Hess Corp HES
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/24/2013

Operator: Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Hess Corporation Earnings Conference Call. My name is Mathew, and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. As a reminder, this call is being recorded for replay purposes.

Now, I would like to turn the call over to Mr. Jay Wilson, Vice President of Investor Relations. Please proceed, sir.

Jay R. Wilson - VP, IR: Thank you, Mathew. 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. These risks include those set forth in the Risk Factor section of Hess's Annual and Quarterly reports filed with the SEC.

With me today are John Hess, Chairman of the Board and Chief Executive Officer; Greg Hill, 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.

John B. Hess - Chairman and CEO: Thank you, Jay, and welcome to our first quarter conference call. I will make a few brief comments, after which Greg Hill will provide an operational update and John Riley will review our financial results.

As most of you are aware, our management team and Board of Directors have been in the process of undertaking a multiyear transformation of Hess Corporation into a more focused, higher growth, lower risk pure play E&P Company.

We are successfully executing our plan and are gratified by the results of our first quarter adjusted earnings of $669 million, which from last year's first quarter of $509 million represents an increase of 31%. We achieved these results even after the loss of production from the sale of our interest in the Beryl, Schiehallion and Bittern fields in the United Kingdom North Sea as well as the downtime associated with the Valhall redevelopment project in Norway.

This accomplishment in the context of our continuing transformation is testimony to the focus, commitment and hard work of our dedicated team of senior managers and employees. While we will get into the financial details behind these results later, I would like to spend the next few minutes reviewing the progress we have made toward becoming a pure play E&P company. On March 4 of this year, we announced the final steps of this strategy with three overarching goals. One, that we continue to reshape our upstream portfolio and exit our remaining downstream operations. Two, that the proceeds from these divestitures be allocated both the fund, the Company's future growth and provide substantial current returns to shareholders. Three, that has deliver on its forecast of 5% to 8% compound average annual growth in production.

In just the seven weeks since this announcement, we have made substantial additional progress toward achieving these goals. Let me start with an update on our divestitures. Both the Azerbaijan and Beryl asset sales were closed in the first quarter, yielding after-tax proceeds of $880 million and $440 million, respectively. We agreed to the sale of our acreage in the Eagle Ford shale play in Texas for $265 million relieving our Company of approximately $500 million of capital expenditures over the next several years.

On April 1, we announced an agreement to sell 100% of Samara-Nafta in Russia to Lukoil for $2.05 billion. Hess has a 90% ownership position in Samara-Nafta. Last week, Lukoil received the consent of the Russian Federal Antimonopoly Service to acquire the assets. We expect to close this transaction within the next week. Work is also underway on the divestment of our upstream assets in both Indonesia and Thailand, as well as the processes to exit our downstream terminals, retail, energy marketing and trading businesses.

We will apply the proceeds from our recent divestitures, including Russia to reduce debt and strengthen our balance sheet, so the Company will have the financial flexibility both to fund its future growth and also to direct most of the proceeds from additional asset sales to return capital directly to shareholders. We expect the $4 billion share repurchase plan to begin in the second half of this year. In addition, we will increase our annual dividend to $1 per share beginning in the third quarter of 2013.

Lastly, we are continuing to make excellent progress toward delivering our production growth forecast of 5% to 8% per year compounded annually. To that end, net production from the Bakken shale oil play in North Dakota, our principal engine of growth, average 65,000 barrels of oil equivalent per day in the first quarter, an increase of 55% over the year ago quarter. We continue to forecast Bakken production this year to average between 64,000 and 70,000 barrels of oil equivalent per day. Our average well cost from drilling the Bakken in the first quarter was $8.6 million, a decline of 36% from the first quarter last year and a continuation of a steady downward trend since the beginning of 2012. We believe our operating performance in the Bakken ranks among the best.

In the emerging Utica shale play, we continue to execute our appraisal program and remain encouraged by the results. In addition, the Valhall Field redevelopment is complete and our focus is on the drilling campaign to increase production. We also continue to advance our development projects at Tubular Bells in the deepwater Gulf of Mexico and the North Malay Basin in the Gulf of Thailand. We will submit our appraisal plan for offshore Ghana to the government in the second quarter. Greg will further elaborate on our operating results in a moment.

As you can see from this brief overview, we are making substantial progress toward our goal of becoming a pure play E&P company. However, there is still much to do. With the commitment of our people and their focus, we are confident that we will continue to successfully execute our program and deliver value to our shareholders.

With that, I would now like to turn the call over to Greg Hill, who will bring you up to date on some of the operational details behind these results.

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Thanks, John. First, I'd like to comment on the recent changes to our portfolio announced on March 4, and then I'd like to provide an update of our progress in executing against our three-pronged growth strategy of unconventionals, exploitation, and focused exploration. As John mentioned, we've taken numerous actions this quarter to ensure our portfolio is focused on higher growth lower risk assets.

