Hess Corporation (HES) today reported net income of $1,008 million for the quarter ended September 30, 2014. Adjusted net income, which excludes items affecting comparability, was $377 million or $1.24 per common share, compared with $405 million or $1.18 per share in the year-ago quarter. Lower realized crude oil selling prices and higher depreciation expense in the third quarter of 2014 were the primary drivers for the decrease in adjusted net income. However, adjusted net income per share in the third quarter of 2014 increased over the third quarter of last year due to an 11 percent decrease in the weighted average number of diluted shares outstanding primarily as a result of the Corporation’s stock repurchase program.
After-tax net income (loss) by major operating activity was as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||
| September 30, | September 30, | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||
| (In millions, except per share amounts) | ||||||||||||||
|
Net Income (Loss) Attributable to Hess Corporation |
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| Exploration and Production | $ | 441 | $ | 455 | $ | 2,006 | $ | 3,274 | ||||||
| Corporate and Interest | (80) | (88) | (260) | (325) | ||||||||||
| Downstream Businesses | 647 | 53 | 579 | 178 | ||||||||||
| Net income attributable to Hess Corporation | $ | 1,008 | $ | 420 | $ | 2,325 | $ | 3,127 | ||||||
| Net income per share (diluted) | $ | 3.31 | $ | 1.23 | $ | 7.44 | $ | 9.11 | ||||||
|
Adjusted Net Income (Loss) |
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| Exploration and Production | $ | 412 | $ | 458 | $ | 1,409 | $ | 1,756 | ||||||
| Corporate and Interest | (78) | (83) | (241) | (308) | ||||||||||
| Downstream Businesses | 43 | 30 | 87 | 146 | ||||||||||
| Adjusted net income attributable to Hess Corporation | $ | 377 | $ | 405 | $ | 1,255 | $ | 1,594 | ||||||
| Adjusted net income per share (diluted) | $ | 1.24 | $ | 1.18 | $ | 4.01 | $ | 4.64 | ||||||
| Weighted average number of shares (diluted) | 305.0 | 343.3 | 312.7 | 343.3 | ||||||||||
| Note: See page 6 for a table of items affecting comparability of earnings between periods. | ||||||||||||||
“We are delivering strong performance and executing our plan,” Chief Executive Officer John Hess said. “With our focused, balanced portfolio and strong balance sheet, we are well positioned in the current price environment to drive cash generative growth and sustainable returns for our shareholders.”
Exploration and Production:
Exploration and Production earnings were $441 million in the third quarter of 2014, compared with $455 million in the third quarter of 2013. Adjusted net income was $412 million in the third quarter of 2014 and $458 million in the third quarter of 2013.
Oil and gas production of 318,000 boepd was up 3 percent from the third quarter a year-ago. Production from the Llano Field in the Gulf of Mexico was up 16,000 boepd due to maintenance in the third quarter of 2013 and first production from the Llano #4 well in the fourth quarter of 2013. Higher production in the Bakken shale play contributed 15,000 boepd versus the year-ago quarter and ongoing development of Utica wet gas acreage increased production by an additional 10,000 boepd. The North Malay Basin Early Production System, which commenced production in October 2013 contributed 7,000 boepd in the quarter. Asset sales reduced third quarter 2014 production by 30,000 boepd while scheduled maintenance at the Valhall Field, offshore Norway reduced production by 12,000 boepd. The Corporation’s average worldwide crude oil selling price, including the effect of hedging, was down 8 percent from $104.95 per barrel in the year-ago quarter to $96.36 per barrel in the third quarter of 2014. The average worldwide natural gas selling price was $5.59 per mcf in the third quarter of 2014, down from $6.52 per mcf in the third quarter a year-ago.
Excluding production from assets sold and Libya, pro forma production was 314,000 boepd in the third quarter of 2014, an increase of 17 percent from 269,000 boepd in the third quarter of 2013. The Corporation expects pro forma production to average near the top end of the range of 305,000 boepd and 315,000 boepd for the full year of 2014 driven by continued growth in the Bakken, higher production from the Valhall Field and the start-up of the Tubular Bells Field in the Gulf of Mexico.
Operational Highlights for the Third Quarter of 2014:
Bakken (Onshore U.S.): Production from the Bakken increased 21 percent from the prior year quarter to 86,000 boepd due to continued development activities and the completion of the Tioga gas plant expansion project. Hess brought 59 gross operated wells on production in the quarter, bringing the year-to-date total to 142 wells. Drilling and completion costs per operated well averaged $7.2 million in the third quarter of 2014, a reduction of 8 percent from the third quarter of 2013.
Tubular Bells (Offshore U.S.): The offshore hook-up and final commissioning activities progressed in the third quarter and we expect first production to commence within the next week. Net production is expected to ramp up through the remainder of 2014 to 25,000 boepd.
Utica (Onshore U.S.): On the Corporation’s joint venture acreage, ten wells were drilled in the third quarter of 2014. Production increased to approximately 11,000 boepd for the quarter.
Valhall (Offshore Norway): Net production averaged 25,000 boepd during the third quarter, compared with 37,000 boepd in the year-ago quarter, reflecting scheduled maintenance downtime in the third quarter of 2014.
North Malay Basin (Offshore Malaysia): Production averaged 7,000 boepd in the third quarter of 2014 from the Early Production System. Progress continued on the full field development project.
