how we allocate capital going forward. But we're happy to be in an opportunity rich, strong position.

There's terrific. Thank you very much.

And our next question comes from the line of Paul Cheng from Barclays Capital. Please proceed.

Hey, guys. I think I should also add my congratulations to John O'Connor. Really appreciate all the years. Just curious that whether you're really ready to sit idle, maybe too boring for you. You're too young.

A number of questions. John, Egypt, can you refresh my memory as to what is the situation for the West Med?

Yes. Thanks, Paul. I'm looking forward to sitting on a beach, to be perfectly honest with you.

You're sure? I mean you're too young.

It would make for a nice change. You should know that, considering some of the trips we've been involved in. The demands it makes on your stamina. But West Med, actually, is now quite interesting, because of course, with the establishment of liquid hydrocarbons in the newer horizon that we drilled last year. This causes us to revisit the fire development concept, which is based around development of dry gas. So the development and transportation to shore and gas processing on shore. So as we take into effect the existence of the liquids we've established, together with the recognition of seismic, there are other similar prospects on the block. I think it's causing us to step back and take a more holistic view of what we may have on the block.

So should we assume that as a result - - I mean, it's great that you found hydrocarbon, but does that also mean that we'll probably see a little bit more of a delay for the project to come on stream?

Yes. I would think that's exactly right, Paul. I think it will be bigger in scope, and it will be changed in terms of technical content and I think it will benefit everybody if we take a more studied approach.

Sure. John, on the reserve addition, you had indicated that Bakken had represented about 13% of the addition. And I think from maybe I gave EN, price, that's a positive 77 million, right?

Offset by a negative 16 million in tax. We're net overall of plus 60.

Okay. Net positive 60. Can you also tell us that what is the other major item, or if there's any major item?

Actually, it's quite interest interesting. We have, as you know, been upgrading and enhancing our technical capability with respect to the subsurface understanding of all of our assets. And this is showing through in the reserve adds of 2008 particularly, because we had only modest new project sanctions. So much of the reserve adds have actually come through from petroleum engineering and reservoir engineering work in the subsurface. And so it's pretty much across all of the assets, Paul. It's [Valhall], it's Okume, it's Libya, it's Atuna, it's - - each one of our regions, North Sea, Southeast Asia, Africa and US.

Okay. Great. John, have you guys already seen any meaningful or sizable downward trend on (inaudible) on order surfaces?

No. I think John Reilly was eluding to that, because of course, most of these contracts that we are involved in certainly were listening-term contracts. And where we would expect to see that effect - -

Well I understand. I'm just talking about the stock market.

Yes. Even the services from - - logging companies or (inaudible), we have not seen it yet. But what we have seen is a willing to come negotiate with us. So I think what you would say now is that we're in a period of negotiating with suppliers. And the environment is one that leads us to believe we will see downward trends.

And normally how long is your contract terms? Is it 12 months, or is it longer?

It's all over the place, Paul.

Other than the deepwater rig.

Yes. Normally, for deepwater rig, it's probably two years.

Right.

Standard with an option for another one. Now we don't have no new contracts. We have an existing contract on the Baroness, which has about somewhere between 12 and 14 months left on that contract that. That's more typical.

Right. But I'm talking about outside the water rig.

Outside of the deepwater rigs?

Right. Is it more from within one year to two years, or - -

Yes. More typically one year.

Okay. A final question for John Rielly. On the hedging, I'm just trying to make sure I understand, there are - - I think unrealized losses 335 million, and that was spread between 2009 and 2010, and that's after tax. So with tax, I would assume about 515 million. Can we just assume to be about a strict 65.25 million. And so whatever is the unrealized price. And I would assume there's no hedging and assume a 65 million hit on the realization?

That's correct, Paul. Just kind of a straight-line amortization of that 335 annually that's after tax, just like you said. So you take the pre-tax.

Oh, 335 is annual? I thought that was both 2009 and 2010 together.

No. Then you were saying dividing by four within the quarter. No. It's $335 million each year for 2009 through 2012.

Okay.

Then you would just take it - - over the four quarter quarters.

Right.

dividing it over - -

And 335 million after tax, so pre-tax each year is about 515?

Correct.

Okay. Perfect. Thank you.

And our next question comes from the line of Paul Sankey with Deutsche Bank. Please proceed, sir.

Hi, everyone. In the spirit of the call, John, I wondered what you consider your greatest achievements to have been and your greatest regrets as you leave?

I'm always afraid to, Paul, to jump into greatest regrets, because there's no way I could answer that adequately. Probably my greatest regret is that I'm leaving right now at a time in time when the Company is poised to deliver even more exciting outcomes. In terms of successes, I think, to start, six years ago, what I considered to be a very dangerous reserve life ratio for the portfolio of - - hitting on six, just about six plus. And to see it drive every year upwards on the basis of both technical work, sound acquisitions and competent developments. And to actually - - we had set ourselves an internal target getting to a reserve life of 10 by the end of 2009. And that's really quite extraordinary that we've managed to accomplish that a year early.