During the first quarter, we announced that we had reached agreements to sell our interest in several non-core assets, including ACG, Beryl and the Eagle Ford and began the process to divest our assets in Indonesia and Thailand. On April 1, just after quarter-end, we also announced an agreement to sell Samara-Nafta in Russia. We expect to close the Samara-Nafta transaction in the second quarter for net proceeds of approximately $1.8 billion generating an after-tax gain on sale of approximately $900 million. The ACG and barrel transactions resulted in gains of $360 million and $323 million, respectively. While we incurred an after-tax loss in the fourth quarter of 2012 of $192 million related to the sale of our Eagle Ford position, we were not able to establish a core acreage position there and will now be able to reallocate approximately $500 million in future capital expenditures, higher return opportunities in our portfolio. Following these divestitures roughly 80% of our remaining reserves and production will be confined to five principal geographical areas. These five areas can be described as long-lived, good margin areas with low risk growth that leverage our capabilities and competitive advantage. The opportunities within these five areas reflect our three-pronged strategy for future growth through one unconventionals with growth driven primarily from the Bakken and Utica, two, exploitation with growth driven by Tubular Bells, Valhall, the North Malay Basin and three, focused exploration in areas such as Ghana. This balanced strategy underpins our forecast of 5% to 8% compound average annual growth and production.

Now let me turn to our progress in executing against each leg of this growth strategy. Starting with the first element of our strategy unconventionals, we continue to make excellent progress towards our mid-decade goal of achieving net production of 120,000 barrels of oil equivalent per day from the Bakken. First-quarter net production was 65,000 barrels of oil equivalent per day, up 55% from the first quarter of 2012 and in line with our previous guidance for 2013. As result of our transition to pad drilling, as previously discussed, production will be relatively flat through May as we continue to build inventory of drilled, but not completed wells, but production will increase substantially in the second half of 2013 as we ramp up our completion activity. We remain confident in our 2013 Bakken production forecast between 64,000 and 70,000 barrels of oil equivalent per day.

In terms of individual Bakken well performance, we are focused on driving high returns, which as you know is a function of both well cost and well productivity. Well cost for the first quarter averaged $8.6 million per well, down 36% from 13.4 million per well in the first quarter of 2012 and down from $9 million per well in the fourth quarter of 2013. The continued quarter-and-quarter reduction in costs has been driven by our application of lean manufacturing techniques. Our productivity continues to be the highest in industry as 10 of the top 25 wells in the North Dakota Bakken play in 2012 were Hess wells. Therefore considering well cost and productivity coupled with higher margins from our infrastructure, we believe we are one of the most competitive Bakken operators and there is much more optimization to come. During the quarter, we brought 30 wells under production, of which 21 were Middle Bakken and 9 were Three Forks. For the full year, we expect to bring approximately 175 wells on production with two-thirds targeting the Middle Bakken and one-third targeting the Three Forks. Our Tioga rail facility ran a capacity in the first quarter, delivering an average of 53,000 barrels per day to higher value markets. Our Tioga gas plant expansion project is on schedule to be commissioned at the end of 2013, which will enable us to capture more value from our own gas and third-party volumes.

In summary, our long-lived high-margin Bakken asset continues to deliver relatively low risk growth that leverages our capability and competitive advantage. Operational performance is firmly on track as our team continues to focus on execution, capital efficiency and profitable production growth.

Turning to the Utica, the appraisal of our acreage continues and we are increasingly encouraged by our well results to-date. In the first quarter, four wells were drilled, seven were completed and five were flow tested. Three of the five tested wells were operated by Hess. On our 100% owned acreage, we tested two wells during the quarter. The Capstone 2H-9 well in Belmont County tested at a rate of 2,242 barrels of oil equivalent per day, including 42% liquids and the NAC 4H-20 well in Jefferson County tested at a rate of 7.5 million cubic feet per day of dry gas.

On our joint venture acreage, we tested the Jeffco 1H-6 well in Harrison County, at a rate of 1,432 barrels of oil equivalent per day including 20% liquids. Also as previously announced, the Athens 1H-24 well also in Harrison County was tested in late 2012 with a rate of 4,230 barrels of oil equivalent per day including 59Z% liquids. Although still very early days in the appraisal phase, these well results are encouraging. In 2013, we and our partner CONSOL plan to drill approximately 30 wells across both our 100% owned joint venture acreage.

Turning to the second element of our strategy, exploitation. Progress continues at Tubular Bells, Valhall and North Malay Basin. At our 57% owned and operated Tubular Bells development in the deepwater Gulf of Mexico, our first production well was drilled during the first quarter and encountered 146 feet of net pay, which is 46% higher than predrill prognosis. We are currently drilling this second production well and facilities construction is on schedule for field startup in mid-2014 to deliver 25,000 net barrels of oil equivalent per day of high margin production.

