NEW YORK Jun 11, 2015 (Thomson StreetEvents) -- Edited Transcript of Hess Corp conference call or presentation Thursday, June 11, 2015 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jay Wilson Hess Corporation - VP of IR * John Hess Hess Corporation - CEO * John Rielly Hess Corporation - CFO * Greg Hill Hess Corporation - COO ================================================================================ Conference Call Participants ================================================================================ * David Heikkinen Heikkinen Energy Advisors - Analyst * Doug Leggate BofA Merrill Lynch - Analyst * Paul Cheng Barclays Capital - Analyst * Paul Sankey Wolfe Research - Analyst * Pavel Molchanov Raymond James & Associates, Inc. - Analyst * Sameer Uplenchwar GMP Securities - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the Hess Corporation conference call regarding the Bakken Midstream joint venture. My name is Mark and I'll be your operator for today. Today's call is also available via webcast with slides. If you would like to view these slides, please log into www.hess.com Investor Relations, Event and Webcasts. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Jay Wilson, Vice President of Investor Relations. Please proceed. -------------------------------------------------------------------------------- Jay Wilson, Hess Corporation - VP of IR [2] -------------------------------------------------------------------------------- Good morning, everyone, and thank you for participating in this morning's conference call. Our press 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 Securities and Exchange Commission. A registration statement related to Hess Midstream Partners LP common units has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. Nothing in this conference call shall constitute an offer to sell or the solicitation of an offer to buy the securities. Nor shall there be any sale of the securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such state or jurisdiction. Also on today's conference call we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website. With me today are John Hess, Chief Executive Officer; Greg Hill, Chief Operating Officer; and John Rielly, Chief Financial Officer. I will turn the call over to John Hess. -------------------------------------------------------------------------------- John Hess, Hess Corporation - CEO [3] -------------------------------------------------------------------------------- Good morning. Thank you, Jay. Today we are announcing an important step in unlocking the value of our Bakken Midstream assets. During this call I will review the strategic highlights of this transaction. John Rielly will then discuss the financial terms and joint venture structure. And Greg Hill will provide an over view of the assets included in the JV. We will then be happy to take your questions. Turning to slide 3, we are announcing the formation of a Bakken Midstream joint venture valued at $5.35 billion. As part of this transaction, Hess Corporation has agreed to sell a 50% interest in its Bakken Midstream assets to Global Infrastructure Partners for $2.65 billion. Hess and Global Infrastructure Partners will create a midstream joint venture, Hess Infrastructure Partners. The joint venture will incur $600 million of debt upon closing through a five-year term loan A facility with proceeds distributed equally to both partners resulting in total after tax proceeds net to Hess of $3 billion. In addition, the joint venture will have independent access to capital including a $400 million five-year senior revolving credit facility which is fully committed. Upon closing, which is expected to occur early in the third quarter, the joint venture plans to continue to pursue the proposed initial public offering of Hess Midstream Partners LP common units. This transaction delivers significant and immediate value to our shareholders. The joint venture, with its strategically located assets, will be one of the largest midstream operators in the Bakken. By capitalizing on the financial strength and midstream energy experience of Global Infrastructure Partners, the joint venture will be in a strong position to fund future energy infrastructure investments and continue to grow its midstream business. The joint venture will also benefit from our Bakken team's experience and capabilities with Hess maintaining control of Bakken Midstream operations and the annual budgeting process. We are very proud of our Bakken team and the outstanding results they continue to deliver. With the proceeds from this transaction plus cash on hand and an untapped $4 billion revolving credit facility, Hess will have a highly advantaged liquidity position compared to its peer group. Consistent with our financial strategy, our Company will use proceeds from this transaction to preserve the strength of its balance sheet in the current oil environment, provide additional financial flexibility for future growth opportunities and continue to repurchase stock on a disciplined basis. Now I'd like to ask John Rielly to review the financial terms and JV structure. -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [4] -------------------------------------------------------------------------------- Thanks, John. Let's go to slide 4 and discuss Hess' advantage liquidity position as well as updated guidance resulting from the transaction. With proceeds of $3 billion from the transaction added to our current cash position, we now have more than $8 billion of liquidity, a pro forma net debt to capital of approximately 10% and no significant