Having said that, the other thing that I am tremendously pleased about is the caliber of people who both stayed with us during the tough times in the early period and who chose to join us, both mid-career people, outstanding professional, petro techs and really smart young kids that we managed to recruit from college. It's quite extraordinary that we've been pulling in 30 kids a year for the past four or five years that have chosen to join us. So those are some of the things, Paul.

Can you talk a little bit about your successor there and what led the Company to choose him?

Yes, I can. I'll be delighted to do that. We have an annual off-site for E&P in February of each year. Where we set demanding goals and metrics for that year. One of the things that came up last year from a number of the VP's who were present was a concern that I might be thinking of going, and how was I going to find a replacement. And I committed to the organization that I would find a replacement as good as, if not better, than myself. And I take that obligation seriously.

So for the past nine months or so, I together with some extraordinarily capable people in the HR community, have been going through the top qualified E&P people worldwide, And we've interviewed a number of those people who were quite keen to be part of this extraordinary adventure. But when I met Greg Hill, and had an opportunity to talk with him and have dinner with him in Singapore, I realized we had found exactly the right person. He had the personality and the leadership capabilities that I was looking for that would fit our Company, not necessarily all companies, but our Company. He had had historic experience extensively on shore in the US , which is a wonderful forcing ground for people to learn this industry with their sleeves rolled up and get their hands dirty.

And then he had had extraordinary success internationally in difficult times in the North Sea and more recently, in a very broad portfolio in Southeast Asia. So in many ways, at his age and stage, his experience resembled mine at a similar point in time. He has a lot of strength in areas where I am weak. And I think he will bring new eyesight to the opportunities that the current portfolio presents. So I have no doubt that he's going to take the E&P business in Hess to a

What are the strengths where you're weak?

I shouldn't you give an opening. or should I? No because that might be inditing some of my legacies. I'm not going there, Paul. We can have a drink some day.

Fair enough. So specifically, can you just update us on Pony. And one very final one for me is, when do you think we'll see first oil from that BMS-22 in Brazil? Thanks.

I have absolutely no idea about BMS-22, quite frankly. I think the operator has said how pleased they are to participate in this pre-salt discovery, which really nobody has really mapped out fully yet. Nobody knows the extent of it yet. So a lot more technical work to be done and there's no better operator than ExxonMobil to do the technical work here. So I think we're very confident that we will end up in the right space at the right point in time.

It's probably reasonable to say it's five years away, right?

Oh - - by the time you appraise from the development plan and then to go to construction, that would be fast-tracking in my view. But that's just my view. I want the be careful not to get crossed over with - - the operator.

And then the Pony and that's the last one for me. And again, thanks, John.

Pony, we're very excited about. We have done all of the fees. We have concepts that we think are extremely viable. And we are waiting to see if refinements to a number of issues will allow us to go to sanction in 2009. But that's conceptually where we are.

And our next question comes from the line of Doug Lagate from [Powell]. Please proceed.

Thanks. John, again, congratulations from me. And thanks for putting up with all of us guys over the years.

I've got a couple - - quick ones and a larger strategic question. I'll go the strategic one first. That ten-year reserve life target was kind of a long-standing thing for the Company. You got there, as you said, a little earlier than you originally thought. And I think, in light of what Paul was saying about BMS-22. How does the strategy now change in terms of post exploration? Are you more likely, for example, to look upon discoveries as assets that could be sold? Just give us an overview of how you see that moving forward?

First of all, with respect to ten as a target - - when your reserve life is 6.5 or 7, you set 10. That's a big mountain to climb. Now when you get to 10 I think you reset the target when you try to add a little more comfort factor into the reserve life. Because It's the best indicator of sustainability. So I would not expect we would rest our laurels at 10.

I think that was an appropriate target at the time. What I would think we would shoot for would be to have a reserve life that would be first quarter when compared to our competitors. So that might be 11 or 12. So there would be some more work to be done there, I think. With respect to the exploration strategy, I think it would be wrong of me to anticipate what Greg might want to do as he gets his hands around the portfolio. So what I would suggest is that perhaps on your next conference call, you might want to ask Greg about that.

Great. The other questions, of course, related to that is, could you just elaborate a little more on what the funds are in Ghana, going forward?

Yes.

And the only other one I have really is Valhall was mentioned as one of the things contributing to the reserve replacement. How do you know you've got the contract extension there? And what are the implications in terms of reserve additions if indeed you did see that lease extension over the next couple of years?

Well we have not got the lease extension, Doug, and it's something that's out there. There have been initial conversations with the regulators. But the answer typically is what you get within a shorter time frame of initial expiring of the license, then come talk to us. I think that's perfectly reasonable. We have no reason to assume that at that point in time, given the current performance and competency, that we will get an extension. But it hasn't occurred yet, although we've had initial conversations.

On Ghana, John.