At the BP operated Valhall field in Norway in which Hess has a 64% interest, the field's redevelopment project completed and the operator resumed production on January 26. In the first quarter of 2013, net production was 5,000 barrels of oil equivalent per day as the operator began to ramp up facilities and resolve routine start-up issues. Full year 2013 net production from Valhall is forecast by the operator to be in the range of 24,000 to 28,000 barrels of oil per day, which we believe will come in at the lower end of this range.

Looking forward our primary focus is to work with the operator to grow production over the coming years leveraging the CHOC reservoir drilling and completion capability we have developed in South Arne in Denmark. Two drilling rigs are working in the field currently with the goal of bringing six new wells online during 2013.

In Southeast Asia, we continue to demonstrate our project execution capability. In the Malaysia-Thailand joint development area, we installed our eighth wellhead platform in the first quarter on-time and on-budget. At North Malay Basin, we installed the jacket and topsides for the early production system in April and plan to start development drilling at mid-year. The project is on track to commence first gas in the fourth quarter of 2013 at a net rate of approximately 40 million cubic feet per day. We also continue to advance full field development scheduled for first gas in 2016, which will increase net production to approximately 125 million cubic feet per day.

Turning to the final element of our strategy focused exploration, we announced in February our seventh consecutive discovery in Ghana, Pecan North number 1. Drilling performance in Ghana has been top-quartile with cost for the last three wells which were drilled in 6,000 to 8,500 feet of water averaging $40 million per well. Discussions regarding the appraisal plans for the block are ongoing with the Canadian government.

In closing, we are on plan with respect to both our strategic positioning and operating performance.

I will now turn the call over to John Riley.

John P. Rielly - SVP and CFO: Thanks, Greg. Hello, everyone. In my remarks today I will compare results from the first quarter of 2013 to the fourth quarter of 2012. But before I begin, I want to highlight some changes we have made in our first quarter earnings release and supplemental data. As a result of the Corporation's previously announced plans to divest its downstream businesses and complete its transformation into a pure play Exploration and Production company. We have presented the after-tax downstream results for all periods as discontinued operations. With this change, we now operate with two segments, an Exploration and Production segment and the Corporate and Other segment, which is primarily comprised of corporate and interest expenses.

As a pure play E&P Company, we have made various changes to the financial and operating data in the earnings release. For example, in the income statement, our previously reported production expenses have been split into two lines operating cost and expenses and production and severance taxes. In the operating data, we have provided quarterly sales volumes in addition to a more detailed breakout of production volumes.

Finally, as we have done in the past, we have filed our supplemental earnings presentation on our website. We have added quarterly operational data for the Bakken and pro forma E&P results for 2012 and 2013 to the supplemental presentation. The pro forma information presents our results as if our asset divesture program had all being completed effective January 1, 2012, so that we can present historical comparison of the performance for the remaining portfolio.

Turning to consolidated results, the Corporation generated consolidated net income of $1.276 billion in the first quarter of 2013 compared with $374 million in the fourth quarter of 2012. As a result of progress in our transformation, there are a number of special items in the quarter. Excluding the items affecting comparability of earnings between periods, the Corporation had earnings of $669 million in the first quarter of 2013 compared with $409 million in the previous quarter.

Turning to Exploration and Production, E&P had income of $1.286 billion in the first quarter of 2013 and $325 million in the fourth quarter of 2012. Excluding items affecting comparability of earnings between periods E&P had income of $698 million in the first quarter of 2013 and $431 million in the fourth quarter of 2012.

First quarter results included after-tax gains totaling $683 million related to the sales of our interest in the Beryl and ACG fields. First quarter results also included an after-tax charge of $67 million from employee severance costs and a non-cash income tax charge of $28 million as a result of a planned divestiture. Fourth quarter 2012 results included net after-tax charges of $106 million from items affecting comparability of earnings between periods. Excluding these items, the changes in after-tax components of the results were as follows; higher realized selling prices increased earnings by $148 million. Lower exploration expenses improved earnings by $94 million, lower operating cost increased income by $57 million, the mix of sales volumes decreased earnings by $17 million, all other items net to a decrease in earnings of $15 million for an overall increase in first quarter adjusted earnings of $267 million.

Our E&P crude oil operations were over-lifted compared with production by approximately 300,000 barrels in the quarter, which increased after-tax income by approximately $10 million. Our E&P cash operating costs were $21.20 per barrel of oil equivalent for the first quarter of 2013 and our guidance range for the full year remains $21 to $22 per barrel. Depreciation, depletion and amortization expenses were $19.28 per barrel for the quarter and our guidance range remains $19 to $20 per barrel for the full year.

The E&P effective income tax rate, excluding items affecting comparability, was 42% for the first quarter of 2013, which was below our guidance due to the start-up of production from the Valhall Field. The full year E&P effective income tax rate is still expected to be in the range of 46% to 50%. We have Brent crude oil hedges covering 90,000 barrels of oil per day at a price of approximately $109.70 per barrel that are in place for the remainder of 2013.