near-term debt maturities. On a pro forma basis, our 2015 E&P capital and exploratory budget will now be reduced to $4.1 billion as the JV will fund midstream capital. Through our cost reduction efforts, decreases in our capital budget and the JV funding our midstream capital, by the second half of this year our annualized E&P capital spend run rate is expected to be $3.5 billion. Turning to updated guidance, as reflected on the bottom right section of slide 4, our E&P pretax unit margins will be reduced by approximately $1.50 per barrel reflecting the net tariffs paid to midstream. This $1.50 per barrel is being transferred to the midstream segment which will have pretax earnings equivalent to this amount. Our partner will receive its 50% share of the pretax midstream earnings. As a result, the net pro forma after tax effect of the joint venture on Hess' consolidated earnings using forecasted earnings of midstream segment for 12 months ending March 31, 2016, is a reduction of approximately $60 million. Now, I'd like to turn to slide 5 and walk through the joint venture structure. Hess and Global Infrastructure Partners, or GIP, will each own 50% of Hess Infrastructure Partners. Hess Infrastructure Partners will be managed by a Board of Directors consisting of six members, with three elected by Hess and three by GIP. Hess through it's elected Directors will control operational decisions over the midstream assets and the annual budgeting process. Other decisions such as capital structure, debt and equity offerings, and new contracts will require joint approval by both Hess and GIP elected Directors. Upon closing of this transaction, Hess Infrastructure Partners will incur $600 million of debt through a five-year term loan A facility. Proceeds from the term loan will be distributed equally to both partners. In addition, the joint venture will have independent access to a $400 million five-year senior revolving credit facility. Hess will consolidate the joint venture in its financial statements. As a result of the announced joint venture transaction, we will begin reporting our Bakken related midstream operations as a separate midstream segment in our second quarter Form 10-Q and will begin disclosing certain historical and forward-looking financial information for the segment. No accounting gain will be recognized on closing as a result of the joint venture being consolidated in the Hess financial statements. Turning to slide 6 for some financial highlights of midstream assets. For the three months ended March 31, 2015 the midstream segment had EBITDA of $64 million and capital expenditures of $39 million. We expect midstream segment EBITDA for the 12 months ending March 31, 2016 to be $290 million to $300 million. We also expect capital expenditures for same period, which will be funded by joint venture, to be $325 million to $350 million. Hess has multiple fee-based commercial contracts with the JV entities which provides stable long-term cash flows for the midstream segment. The tariffs adjust based on volume and capital in the first 10 years and are fixed with CPI indexation in the second 10-year term. Hess has three year rolling minimum volume commitments to the JV which are based on the Bakken's development plans. I will now turn the call over to Greg Hill. -------------------------------------------------------------------------------- Greg Hill, Hess Corporation - COO [5] -------------------------------------------------------------------------------- Thanks, John. Over the past five years, we had built upon our legacy position in the core of the Bakken and have expanded and upgraded our infrastructure assets into a state of the art and competitively advantaged system. There are three major types of assets that form the basis of the joint venture. The first group of assets are related to gas processing and propane storage as shown on slide 7. As many of you know, in 2014, Hess completed a large scale expansion and upgrade of the Tioga gas plant. It is now the single largest cryogenic gas plant in the state of North Dakota with an inlet natural gas processing capacity of 250 million cubic feet per day and a natural gas liquids extraction capacity of 60,000 barrels a day. Importantly, it is also the only plant in North Dakota capable of extracting ethane which is sold to NOVA Chemicals Corporation in Canada under a long-term contract. We are currently evaluating a debottlenecking project to further upgrade the plant's inlet capacity from 250 million cubic feet a day to 300 million cubic feet a day. Also included in the joint venture is the Mentor, Minnesota propane storage terminal which saves 320,000 barrel propane storage cavern with rail and truck transloading facilities. The second group of assets included in the joint venture are related to logistics and are shown on slide 8. The Tioga rail terminal is the third largest Bakken terminal and is capable of loading two unit trains per day for a maximum capacity of 140,000 barrels a day of crude oil and 30,000 barrels a day of natural gas liquids. The current export capacity of 54,000 barrels a day is provided by nine crude oil train sets that deliver crude oil to advantaged markets in the East, West and Gulf Coast regions. These trains are the second generation CPC-1232 design that can be upgraded over the next five years to meet the new Department of Transportation standards. Also included in the joint venture will be 550 new rail cars currently under construction that will be fully compliant with the new DOT standards. These additional cars will provide further capacity for growth and could