Ghana (Offshore): The Corporation completed drilling of the Almond 2 well, the last of a three well appraisal program, in the third quarter of 2014.
Libya: Civil unrest continues in Libya, however during the third quarter, the operator recommenced production at a reduced rate and the Corporation sold one cargo of crude oil. Hess net production from Libya averaged 4,000 boepd for the third quarter of 2014 and 11,000 boepd in the year-ago quarter.
Capital and Exploratory Expenditures:
Capital and exploratory expenditures in the third quarter of 2014 were $1,418 million, down from $1,503 million in the prior year quarter.
Hess Midstream Partners LP:
On September 24, 2014 the Corporation’s wholly owned subsidiary, Hess Midstream Partners LP, filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission (SEC) related to its proposed initial public offering of common units representing limited partner interests. The offering is expected to occur in 2015.
Asset Sales:
In September 2014, the Corporation completed the sale of its retail marketing business for cash proceeds of $2.8 billion and its interest in an exploration asset in the United Kingdom North Sea for $53 million. In October, the Corporation signed an agreement to sell its interest in HETCO, its energy trading joint venture.
Liquidity:
Net cash provided by operating activities was $1,338 million in the third quarter of 2014, compared with $1,254 million in the same quarter of 2013. At September 30, 2014, cash and cash equivalents totaled $4,120 million, compared with $1,814 million at December 31, 2013, primarily reflecting the collection of proceeds from the sale of the retail business. Total debt was $5,996 million at September 30, 2014 compared with $5,798 million at December 31, 2013. The Corporation’s debt to capitalization ratio at September 30, 2014 was 19.7 percent, and 19.0 percent at the end of 2013.
Returning Capital to Shareholders:
In the third quarter of 2014, the Corporation repurchased 9.2 million shares of common stock at a cost of $903 million. Since initiation of the buyback program in August 2013, total shares repurchased through September 30, 2014 amounted to 49.4 million at a total cost of approximately $4.2 billion for an average cost per share of $85.14.
Dividends paid to shareholders amounted to $232 million in the first nine months of 2014 and $154 million in the first nine months of 2013.
Downstream Businesses:
The downstream businesses reported income of $647 million in the third quarter of 2014, compared with income of $53 million in the same period in 2013. Adjusted net income was $43 million in the third quarter of 2014, up from $30 million in the third quarter of 2013 reflecting higher retail earnings and improved energy trading results. The Corporation’s divested downstream businesses, including the retail marketing business, are reported as discontinued operations in the consolidated income statements on pages 9 and 10. The energy trading joint venture will be classified as discontinued operations beginning in the fourth quarter of 2014.
Items Affecting Comparability of Earnings Between Periods:
The following table reflects the total after-tax income (expense) of items affecting comparability of earnings between periods:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||
| Exploration and Production | $ | 29 | $ | (3) | $ | 597 | $ | 1,518 | |||||||||||||||||||||||
| Corporate and Interest | (2) | (5) | (19) | (17) | |||||||||||||||||||||||||||
| Downstream Businesses | 604 | 23 | 492 | 32 | |||||||||||||||||||||||||||
| Total items affecting comparability of | |||||||||||||||||||||||||||||||
| earnings between periods | $ | 631 | $ | 15 | $ | 1,070 | $ | 1,533 | |||||||||||||||||||||||
Exploration and Production: Third quarter 2014 Exploration and Production results included an after-tax gain of $33 million from the sale of the Corporation’s interest in the Cambo Field in the United Kingdom North Sea. This gain was partially offset by severance and other charges totaling $4 million after-tax.
Corporate and Interest: Third quarter 2014 results included after-tax charges of $2 million for severance and other charges.
Downstream Businesses: Third quarter 2014 results included an after-tax gain of $602 million related to the sale of the Corporation’s retail business. In addition, the Corporation realized an after-tax gain of $114 million on the liquidation of last-in, first-out (LIFO) inventories, which was largely offset by impairment and other charges associated with the continued divestiture of the downstream businesses.
Reconciliation of U.S. GAAP to Non-GAAP measures:
The following table reconciles reported net income attributable to Hess Corporation and adjusted net income:
| Three Months Ended | Nine Months Ended | |||||||||||||
| September 30, | September 30, | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||
| (In millions) | ||||||||||||||
| Net income attributable to Hess Corporation | $ | 1,008 | $ | 420 | $ | 2,325 | $ | 3,127 | ||||||
| Less: Total items affecting comparability of earnings | ||||||||||||||
| between periods | 631 | 15 | 1,070 | 1,533 | ||||||||||
| Adjusted net income attributable to Hess Corporation | $ | 377 | $ | 405 | $ | 1,255 | $ | 1,594 | ||||||
The following table reconciles reported net cash provided by operating activities to cash flows from operations before changes in working capital:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||||||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 1,338 | $ | 1,254 | $ | 3,407 | $ | 3,320 | ||||||||||||||||||||||||
| Add back: Increases in working capital | 170 | 143 | 821 | 1,070 | ||||||||||||||||||||||||||||
| Cash flows from operations, before | ||||||||||||||||||||||||||||||||
| working capital changes | $ | 1,508 | $ | 1,397 | $ | 4,228 | $ | 4,390 | ||||||||||||||||||||||||