Turning to Corporate and Other, corporate expenses were $44 million in the first quarter of 2013 compared with $43 million in the fourth quarter of 2012. Corporate expenses in the first quarter of 2013 included an after-tax charge of $11 million for employee severance cost. After-tax interest expense was $66 million in the first quarter of 2013 compared with $67 million in the fourth quarter of 2012.

Turning to Marketing and Refining, which are now classified as discontinued operations, Marketing and Refining earnings were $100 million in the first quarter of 2013 and $159 million in the fourth quarter of 2012. As a result of ceasing refining operations at the Port Reading facility in February, first quarter 2013 results included after-tax income of $137 million relating to the liquidation of LIFO inventories, partially offset by after-tax charges totaling $64 million comprised of accelerated depreciation and other shutdown costs. In addition, an after-tax charge of $43 million was recorded for employee severance costs related to our plan to exit the Corporation's downstream businesses. Fourth quarter 2012 results included net after-tax income of $71 million from items affecting comparability of earnings between periods.

Turning to our financial position, we are applying the proceeds from our asset sales program in order to have the financial flexibility to both fund growth and provide current returns to shareholders. To fund our growth, we have committed that the proceeds from divestitures would be sequentially applied to first repay short-term debt of approximately $2.5 billion; second, to provide a 1 billion cash cushion; third, to fund the 2013 cash flow deficit; and four, to return cash to shareholders by repurchasing up to $4 billion of shares.

In addition, as John Hess stated earlier, the Corporation will increase its annual dividend starting in the third quarter of 2013. Subsequent to our March 4 announcement of our transformation to a pure play E&P Company; S&P, Moody's and Fitch all maintained our mid-BBB rating. Following the completion of the sale of our Russian subsidiary, Samara-Nafta we will be able to repay all remaining outstanding short-term debt and begin building our cash cushion. As John Hess mentioned earlier, we expect to begin our share repurchase program in the second half of this year as further planned assets sales are completed.

During the first quarter of 2013, the Corporation generated net cash from continuing and discontinued operations of $819 million. The cash provided by operations together with proceeds from asset sales of $1.326 billion and cash on hand we used to fund $1.521 billion of capital expenditures and repay $752 million of outstanding borrowings. We had $444 million of cash and cash equivalents at March 31, 2013 and $642 million at December 31, 2012. Total debt was $7.376 billion at March 31, 2013, and $8.111 billion at December 31, 2012. The corporation debt to capitalization ratio was 24.7% at March 31, 2013 compared with 27.7% at the end of 2012. This concludes my remarks, we will be happy to answer any questions.

I will now turn the call over to the operator.

Transcript Call Date 04/24/2013

Operator: Doug Terreson, ISI.

Doug Terreson - ISI: So I wanted to see – I had a strategic question. I want to see if we could get an updated view on Australia in light of the recent commentary that Woodside is no longer going to seek third-party gas for its Pluto development? Then second, the next steps or plan for the other position the one in the Beetaloo Basin in Australia? So, two Australia questions.

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: On your question related to the offshore position in Western Australia 390-P, recall we are negotiating with three different parties for liquefaction of that gas. So, there's other parties besides Woodside in the mix, and both discussions are continuing with the parties. For the second thing on the Beetaloo Basin we are in the process of processing the new seismic that we just shot and then we have to make a drill or drop decision by mid-year, and so that's where we are in the process.

Doug Terreson - ISI: Mid-year '13.

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Yes.

Operator: Roger Read, Wells Fargo.

Roger Read - Wells Fargo: I guess, following up on your Bakken expectations. Can you walk us through may be right now are we seeing production actually declining into the month of May, I mean, kind of reflecting depletion rates and then obviously, as wells come on beginning in May all the way through the end of the year production ramps up and could exceed your level or 70s really as good as it gets in 2013. I am just trying to understand the moving parts there?

John P. Rielly - SVP and CFO: I think as we announced previously as a result of our switch to pad drilling from held by production drilling you build inventory of drilled, but not completed wells so your completion rate is lower than what it was last year. So as a result of that your production for the first five months of the year is flat to slightly declining. In the first quarter our production was 65, for the next couple months that could decline just a little bit so it will be flattish, and then as we put wells on completion as we move the completion spreads in, our completion rate really doubles last half of the year. So, our production is very much backend loaded for the year. As we said in the opening remarks, we feel confident of our range of 64,000 to 70,000 barrels a day.

Roger Read - Wells Fargo: Then on Ghana, what -- is there a timeline we can think about there in terms of, okay, obviously great success story on the exploration front. You start working with the government here. I mean I'd say start working you already have been, but any expectations for when something might occur there that you could talk about in terms of a future development plan or anything like that?