replace capacity lost during the retrofit of the existing fleet. Additionally the Ramberg the trucking facility is a crude oil truck and pipeline terminal capable of receiving up to 130,000 barrels a day that then delivers into the Tioga rail terminal and various interconnecting pipelines and also has a storage capacity of 39,000 barrels. Now let's turn to the final group of assets in the JV, the gathering assets as shown on slide 9. There are over 3000 miles of gathering pipelines and multiple compressor stations that support our Bakken assets. Included in the JV will be three major systems, the Red Sky, Hawkeye and Goliath systems that together have a current gross throughput of over 200 million cubic feet a day of gas and 30,000 barrels a day of liquids. Each of these plants are planned to be expanded in the coming years to an anticipated gross capacity in excess of 300 million cubic feet a day and 200,000 barrels a day respectively. Finally, due to their strategic position in the heart of the field, we also anticipate capturing additional third-party volumes. Importantly, all of the three areas of infrastructure that I described will continue to be operated by the same Hess people that enabled their successful expansion and operation to date. This team's continued experience and contributions will be key to maximizing the value not only from the JV but also from the Hess upstream assets that are shown on slide 10. We have one of the best portfolios in the Bakken. It is competitively advantaged in a number of ways, from the infrastructure position I just described, from our acreage position in the core of the play and from our distinctive lean manufacturing capability that is delivering top quartile well costs and productivity. We know from benchmarking that we are delivering some of the highest return wells in the play. We remain confident of our long term goal of reaching some 175,000 barrels per day and over 1.4 billion barrels of recovery as oil prices recover. Although we've reduced our rig count to 8 in 2015 from 17 in 2014 in response to prices, we still have a robust well inventory with more acreage in the core than any other operator as shown on slide 11. As the chart on slide 11 shows on the right, based on a constant eight rig program, and a seven in six configuration, we have a very healthy inventory of both middle Bakken and Three Forks wells that can generate a 15% return or higher even at low prices. The pace of development in the Bakken will ultimately be driven by returns which obviously is a strong function of oil price. So in closing, to summarize the transaction with slide 12, we believe the creation of Hess Infrastructure Partners is highly complimentary to our financial strategy of; one, investing for returns; two, managing our business to be cash generative over the long term; three, using our cash and balance sheet in a given year to fund the shortfall on operating cash flow; and four, preserving our investment grade credit rating. Hess will retain operational and investment control of our highly strategic midstream Bakken Midstream assets while realizing approximately $3 billion in total cash proceeds providing us with one of the strongest liquidity positions and balance sheets among our EP peers. The transaction proceeds will more than cover our 2015 spending deficit in the current price environment, and with our identified cash cost reductions of approximately 550 million already realized and more being pursued, Hess is very well positioned to continue delivering strong operating results to our shareholders. This concludes our remarks. We will be happy to answer any questions bearing in mind that we are still within the quiet period and the registration process for the MLP and therefore we're limited in discussing our midstream assets. I will now turn the call over to the operator for question and answer. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of David Heikkinen. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [2] -------------------------------------------------------------------------------- Good morning. Congratulations on the valuation you got. And just wanted to -- can you talk through, at the eight-rig program, the expectations for Hess's operating growth? And I am trying to think about the 18 times multiple that was paid, as far as relative expectations for further consolidation of other midstream assets, additional dropdowns and/or expectation of growth in the asset from Hess. -------------------------------------------------------------------------------- Greg Hill, Hess Corporation - COO [3] -------------------------------------------------------------------------------- Thanks, David, this is Greg Hill. I'll take the first part of the question, and then give the second part to John Rielly. I think, as we talked about on our first-quarter call, at an eight-rig program we believe that we can hold the Bakken production flat in this range of 95,000 to 105,000, so, around 100,000 barrels a day. Obviously, given our strong inventory of very high-return wells, particularly above $50 to $60, obviously as oil prices recover, we will once again continue to grow that production. But for 2015, we'll stick with an eight-rig program until we get more visibility of higher prices. So, that kind of answers your question about near-term growth in the Bakken. Now I'll turn it over to John to address your questions around additional dropdowns and things like that. -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [4] -------------------------------------------------------------------------------- Sure. David, so, first