The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read together with the unaudited consolidated
financial statements and accompanying footnotes for the quarter ended March 31,
2020 included under Item 1. Financial Statements of this Form 10-Q and the
audited consolidated financial statements and related notes included in Item 8
of our Annual Report on Form 10-K for the year ended December 31, 2019. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
below. Factors that could cause or contribute to such differences include, but
are not limited to, those identified below under the section entitled "Risk
Factors" and those discussed in Item 1A. Risk Factors of our Annual Report on
Form 10-K for the year ended December 31, 2019.
Overview
Hess Corporation is a global Exploration and Production (E&P) company engaged in
exploration, development, production, transportation, purchase and sale of crude
oil, natural gas liquids (NGLs), and natural gas with production operations
located primarily in the United States (U.S.), Guyana, the Malaysia/Thailand
Joint Development Area (JDA), Malaysia, and Denmark. We conduct exploration
activities primarily offshore Guyana, the U.S. Gulf of Mexico, and offshore
Suriname and Canada. At the Stabroek Block (Hess 30%), offshore Guyana, we have
announced sixteen significant discoveries. The Liza Phase 1 development achieved
first production in December 2019, with peak production expected to reach up to
120,000 gross bopd. The Liza Phase 2 development was sanctioned in the second
quarter of 2019 and is expected to start up in 2022 with production reaching up
to 220,000 gross bopd.
Our Midstream operating segment, which is comprised of Hess Corporation's 47%
consolidated ownership interest in Hess Midstream LP, provides fee-based
services, including gathering, compressing and processing natural gas and
fractionating NGL; gathering, terminaling, loading and transporting crude oil
and NGL; storing and terminaling propane, and water handling services primarily
in the Bakken shale play in the Williston Basin area of North Dakota.
Hess Response to Global Pandemic and Market Conditions
The COVID-19 pandemic continues to have a profound impact on society and
industry. The Corporation's first priority in the midst of the COVID-19 pandemic
has been the health and safety of the Hess workforce and local communities. A
multidisciplinary Hess emergency response team has been overseeing plans and
precautions to reduce the risks of COVID-19 in the work environment while
maintaining business continuity based on the most current recommendations by
government and public health agencies. The Corporation has implemented a variety
of health and safety measures including enhanced cleaning procedures and
modified work practices such as travel restrictions, health screenings, reduced
personnel at offshore platforms and onshore work sites wherever this can be done
safely, and remote working arrangements for office workers.
In addition to the global health concerns of COVID-19, the pandemic has severely
impacted demand for oil. In response to the resulting sharp decline in oil
prices, the Corporation's focus is on preserving cash and capability, while
protecting the long-term value of its assets. Hess entered into a new $1.0
billion three-year term loan agreement and further reduced its E&P capital and
exploratory budget for 2020 to $1.9 billion, a 37% reduction from the original
budget of $3.0 billion. This reduction will be achieved primarily by shifting
from a six-rig program to one rig in the Bakken and deferring discretionary
spending across the portfolio including a six to twelve month deferral in the
development of the Payara Field and reduced 2020 drilling activity on the
Stabroek Block offshore Guyana.
As a result of the unprecedented reduction in demand due to COVID-19, commercial
storage in the United States is expected to reach capacity in the second
quarter, which is requiring curtailments and shut-ins of production by the
industry. To maximize the value of Hess production, the Corporation has
chartered three very large crude carriers (VLCCs) to store 2 million barrels
each of May, June and July Bakken crude oil production that is expected to be
sold in the fourth quarter of 2020.
14
--------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION (CONT'D.)
Overview (continued)
Slowing economic activity caused by the pandemic has impacted natural gas
nominations at the Corporation's North Malay Basin (NMB) and JDA assets in
Southeast Asia. Production in the first quarter for NMB and JDA was 58,000
barrels of oil equivalent per day (boepd) compared to 68,000 boepd in the first
quarter of 2019. Nominations have been reduced due to the decline in business
activity and production from NMB and JDA is forecast to be approximately 35,000
boepd in the second quarter and approximately 50,000 boepd for the full year
2020. In Guyana, the operator has temporarily idled two of the four drilling
rigs on the Stabroek Block due to pandemic-related travel restrictions. The Liza
Destiny floating production, offloading, and storage vessel (FPSO) is expected
to reach its full capacity of 120,000 gross bopd, in June, with April gross
production of approximately 75,000 bopd. Despite pandemic-related delays, the
Liza Phase 2 development remains on schedule to start production in 2022.
First Quarter Results
In the first quarter of 2020, we incurred a net loss of $2,433 million, compared
with net income of $32 million in the first quarter of 2019. Excluding items
affecting comparability of earnings between periods detailed on page 22, we
incurred an adjusted net loss of $182 million in the first quarter of 2020. The
decline in adjusted first quarter 2020 results, compared with the prior-year
quarter, primarily reflects lower realized selling prices from the weak
commodity price environment, partially offset by higher production volumes.
Net cash provided by operating activities was $445 million in the first quarter
of 2020, compared with $238 million in the first quarter of 2019. Net cash
provided by operating activities before changes in operating assets and
liabilities were $502 million in the first quarter of 2020 and $635 million in
the first quarter of 2019. Capital expenditures were $666 million in the first
quarter of 2020 and $642 million in the first quarter of 2019.