John P. Rielly - SVP and CFO: Sure. I think -- so, there is two things that we have to do. The first thing, which is the most important piece of the business right now for us is to get the approval -- appraisal program approved by the government, that has to occur by mid-year and so we are in the process of having those discussions with the Ghanaian government. In parallel, we're also doing predevelopment studies. Now, once we get the appraisal program approved by the government then we have a two-year clock to get our appraisal activities done, so that kind of lays out a timeframe for you. Lots of appraisal activity over the next couple of years, predevelopment studies in parallel and then we aim to make a decision obviously after that appraisal period is done.

Operator: Eliot Javanmardi, Capital One Southcoast.

Eliot Javanmardi - Capital One Southcoast: Just a question, you spoke about in the last quarter, your expectations for your Middle Bakken wells and (indiscernible) I want to see the range between 600,000 to 700,000 barrels equivalent. Are you seeing something along those lines with that range in the Middle Bakken and also I don't know if you can, but could you give us maybe a percentage acreage split on what you have in Middle Bakken and Three Forks?

John P. Rielly - SVP and CFO: I think as we said in our opening remarks. We plan to drill about one-third of our more wells in the Middle Bakken this year, right? Two-thirds of the wells this year will be – or sorry, one-third Three Forks, two-thirds of Middle Bakken wells this year. Regarding your question on EUR the range is still valid; the EURs in the first quarter that came out of the wells that we drilled were in the low 600s.

Eliot Javanmardi - Capital One Southcoast: Last question then. With your increasing appraisal activity likely for Ghana, should we expect the exploration appraisal budget to swell a bit in the coming years versus where we are now?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: I think as we've guided previously this 500 to 600 level is where we want to keep that budget, so we're going to fit live within those means.

Eliot Javanmardi - Capital One Southcoast: Lastly, on the Utica well, the gaps done well. Was there a timing duration you guys could give on the results that you provide there if not I'll just leave it at that.

John B. Hess - Chairman and CEO: On the Utica wells we're trying to give comparables to what all the competitors are giving. So these are early time tests, right, typically 24-hour kind of test.

Operator: Doug Leggate, Bank of America/Merrill Lynch.

Doug Leggate - Bank of America/Merrill Lynch: Greg, on the – I guess the commentary around the Utica and the Bakken, just a couple of questions if I may. First of all in the Bakken is what proportion of your acreage is perspective for Three Forks, and if you could maybe help us with how the activity level there may had accelerate given that you're now starting to go to the Three Forks? I guess some more question on the Utica in terms of pace of development, I've got a follow-up please.

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Doug, I think as we've previously discussed the Three Forks underlies the majority of our acreage. And the acreage we consider core this 550,000 to 650,000 acres a lot of that is underlined by the Three Forks. Regarding the Three Forks at the end of 2012 we had 52 wells in the Three Forks, by the end of this year we'll have another 65 or so in the Three Forks. So, that gives you a sense of where we are. And again our drilling program one-third Three Forks this year, two-thirds Middle Bakken.

Doug Leggate - Bank of America/Merrill Lynch: So, I guess, what I am really trying to figure out is you've essentially doubled your locations and if you are saying the Three Forks underlies most of the acreage, so what does that mean in terms of pace of development. I mean, 175 well seems fairly modest given the opportunity set?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Yeah, I think, Doug, on the Three Forks while it underlies our acreage we still have to do some appraisal of that just like everyone else I think there'll be really good parts of the Three Forks to be seen and there maybe some not so good parts of the Three Forks. So, that's really what we have to figure out in our drilling program this year and next year if how much of that is really, really prospective. Our focus this year, obviously in 2013 is capital efficiencies so we are going in and drilling some of the best locations in the Three Forks, as well as appraising some of the other acreage.

Doug Leggate - Bank of America/Merrill Lynch: So, same question for the Utica, in terms of are we at the point where you are ready to talk about development plan yet or still too early?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: No, Doug, it's still too early. To put it in context, if you add up 2012 and 2013 we've drilled 11 wells in '12 and '13 so far, and we've only tested 10. So, clearly, we've got a lot more drilling to do. We plan to drill about 30 wells this year. So at the end of this year, we'll have about 42 wells under our belt. In contrast after to the Bakken, of course, where we have over 600 wells. So, it's still early days in the Utica, but we're encouraged by the results so far particularly in Belmont, Jefferson, Harrison Counties.