of all, with -- as Greg said, we're at the eight rigs. We'll see what the function of price is -- we are seeing prices defirm. And as you saw the returns on the wells there, it will be some of the first use of capital will be going to the Bakken. So, we do see capital ultimately getting to go to the Bakken. Now, let's just say if prices stay low, and we stay at the eight rigs -- so, we believe the strategic location of our existing assets to midstream assets -- they've got direct connections to multiple interstate pipelines and to the BNSF railway -- provide us a competitive advantage that will result in additional third-party throughput volumes. And so, then also, while the JV is being set up initially to operate Hess's Bakken-related midstream infrastructure, our growth strategy also envisions potential acquisitions -- again, organic growth within our business lines, and also potential growth outside the Bakken. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [5] -------------------------------------------------------------------------------- Okay, that's helpful, as you think about price recovery and further acceleration in the future. On the second side of the untapped facility cash on hand and unused credit, the question comes up of -- your dividend is sacrosanct, then you have opportunities for organic capital. Where does share repurchase or acquisitions -- how would you force rank those four things? -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [6] -------------------------------------------------------------------------------- Sure. As John mentioned earlier, we're going to be using the proceeds from the transaction to preserve the strength of our balance sheet, obviously in the lower commodity price environment, provide additional financial flexibility for future growth opportunities, and continue to repurchase stock on a disciplined basis. So, in terms of future growth opportunities, we continue to look for potential acquisition candidates that meet our investment threshold, but they have to strengthen our portfolio and allow us to preserve our investment-grade credit rating. With regard to your question to our share repurchase program, we continually evaluate opportunities to repurchase stock, and we will be continuing to do so. And then, as usual, we'll provide updates on our quarterly conference calls. -------------------------------------------------------------------------------- David Heikkinen, Heikkinen Energy Advisors - Analyst [7] -------------------------------------------------------------------------------- Okay, thanks, guys. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Your next question comes from Doug Leggate from Bank of America. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [9] -------------------------------------------------------------------------------- Congratulations going on (inaudible) looks like a great transaction. A couple questions, if I may: First of all, what's happening to the general partnership in the new entity? And I guess as a related follow up, can you talk to the IPO process from here, and what proportion of your interest you might consider contributing to that? I guess that's not included in the $3 billion cash that you talked about? And I've got a follow up. -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [10] -------------------------------------------------------------------------------- Yes, Doug, the IPO is not included in this $3 billion cash proceeds. And then, as Greg mentioned earlier, we are just limited in what we can discuss related to anything related to the MLP IPO because of the quiet period. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [11] -------------------------------------------------------------------------------- Okay, I understand. And then, on the GP ownership, John? -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [12] -------------------------------------------------------------------------------- The GP will stay -- that structure. We just showed you a simplified organization structure. So, there is a GP within our detailed structure. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [13] -------------------------------------------------------------------------------- And you have (multiple speakers) [50%] ownership of that or -- sorry. -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [14] -------------------------------------------------------------------------------- Yes, exactly. So, there will be a GP of the joint venture, and we'll have 50% of that; and there will be a GP, should an MLP IPO go forward. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [15] -------------------------------------------------------------------------------- And you retain operational control of the whole thing? -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [16] -------------------------------------------------------------------------------- That is correct. So, we keep it -- through our elected Directors, we can make all the operational decisions for the Bakken midstream assets, as well as the budgeting process. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [17] -------------------------------------------------------------------------------- Okay. My second question is really a follow up to Dave's. So, when you look outside of the Bakken -- so, for example, in the Utica -- would this entity take away the infrastructure spending requirements or obligations there, or is it just related to the Bakken, and I'll leave it at that, given I've got a lot of noise in the background. Thank you. -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [18] -------------------------------------------------------------------------------- Sure. It's initially set up -- because we believe and perceive a lot of growth within our North Dakota asset. So, it's initially set up to do that. However, as I mentioned before, part of the strategy will be acquisitions, as well as growth outside of North Dakota. So, it could pick up some additional midstream capital there. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [19] -------------------------------------------------------------------------------- I appreciate the answers. Thanks again. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Your next question comes from Paul Cheng from Barclays. -------------------------------------------------------------------------------- Paul Cheng, Barclays Capital - Analyst [21] -------------------------------------------------------------------------------- Several quick questions hopefully: John Rielly, what is the minimum cash that you want to preserve? -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [22] -------------------------------------------------------------------------------- That's always a difficult answer, depending on where commodity prices are. So, the way I answer this, Paul, is we want to maintain our solid investment-grade credit rating. And so, it's a combination then of the cash cushion that we maintain related to that, and obviously our debt levels and the size of our Company. So, all of that factors in; not a specific amount of cash, as we said. When the lower price environment, if our debt levels are low, we use our balance sheet to get through that type of cycle. So, it's a balance between all that; our focus is on maintaining that investment-grade credit rating. -------------------------------------------------------------------------------- Paul Cheng, Barclays Capital - Analyst [23] -------------------------------------------------------------------------------- Maybe let me ask in this way: If we assume the current market conditions sustain and not really change for the next 12 months, and given your current net debt level is down at 10%, what is the minimum cash that you want to stay in (inaudible)? I mean, I suppose there is not going to be $4 billion that you need to stay at that level? -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [24] -------------------------------------------------------------------------------- Correct. We don't need a $4-billion cash cushion. Our net debt is at a fairly low position -- I mean, fairly low pro forma at 10%. So, again, it goes back to our use of the proceeds that I discussed earlier; that's what we'll be focusing on. -------------------------------------------------------------------------------- Paul Cheng, Barclays Capital - Analyst [25] -------------------------------------------------------------------------------- I see, all right. Greg or John Hess, is there any other midstream asset that you retain inside Hess, at this point? -------------------------------------------------------------------------------- John Hess, Hess Corporation - CEO [26] -------------------------------------------------------------------------------- Right now, as John Rielly said, the focus is going to be Hess Infrastructure Partners focusing on the Bakken. Obviously, we have the flexibility to look at other opportunities as the future unfolds outside of the Bakken. -------------------------------------------------------------------------------- Paul Cheng, Barclays Capital - Analyst [27] -------------------------------------------------------------------------------- No, but, John, I mean, inside Hess organization, the C-corp after this formation of the joint venture, what other midstream assets you still have inside your C-corp? -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [28] -------------------------------------------------------------------------------- Sure. So, in Gulf of Mexico, we have infrastructure there. There is West Texas, our Permian. So, there's other midstream-type assets throughout the portfolio. But again, the focus that we have right now is in North Dakota. -------------------------------------------------------------------------------- Paul Cheng, Barclays Capital - Analyst [29] -------------------------------------------------------------------------------- All right. And then, how much is the revenue in this new joint venture is directly from Hess, and how much is from third party? -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [30] -------------------------------------------------------------------------------- So, the way we -- way it's set up, and the majority of it is -- Hess goes out and contracts the third parties. And they're -- and we are the anchor shipper on the export lines here in use of the gas plant. And we have a 90% firm capacity going through these midstream assets. So, we do have -- Hess obviously contracts then with third parties, and puts it through this. But the way it's set up, it is coming through Hess, going to the midstream, at least on a 90% basis. So, the majority right now, how we look at it is considered Hess. Now, we'll continue -- because we do have third-party volumes going through the gas plant at significant levels, and we're going to be continuing to get third parties there, as well as the gathering and logistics assets. -------------------------------------------------------------------------------- Paul Cheng, Barclays Capital - Analyst [31] -------------------------------------------------------------------------------- Okay. Two final questions: One, John, will