2020 Outlook
With our revised capital and exploratory budget of $1.9 billion, we forecast oil
and gas production in 2020, excluding Libya, to be approximately 320,000 boepd,
which is down from the original guidance range of 330,000 boepd to 335,000
boepd. We have in excess of 80% of our forecasted crude oil production for the
remainder of 2020 hedged with $55 WTI put options for 130,000 bopd and $60 Brent
put options for 20,000 bopd. We also have no near-term debt maturities aside
from the new term loan in March 2023.
In 2020, based on current forward strip crude oil prices, we expect cash flow
from operating activities, including settlements from crude oil put option
contracts, cash and cash equivalents existing at March 31, 2020 of $2.1 billion,
and our available committed revolving credit facility will be sufficient to fund
our capital investment program and dividends. Due to the weak commodity price
environment, we may take any of the following steps, or a combination thereof,
to improve our liquidity and financial position: further reduce the planned
capital program and other cash outlays, including dividends, issue debt or
equity securities, and pursue asset sales.
15
--------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION (CONT'D.)
Overview (continued)
Exploration and Production Results
In the first quarter of 2020, E&P had a net loss of $2,371 million, compared
with net income of $109 million in the first quarter of 2019. Excluding items
affecting comparability of earnings between periods, the adjusted net loss for
the first quarter of 2020 was $120 million. Total net production, excluding
Libya, averaged 344,000 boepd in the first quarter of 2020, compared with
278,000 boepd in the first quarter of 2019. The average realized crude oil
selling price, including hedging, was $45.94 per barrel, down from $55.91 per
barrel in the first quarter of 2019. The average realized NGLs selling price in
the first quarter of 2020 was $9.32 per barrel, down from $18.46 per barrel in
the prior-year quarter, while the average realized natural gas selling price was
$3.16 per thousand cubic feet (mcf), down from $4.43 per mcf in the first
quarter of 2019.
The following is an update of our ongoing E&P activities:
• In North Dakota, net production from the Bakken oil shale play averaged
190,000 boepd for the first quarter of 2020 (2019 Q1: 130,000 boepd), with
net oil production up 34% to 114,000 bopd from 85,000 bopd in the year-ago
period, primarily due to increased drilling activity and improved well
performance. Natural gas and NGLs production were also higher due to the
increased drilling activity, as well as additional natural gas captured with
the start-up of the Little Missouri 4 natural gas processing plant in July
2019 and additional NGLs received under percentage of proceeds contracts
resulting from lower prices. The Corporation operated six rigs in the first
quarter, drilling 41 wells, completing 50 wells and bringing 37 new wells
online. We forecast net production to average approximately 175,000 boepd for
full year 2020 versus original guidance of 180,000 boepd, reflecting a
reduction in the rig count to one from six by the end of May in response to
the weak commodity price environment. To date, we have chartered three VLCCs
to store 2 million barrels each of May, June and July Bakken crude oil
production that is expected to be sold in the fourth quarter of 2020, to
maximize the value of Hess production.
• In the Gulf of Mexico, net production for the first quarter of 2020 averaged
74,000 boepd (2019 Q1: 70,000 boepd). The Esox-1 oil discovery in Mississippi
Canyon (Hess - 57%) achieved first production in February as a low-cost
tieback to the Tubular Bells production facilities.
• At the Stabroek Block (Hess - 30%), offshore Guyana, net production from the
Liza Phase 1 development for the first quarter of 2020 averaged 15,000 bopd
following first production in December 2019. The operator, Esso Exploration
and Production Guyana Limited, expects the Liza Destiny FPSO to reach full
capacity of 120,000 gross bopd in June. The first one million barrel cargo of
oil allocated to Hess was sold in March 2020.
Phase 2 of the Liza Field development, which will utilize the Liza Unity FPSO
with an expected capacity of up to 220,000 gross bopd, remains on target to
achieve first oil in 2022. A third development, Payara, with expected production
capacity of up to 220,000 gross bopd, is planned. Pending government approval to
proceed, some 2020 activities at Payara are now being deferred, creating a
potential delay in first production of six to twelve months beyond the initial
start-up target in 2023.
As previously announced a 16th discovery was made in the first quarter at the
Uaru-1 well, which encountered approximately 94 feet of high-quality oil-bearing
sandstone reservoir and is located approximately 10 miles northeast of the Liza
Field.
• In the Gulf of Thailand, net production from Block A-18 of the JDA averaged
32,000 boepd for the first quarter of 2020 (2019 Q1: 37,000 boepd), including
contribution from unitized acreage in Malaysia. Net production from North
Malay Basin, offshore Peninsular Malaysia, averaged 26,000 boepd for the
first quarter of 2020 (2019 Q1: 31,000 boepd).
• At the Waha fields (Hess - 8%), onshore Libya, production ceased following
the declaration of force majeure in January by the Libyan National Oil
Corporation as a result of civil unrest. Net production averaged 5,000 boepd
for the first quarter of 2020 (2019 Q1: 21,000 boepd).
16
--------------------------------------------------------------------------------
© Edgar Online, source Glimpses
HESS CORPORATION 