Doug Leggate - Bank of America/Merrill Lynch: My quick follow-up is for John Rielly, on the operating cost guidance John. Does that still include Russia and can you -- now that you've got a deal in Russia. Can you give us an idea what the OpEx would look like ex-Russia and I'll leave it there?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Sure, Doug. Just to let you know that we do -- it's not on our website now in that supplemental presentation. We have pro forma results up there, showing what the portfolio would look like with Russia and Indonesia and Thailand, all the assets sold as if it went back to the beginning of 2012. But just to give you an answer to your questions here, if you're looking at 2013, what we expect from overall first on a revenue per barrel, our revenue per barrel will go up over $5 a barrel because of Russia exiting the portfolio. So, first, you get that higher lift in on the revenue line. When it comes to cash cost, we see that basically from our guidance standpoint being relatively flat for the full year pulling out all those assets. In the first quarter for example, I told you the portfolio had a cash cost of $21.20 on a pro forma basis with the assets sold that would have been $21.08. Now, when it gets to DD&A, when you start removing some of these assets from DD&A, they have a lower overall DD&A rate in the portfolio. So, we expect I would tell you the guidance then on the DD&A would be about $4 higher from an overall portfolio standpoint and then for example in the first quarter, I said the DD&A rate for the total E&P assets were $19.28 for the first quarter pro forma basis would be $22.45. So that's our cost guidance. Just to round it off to give you all the guidance on a tax, what we see from a tax rate standpoint is somewhere around from a portfolio standpoint, one between a 100 basis points and 200 basis points higher and we have some of the U.K. assets obviously with tax rates higher than the portfolio, but Russian Azerbaijan being below it, and that's why the tax rate then effectively goes up. Then we expect again as we've said that our cash margin overall goes up $5 per barrel.

Operator: Arjun Murti, Goldman Sachs & Co.

Arjun Murti - Goldman Sachs & Co.: Just a few follow-up questions. Just on the Utica results, just sounds like its liquids rich type gas at this point, mostly NGLs, if you can confirm that? And any comments on maybe the black oil potential of the Utica and maybe you've not drilled that par yet, but any thoughts there would be very helpful.

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Particularly in Belmont, Jefferson, and Harris Counties were in that liquids rich part of the play. As you move east, as we've said before in our Marquette acreage then you move more into the dry gas as the Point Pleasant plunges deeper to the East. Regarding the oil activity in the West, so far I would say the results are disappointing. It's like the Eagle Ford oil window you get shallower and the reservoir just doesn't have the energy that are required.

Arjun Murti - Goldman Sachs & Co.: Any update on Pony, I don't think I heard an update there.

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Arjun, Pony we're continuing the feed and we'll continue feed through this year and we're aiming for sanction decision both us and the partners

Arjun Murti - Goldman Sachs & Co.: And we can add 4 years from sanction to start-up something like that?

John P. Rielly - SVP and CFO: Yeah, that's probably a reasonable expectation.

Operator: Evan Calio, Morgan Stanley.

Evan Calio - Morgan Stanley: On your statement you expect to begin the $4 billion buyback in the second half. I mean, per your ordering of priorities in the opening comments should we assume that you go to work only after you've paid down 2.5 billion of debt and built the $1 billion cash cushion?

John P. Rielly - SVP and CFO: Yes, that's correct. And as I mentioned, we actually expect our Russian asset sale to close fairly soon and with the proceeds from that we will have fully paid-off our short-term debt at that point and actually we'll be starting to build that cash cushion. So, when we are saying the second half of the year is as these next asset sales come in we are going to be in this position to be able to start buying back shares.

Evan Calio - Morgan Stanley: So, if you assume to working the buyback in the second half you are assuming that some number of the Indonesia, Thailand terminal sales are completed by year end. Is that fair?

John P. Rielly - SVP and CFO: That is fair.

Evan Calio - Morgan Stanley: Can you give me just the operating cash flow on the quarter or just kind of tell me what the working capital adjustment is?

John P. Rielly - SVP and CFO: The working capital is approximately $600 million in the first quarter. Typically in the first quarter we have a very high working capital as you saw compared to the first quarter. I have already started to see some of that turn in April and we expect like usual the majority of that to turn by the end of the year.

Evan Calio - Morgan Stanley: Then lastly for me. On Valhall can you discuss the ramp in 2013 where the exit rate was in the quarter and are you still on track for the average guidance of 24, 28 through '13?

John P. Rielly - SVP and CFO: Evan, as we said in our opening remarks the operator forecast range of 24 to 28. We think we'll be at the low end of that range. First quarter production averaged about 5,000 barrels per day. Just as a reference point, production reached about 16,000 barrels per day by the middle of April. In addition to just the routine ramp I'll say in the (indiscernible) production associated with that. You also have the drilling rigs in there with our aim to get six wells drilled this year. So, there will be some back end contribution from those wells also.

Operator: Paul Cheng, Barclays.

Paul Cheng - Barclays Capital: Greg, when you say Valhall say BP is 24 to 28 is that the gross number or your net to you?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: No, that's net, Paul. Thank you. I should have clarified that.

Paul Cheng - Barclays Capital: On Ghana is it too early to give a rough estimate of what you think maybe the total recoverable resource of the seven discoveries, and also do you have a rough estimate on the liquid and gas split on those resource base?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Yes, Paul. It is too early to give a resource estimate for one reason. We are not allowed to speak about resources without the approval of the Ghanaian government and they have not allowed us to do that until we get done with our appraisal plan. So, that's the reason.

Paul Cheng - Barclays Capital: How about say in terms of the split between the liquid and black oil and NGL and natural gas, where you – are you allowed to talk about that?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: No, we can't do that yet either, Paul. But clearly with our seven discoveries and a number of them black oil, the pre-development studies are focused on the black oil.