Ghana? Ghana is really interesting, because we only had seismic over the eastern part of the block, which showed up a very attractive prospect, which we went and drilled and it was dry. The offsetting the discoveries in Jubilee on the near shore block offset the western part of our block, and we are current currently shooting seismic there right now as we speak. So my expectation is once that seismic is acquired, processed and interpreted, we will certainly be looking at wildcat locations in that part of the block, which we would preliminary pencil in to be drilled in 2010, Doug.

Great. Again, John, congratulations. Thanks very much.

Many thanks.

And our next question comes from the line of Mark Gilman with Benchmark. Please proceed.

Hi, guys. Good morning. And John O'Connor, also my congratulations. I've enjoyed our discussions over many, many years. A couple things if I could please. John O'Connor, I guess I'm wondering what kind of inference one can draw from the fact that the first well on the Ghana block was not really targeted at a Jubilee analog type prospect, given all of the encouragement and enthusiasm with respect to the size of that discovery?

Yes. Thanks, Mark. I am certainly going to miss our quarterly jousts. That will be one of the things I will miss in the industry.

As far as Ghana is concerned, it's just really one of those things I would say. I mean, we were tight for rig [sloth], we had seismic over one part of the block. The seismic indicated a very attractive prospect. But as we made clear before we ever spotted the well, as you know, Mark, this was not in the same target horizons as the Jubilee discovery. So a lot of things had been said really before Jubilee was a discovery and announced. We did not have seismic adequate to pick a prospect, offsetting the Jubilee discovery. It looked like we had a very viable discovery.

We were certainly encouraged in many ways by the information we obtained from the Ankobra well. The one thing that was missing was reservoir, but lots of other things worked. So it's part of the learning process. And as I said, I expect that we will identify analogs to Jubilee once we process the seismic. That's my expectation at this stage. May be getting ahead of myself. But that's the reason why we did what we did.

Okay. John O'Connor, also certain press reports regarding the filing of the A&P in Brazil on the BMS-22 well use the word "traces of hydrocarbons". Was that a correct reference to the actual report that was filed, or was that some editorialization by the journalist involved?

That was editorializing, Mark. That's not what my transmission of the submission says.

Okay. Just a few other quicker ones, if I could, please. John Rielly, I'm confused by the 20 million tax charge, which I believe you said was associated with a reduction in the Algeria statutory tax rate.

Yes, it is.

Did I get it right?

Yes, you did. It's a bit unusual, but in Algeria, we have a net deferred tax asset in Algeria. Because of the way the windfall profits tax works in Algeria, when there were higher commodity prices, the tax rate went higher because it went by the bands of the commodity prices. So now you come to December 31st, and the oil price drops down, the tax rate drops down so you have to apply a lower tax rate to determine your deferred tax asset. So it's just a non-cash charge reducing the value of that deferred tax asset on the balance sheet.

Got it. The comment with respect to the 2009 E&P tax rate. John, I just don't understand why, in a fixed margin environment - - such as Libya, that the price decline really had such an impact - - has any impact, frankly, on the effect of the E&P tax rate. Can you help me? .

Sure. Let me just pick - - I can give you certain examples. If you're in Libya, right, and you earn $100 and you have a 90% tax rate, you have $90 of tax on that. If you have a $100 loss somewhere else, be it exploration, dry hole. There - - now you have zero pre-tax income. That tax benefit usually stay at 40%. You're going to left with $50 of taxes with zero dollars of pre-tax income. So again, as the commodity prices come down, our unit cost in Libya are very low. So on our pre-tax margin percentage in Libya is our best country pre-tax margin. So Libya becomes just a higher part of pre-tax income, and, therefore, with a high rate, just ends up just mechanically increases the E&P effective rate. And that's why I was trying the say, without Libya we were 40% - - we were, I think, 41.7% in 2007, we were 40% in 2008, and we're ranging between 40 and 44. Again, the range is due to where the liftings are, and depending on exploration expenses.

Okay. Just one final one. The difference in the quarter between liftings and production, John?

It was - - it was immaterial. It had a small net underlift, but it's immaterial.

Okay, guys. Thanks very much.

Sure.

And our final question is a follow-up from Erik Mielke with Merrill Lynch. Please proceed.

My question also relates to liftings, not whether it's an underlift or overlift, but the timing of liftings, given the sharp change in prices during the quarter. Were you lifting as an average pace throughout, or was there a bias towards the end of the quarter?

When it turns out, I mean, nothing from pure mechanics or what we were doing with lifting liftings, but we did have a bias toward the end of the quarter, because let's just take the US. In the US, you had the hurricanes. Basically we had our 33,000 to 34,000 barrels of day shut in at the beginning of the fourth quarter. So we started to restore 18,000 barrels of it during the quarter. That restoration came more in November and December. So just from the timing of that lifting, we're more towards the end of the quarter. Outside of that, I wouldn't say there's anything unusual from the timing of the lifting.

Can you quantify the volumes over the three months?

For the US, you mean?

Yes.

Or just in general. So, again - - you're picking up - - I would say, from a US standpoint, we are not from - - if you look at our production, we're not really underlifted or overlifted, but I could say that our sales volumes were basically up 10,000 barrels a day from October in November and December.

Okay. Thank you.

Sure.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.