you be able to tell us that what is Hess hedge support on this new venture, in terms of what is their minimum volume and minimum price or the fee that you agree upon, whether it is both in the gas plant and the well-loading facility, the use of the well car or the other gathering system? So, if there's anything you can share on that? And secondly, that when you plan to provide the historical breakdown of the -- more detail on this new entity, so that we can restate our historical data? -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [32] -------------------------------------------------------------------------------- So, starting with our second-quarter Form 10-Q, we will show a separate midstream segment. So, it'll have the current information, as well as prior-year information, so you can see at least historical information as it relates to that. Minimum volume information has been out publicly in documents that have been filed with the SEC previously. So, the minimum volumes are there, and we, again, are limited in what we can say because we are in this registration period. But you can see the minimum volumes are there. Anything else that we get with the JV, which will really -- the only piece that's not there is the gathering, because initially that were not included in the MLP IPO will be provided as we get to the second-quarter 10-Q. -------------------------------------------------------------------------------- Paul Cheng, Barclays Capital - Analyst [33] -------------------------------------------------------------------------------- Okay. Other than the crude gathering, that there's no other additional hedges or additional support beyond what you already disclosed from the S1? -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [34] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Paul Cheng, Barclays Capital - Analyst [35] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [36] -------------------------------------------------------------------------------- Yes, same assets. -------------------------------------------------------------------------------- Paul Cheng, Barclays Capital - Analyst [37] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Your next question comes from the line of Paul Sankey from Wolfe Research. -------------------------------------------------------------------------------- Paul Sankey, Wolfe Research - Analyst [39] -------------------------------------------------------------------------------- John Rielly, you just elevated -- I guess, this is a question for all of you, but specifically John -- you elevated acquisitions in the list of options for use of cash. I assume that was a conscious prioritization, second with share repurchase. Is that acquisition related to the potential for midstream acquisitions as a result of this, or is it a wider statement about the potential for acquisitions? Thanks. -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [40] -------------------------------------------------------------------------------- And whether it's elevated, Paul -- I mean, with the low price commodity environment, it's something that we have been looking at because we were in a good position. Before even this transaction, we were in a good position related to our peers to be able to potentially take advantage of the low price situation, and see where there are opportunities that would complement and strengthen our portfolio. So, it was always there. Now, I mean, we have the transaction proceeds, so it's just part of our potential use of these proceeds. But again, we won't do any acquisition if it doesn't meet our investment thresholds or improve our portfolio. -------------------------------------------------------------------------------- John Hess, Hess Corporation - CEO [41] -------------------------------------------------------------------------------- Yes, and Paul, our first priority is to preserve the strength of our balance sheet and liquidity position in this time of volatile and uncertain and low prices. That's really priority number one, two and three. We just put the other two points there is because we are always looking to optimize our portfolio, be it selling assets for value like we just did here, or purchasing things in this low price environment that would be accretive strategically, economically that wouldn't jeopardize our balance sheet. And in all of this, we will have additional liquidity to continue our share repurchase program on a disciplined basis. -------------------------------------------------------------------------------- Paul Sankey, Wolfe Research - Analyst [42] -------------------------------------------------------------------------------- Thank you. Just a follow-up, and then if I could, I'll ask a third question. But the follow-up is: As a result of the protection that you're talking about, have you done anything different in hedging recently? -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [43] -------------------------------------------------------------------------------- No, we provide updates on our hedging on each quarterly conference call. -------------------------------------------------------------------------------- Paul Sankey, Wolfe Research - Analyst [44] -------------------------------------------------------------------------------- Okay, so, no comment for now obviously. And then, finally, you've repeated many times on this call the sense of your focus on the Bakken. Could you just update us on how you're viewing the rest of the Hess portfolio after this restructuring program that you've been through? Where do we sit now in restructuring, given