Paul Cheng - Barclays Capital: Going on the Bakken, is there a rough estimate kind of number there or and any trend you can guide us that what is the cash operating cost right now? And how that may look like in 2014?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Paul, there is no difference actually I think from basically what we have in guiding there in the Bakken right now. So including production and severance taxes in in North Dakota when you put that together with our Bakken operating cost, the cash cost right now are just slightly below our portfolio average in the Bakken.

Paul Cheng - Barclays Capital: John when you say the portfolio average you're talking about U.S. portfolio or total Company portfolio?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: The total Company portfolio.

Paul Cheng - Barclays Capital: Right now you're slightly below total Company?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: I'm sorry.

Paul Cheng - Barclays Capital: Right now you're slightly below total Company?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Yes, it is.

Paul Cheng - Barclays Capital: Then how about your target for 2014?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Again, as production beings to ramp up and obviously then you can take those fixed cost going over more barrel. So, we see a declining cash cost per barrel. We'll be focused on that, as well as just as the maturity of the reserve bookings and the additional coming on there will be a slow decline in the DD&A rate as well.

Paul Cheng - Barclays Capital: You are not going to be willing to give us some numbers there is it decline $2, $3 average while next year comparing to this year? Or anything like that you can provide.

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: No, not at this point. First of all from guidance on next year and what we're doing with capital and what walls we're going to drill and all that. It's still very early for us to be able to do that what we can say is as we know our production is going to ramp up to 120,000 barrels a day as we said in mid-decade. So clearly you tell from that standpoint that it'll just be the cost will go over more barrels. As Greg is saying, as just alluded to our well cost on our drilling complete are coming down. So again, we've been basically focused in driving down operating costs, well costs and so both cash cost and DD&A cost will decline over time. But I can't give you specific guidance on that.

Paul Cheng - Barclays Capital: John, in terms of – on the pro forma basis how is your CapEx going forward may look like. Is there something that you can give some light?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Yes, sure. So, first of all then again on the pro forma data that we included on the supplemental presentation, so on a pro forma basis the capital and exploratory expenditures was $1.405 billion versus our total portfolio of $1.613 billion in E&P. So, it gives you some type of range from that standpoint. We've given guidance that on a pro forma basis our full year capital would be $6.2 billion, so that's with all the assets out of the portfolio essentially effective at the beginning of the year. We clearly are giving guidance that our capital will have a 5 handle, can I call that, and so we will have 5 at the start of it. So, our capital will be in the 5 billion range next year, I just can't give you any further guidance at that point. With driving that down we expect with our portfolio and the enhancement of cash margin that we will be driving towards a balance between cash flow and capital spend in 2014. And then beyond that we expect to be able to become cash positive.

Paul Cheng - Barclays Capital: Greg, in Bakken have you guys start testing on the down spacing to 160 and so far what's the (result there)?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Yeah, we have, Paul. So, we've done an awful lot of work in down spacing. I think the Bakken will be down spaced that's clear from the pilots that we have run. One thing I will say is the degree of down spacing will depend upon where you are in the field and so for higher productivity areas you probably don't need to down space as low as you might in some of the lower productivity areas of the field. So, the answer is it depends on the degree of down spacing, but there will be down spacing potential in the Bakken.

Paul Cheng - Barclays Capital: Final point, it's seems that majority of your acreage is in the Three Forks, when that you think is going to reach the inflection point, you started during the majority of the well in Three Forks and not in the Middle Bakken?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Well, Paul, we've got 2,500 well locations to drill and even more if you consider infill and our…

Paul Cheng - Barclays Capital: In the Middle Bakken?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: No, in Middle Bakken and Three Forks combined and then if you down space an infill lower in some parts of the field obviously that number is going to go up. We are prioritizing wells based on highest return and also in pads where we can capitalize on the efficiencies, right, of being on the pad, say drilling Middle Bakken wells. We'll add a couple Three Forks since we are there on the pad, right. But as I said, I think, we've got 52 Three Forks wells in the ground at the end of 2012 and we'll have 65 more at the end of this year. So, we'll have a good understanding of the Three Forks. In addition to that, we have 30 cores in the Three Forks who have done a major study of the Three Forks, including all of the Three Forks production data that exist from the NDAC as well as our own data. So, we have a pretty good understanding of Three Forks. So, it's going to be a good play for us.

Operator: Robert Kessler, Tudor, Pickering, Holt.

Robert Kessler - Tudor, Pickering, Holt: I had a follow-up question on Stampede or Pony. You characterize this as being too early I think previously to consider divestment of that asset. I was curious what you need to see in order to possibly put it in the development queue. I know you've got pre-FID work ongoing. Is this more of a commercial kind of cost structure delineation that you need to accomplish or is there more actual drilling you need to do to better understand the resource before deciding to sell.