that you've completed, in many ways, what you said you would do initially? Thank you. -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [45] -------------------------------------------------------------------------------- So, again, from our restructuring and the plan that we put in place, just as you had said, Paul, we really have gotten through and have executed that plan, while we were very focused on improving our operating capabilities and driving operating efficiencies. So, we feel good on where we are with the transition. We feel good where the portfolio is, and the way the portfolio is performing. Now, we'll always look every year at our portfolio to see if we should make further changes. But at this point in time, you are right, we are finished with the transformation, and now we're very focused on getting the most out of those assets that we have. -------------------------------------------------------------------------------- John Hess, Hess Corporation - CEO [46] -------------------------------------------------------------------------------- Yes, Paul, we'll always look at optimizing our portfolio, but we still are committed to a 50/50 balance between unconventionals/conventionals, US/international, as well as onshore/offshore. And we obviously have low risk growth opportunities both in the Bakken and Utica to execute as prices give us the signal that we can get sufficient returns for our shareholders. And we're not at that point now where we would want to increase our rig counts there, given where oil prices are; except you saw in the slide pack that the Bakken has a very healthy inventory of drilling locations that can makes returns in excess of 15% hurdle rate, even at these prices and lower prices. Having said that, you're also aware that recently we've had some significant exploration success, both at our Sicily prospect in the deepwater Gulf, which we think is very exciting, something that's going to have appraisal, as well as our efforts in Guyana, where we also had a significant oil discovery. So, I think it's a testament to our people, and also the balanced strategy we have to be both onshore and offshore to provide our shareholders with attractive growth opportunities, not just for the next 6 or 12 months, but also for many years to come. -------------------------------------------------------------------------------- Paul Sankey, Wolfe Research - Analyst [47] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from the line of Pavel Molchanov from Raymond James. -------------------------------------------------------------------------------- Pavel Molchanov, Raymond James & Associates, Inc. - Analyst [49] -------------------------------------------------------------------------------- Can I ask about the back history here a little bit, who called who, how you guys connected with GIP, simply because it seemed like a straight IPO had been the original game plan? -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [50] -------------------------------------------------------------------------------- Pavel, all I'd say -- obviously with these assets, there were a lot of interest in the assets. We ran a competitive process, and that's really all I can comment on. -------------------------------------------------------------------------------- Paul Sankey, Wolfe Research - Analyst [51] -------------------------------------------------------------------------------- Okay, fair enough. And then, you talked about use of proceeds, acquisitions, organic, and potentially buyback. Any change in your approach to the dividend after the big increase last year? -------------------------------------------------------------------------------- John Rielly, Hess Corporation - CFO [52] -------------------------------------------------------------------------------- No, no change is contemplated at this point with the dividend, again, with where oil prices are. -------------------------------------------------------------------------------- Paul Sankey, Wolfe Research - Analyst [53] -------------------------------------------------------------------------------- Okay. I mean, is it something that you plan to increase progressively over time, or not ready to make that commitment? -------------------------------------------------------------------------------- John Hess, Hess Corporation - CEO [54] -------------------------------------------------------------------------------- Our long-term plan for the Company is, and will continue to be, to provide competitive growth in our production in terms of production growth, but also returns. And when we get cash flow generative on a recurring basis, that's the time we would be in a position to address the dividend, and we certainly will continue to consider that strongly. But with low prices right now, we're certainly not in that position, even though our liquidity position -- it's much stronger as a result of this transaction. -------------------------------------------------------------------------------- Paul Sankey, Wolfe Research - Analyst [55] -------------------------------------------------------------------------------- Okay. Appreciate it, guys. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Your next question comes from the line of Sameer Uplenchwar from GMP Securities. -------------------------------------------------------------------------------- Sameer Uplenchwar, GMP Securities - Analyst [57] -------------------------------------------------------------------------------- Congratulations on another great transaction. The one and only question I have is: You have been saying that oil prices need to move higher for you to ramp up your operations in the Bakken or Utica. If well costs are coming down and operational efficiencies are kicking in, will you still ramp it up because it's a returns game? How should we think about that? -------------------------------------------------------------------------------- Greg Hill, Hess Corporation - COO [58] -------------------------------------------------------------------------------- Well, I think, as John Hess said earlier, I think given the volatility of prices, they're still relatively volatile. So, I think for us to again significantly ramp up the Bakken, we're going to have to see stability in the oil markets before we ramp it up. I think the other thing that is important to mention in that space is that a lot of the people have left the industry as a result of the downturn. So, a rapid industry ramp up, I think, is going to be low and slow, even if prices do recover. -------------------------------------------------------------------------------- Sameer Uplenchwar, GMP Securities - Analyst [59] -------------------------------------------------------------------------------- On the well-cost front, how much of these costs do you believe are going to be sustainable if oil prices do move higher, considering a lot of your smaller competitors are moving out of the Bakken? -------------------------------------------------------------------------------- Greg Hill, Hess Corporation - COO [60] -------------------------------------------------------------------------------- I think we're seeing visibility for 18 months to 24 months on sustained cost reductions. After that, again, I think it'll be a function of again how fast the industry ramps up. So, we're just focused on getting the costs down, not only from our supply chain, but also from continuing to apply our lean manufacturing capability to the Bakken. So, that will continue to provide benefits, almost independent of the supply chain, which we've demonstrated quarter on quarter. -------------------------------------------------------------------------------- Sameer Uplenchwar, GMP Securities - Analyst [61] -------------------------------------------------------------------------------- Perfect, thank you. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- Your next question comes from the line of Doug Leggate from Bank of America. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [63] -------------------------------------------------------------------------------- I apologize for the follow-up, but, John, I wanted to, I guess, take the call on a slightly different direction, following up on one of your comments relating to Guyana. So, I don't know to what extent you'd be prepared to answer at this point, but at your analyst day you suggested that your net risk resource in Guyana was about 0.5 billion barrels. Obviously, that's very, very speculative at this point. However, if we think about how you put that risk together in a (inaudible) well [cat] area, one would assume that you've got things like proving a hydrocarbon system, [trap seal] migration and so on, and arguably the well that you drove (inaudible) has addressed some of those issues. So, my question is: What is your risk assessment of Guyana look like today, after that well result? And I realize it's very early days. -------------------------------------------------------------------------------- Greg Hill, Hess Corporation - COO [64] -------------------------------------------------------------------------------- Yes, Doug, first of all, I really can't comment on that yet because of what you said; it's still early days. I think, again, just to remind everyone on the call, we did discover a high-quality oil-bearing sandstone reservoir, about 295 feet of pay. And as you intimated, what that did confirm for us was two things: one, that the reservoirs in the Guyana block, at least on this discovery, are very high quality; and secondly, that there is a working petroleum system on the block. So, obviously those two things have derisked certainly this prospect and also the block as well. Again, this is a huge block. It's 6.6 million acres over 1,000 Gulf of Mexico blocks. So, we have got a lot of work to do to understand what does this all really mean, but obviously it's very encouraging. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [65] -------------------------------------------------------------------------------- Do you see any issues with the border dispute, Greg? Or are you too far south to be too concerned with that? -------------------------------------------------------------------------------- Greg Hill, Hess Corporation - COO [66] -------------------------------------------------------------------------------- I think there's active conversations going on about the border dispute, and it's just too early to figure out what it all means. But a good part of the block (multiple speakers) -- even with the border dispute as contemplated right now, a good part of the block is still accessible on the Guyana side. -------------------------------------------------------------------------------- Doug Leggate, BofA Merrill Lynch - Analyst [67] -------------------------------------------------------------------------------- I appreciate you answering the questions -- worth a try. Thank you. -------------------------------------------------------------------------------- Operator [68] -------------------------------------------------------------------------------- Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.
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