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: No, I think this project will be at its maximum value point at sanction. So at that point in time we'll know all the cost because feed will be done. We have a good understanding of the subsurface already, the combination of our data plus the partner's data. At the end of the day the decision will be focused on returns.

Robert Kessler - Tudor, Pickering, Holt: With the good understanding now at the subsurface, how many barrels (do you) expect to recover for Stampede?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: We haven't said that yet only because we haven't got all the development studies done, that's part of the fee process right. We will announce that at the point of sanction obviously.

Robert Kessler - Tudor, Pickering, Holt: Then unrelated question for me retail divestment. Have you gotten any further on that in terms of the form that divestment may take are you considering a spin out, an IPO, or an outright sale to a third-party for cash?

John B. Hess - Chairman and CEO: We're looking at all options to maximize shareholder value, and as I said in all of our downstream divestitures the sales processes are well underway.

Operator: Edward Westlake, Credit Suisse.

Scott Willis - Credit Suisse: This is Scott Willis on for Ed. I was wondering as far as the international asset portfolio, is there going to be further rationalization of that portfolio in the future beyond the assets already announced?

John B. Hess - Chairman and CEO: We gave a lot of study between our leadership team, our board and advisors on the optimum portfolio to hopefully create portfolio that will generate a lot of returns to our investors and this focused liquids rich portfolio that is lower risk with 5% to 8% compounded average annual growth rate. So, there are no current plans for any other divestitures there. It's a dynamic business. Obviously, we will always look at opportunities as we move ahead to continue to refocus and strengthen our portfolio, but there are no current plans beyond the ones we've already announced.

Scott Willis - Credit Suisse: Then just on reserve replacement looking kind of longer-term even past Ghana. Could you just talk a little bit about where you think that reserve replacement could come from?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Well, I think, if you look at our portfolio in this 5% to 8% compounded annual growth rate that we've talked about, certainly we'll be able to replace all of that in the five year period and some, right. Obviously, that comes from the Bakken, Utica, Ghana, North Malay Basin, T-Bells, all of the developments that we've announced.

Operator: Pavel Molkanov, Raymond James.

Pavel Molkanov - Raymond James: Just wanted to ask about two international exploration areas that that I don't think you've touched on yet. First Kurdistan, I think you had two commitment wells for this year, any status update on that?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Yes. So, we are currently mobilizing drilling rigs to begin drilling in the back half of 2013 in Kurdistan.

Pavel Molkanov - Raymond James: In the back half. Have you identified sites for those?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Yes. We have. We've got both locations picked during the process of building locations, roads et cetera to mobilize the rigs.

Pavel Molkanov - Raymond James: On your legacy acreage in France, obviously, the unconventional stuff is out of the picture right now, but are you still planning to do some conventional work this year?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Yes, in fact, we finished one well and the rig is moving to the second well. The first well we cut almost 400 meters a core. So, we got a lot of core out of the well and now, the core is off to be studied, but so far, it looks good and the rig as I said is moving to the second well.

Pavel Molkanov - Raymond James: Is this still oil or gas?

Gregory P. Hill - EVP and President, Worldwide Exploration and Production: Oil.

Operator: Thank you for your questions, ladies and gentlemen. I would now like to turn the call over to Mr. John Hess for the closing remarks.

John B. Hess - Chairman and CEO: Thank you. In closing, I'd like to say that we are excited about the opportunities for Hess and our shareholders. You've just heard how well we did in the first quarter both operationally and in terms of our strategic repositioning. We are on track to complete our transformation into a pure play E&P Company and are also making steady progress towards increasing our future production at a compound average annual growth rate of 5% to 8% as forecasted on March 4. Just as importantly, we expect to begin returning capital to shareholders as John Rielly talked about in the second half of this year as a consequence of these actions. We also have a wonderful opportunity to add a world class slate of new and independent directors to our board. John Krenicki is the former Vice Chairman of GE, former President and CEO of GE Energy, and a partner at Clayton Dubilier. Kevin Myers was the Senior Executive at ConocoPhillips that led their U.S. E&P business transformed it and spearheaded development of their U.S. unconventional plays. Fred Reynolds is one of the best CFOs in corporate America. He created tremendous value at CBS and later Viacom transforming those companies and making them leaders in returning capital to shareholders, and is lead independent director at AOL. Bill Schrader is the person BP put in charge of its best and most valued E&P assets, including ACG in Azerbaijan, BP exploration Angola, TNK-BP in Russia. Mark Williams is well known as one of the best oil and gas executives in the industry. He was on the executive committee of Royal Dutch Shell and has spent two-thirds of his 33 year career in the upstream and midstream businesses. Their objectivity and counsel have already been a tremendous addition to our Company and all of us at Hess look forward to continuing to benefit from their extensive experience in the future. Finally, I'd like to thank our shareholders for their thoughtful input and continued support. Thank you very much.

Operator: Thank you, John. Ladies and gentlemen, thank you for joining today's conference. This concludes the presentation. You may now disconnect. Have a good day.