HESS CORPORATION 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 endedJune 30, 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 endedDecember 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 endedDecember 31, 2019 and Part II, Item 1A. in our Form 10-Q for the fiscal quarter endedMarch 31, 2020 . OverviewHess 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 inthe United States (U.S. ),Guyana , theMalaysia /Thailand Joint Development Area (JDA),Malaysia , andDenmark . We conduct exploration activities primarily offshoreGuyana , theU.S. Gulf of Mexico , and offshore Suriname andCanada . At the Stabroek Block (Hess 30%), offshoreGuyana , we have announced sixteen significant discoveries. The Liza Phase 1 development achieved first production inDecember 2019 , with peak production expected to reach 120,000 gross bopd in August. The Liza Phase 2 development was sanctioned in the second quarter of 2019 and is expected to start up in early 2022 with production reaching 220,000 gross bopd. Our Midstream operating segment, which is comprised ofHess 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 theWilliston Basin area ofNorth Dakota . Hess Response to Global Pandemic and Market Conditions The global 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 theHess workforce and local communities. A multidisciplinaryHess 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. InJuly 2020 , Hess Midstream LP announced that the planned maintenance turnaround at theTioga Gas Plant originally scheduled for the third quarter of 2020 will be deferred until 2021 to ensure safe and timely execution in light of the COVID-19 pandemic. 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. In the first quarter of 2020,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, which was accomplished in May, and deferring discretionary spending across the portfolio, including reduced 2020 drilling activity on the Stabroek Block offshoreGuyana and deferral of some development activities for the Payara Field pending government approval of the project, creating a potential delay in production startup of six to twelve months. 2020 Outlook We project our E&P capital and exploratory expenditures will be approximately$1.9 billion in 2020. Oil and gas production in 2020, excludingLibya , is forecast to be approximately 330,000 boepd, up from previous guidance of 320,000 boepd. We have more than 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. The fair value of the open crude oil put option contracts atJune 30, 2020 was approximately$450 million . We also have no debt maturities until 2023 when the three year term loan matures. Net cash provided by operating activities was$711 million in the first six months of 2020, compared with$913 million in the first six months of 2019. Net cash provided by operating activities before changes in operating assets and liabilities was$803 million in the first six months of 2020 and$1,195 million in the first six months of 2019. Capital expenditures were$1,173 million in the first six months of 2020 and$1,336 million in the first six months of 2019. 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 atJune 30, 2020 of$1.6 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 16
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PART I - FINANCIAL INFORMATION (CONT'D.)
Overview (continued)
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, pursue asset sales
or issue debt or equity securities.
Second Quarter Results
In the second quarter of 2020, we incurred a net loss of $320 million , compared
with a net loss of $6 million in the second quarter of 2019. Excluding items
affecting comparability of earnings between periods detailed on pages 24 and 25,
we incurred an adjusted net loss of $28 million in the second quarter of
2019. The decrease in second quarter 2020 results compared with adjusted results
in the prior-year quarter, primarily reflects lower realized selling prices.
Exploration and Production Results
In the second quarter of 2020, E&P had a net loss of $249 million , compared with
net income of $68 million in the second quarter of 2019. Excluding items
affecting comparability of earnings between periods, the adjusted net income for
the second quarter of 2019 was $46 million . Total net production, excluding
Libya , averaged 334,000 boepd in the second quarter of 2020, compared with
273,000 boepd in the second quarter of 2019. The average realized crude oil
selling price, excluding the effect of hedging, was $20.63 per barrel in the
second quarter of 2020, compared with $61.37 per barrel in the prior-year
quarter reflecting a decrease in benchmark oil prices and widening of crude
differentials realized as a result of reduced demand caused by the COVID-19
pandemic. In addition, a higher proportion of Bakken and Guyana production was
sold in April and May which had lower prices than the month of June. Realized
gains from crude oil hedging activities improved after-tax results by $228
million in the second quarter of 2020 and reduced after-tax results by $14
million in the second quarter of 2019. The average realized crude oil selling
price, including hedging, was $38.46 per barrel, down from $60.45 per barrel in
the second quarter of 2019. The average realized NGLs selling price in the
second quarter of 2020 was $7.32 per barrel, down from $12.18 per barrel in the
prior-year quarter, while the average realized natural gas selling price was
$2.41 per thousand cubic feet (mcf), down from $3.92 per mcf in the second
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 194,000
boepd for the second quarter of 2020 (2019 Q2: 140,000 boepd), with net oil
production up 26% to 108,000 bopd from 86,000 bopd in the year-ago period,
primarily due to increased wells online and improved well performance. Natural
gas and NGL production also increased from higher wells online, additional
natural gas captured and processed at the Little Missouri 4 natural gas
processing plant that commenced operations in July 2019 , and additional volumes
received under percentage of proceeds contracts resulting from lower prices. The
Corporation reduced the number of rigs operating in the Bakken from six to one
in May and drilled 17 wells, completed 31 wells, and brought 40 new wells online
during the second quarter of 2020. We now forecast net production to average
approximately 185,000 boepd for the third quarter and for the full year 2020 due
to year to date performance and the deferral of the planned maintenance
turnaround at the Tioga Gas Plant.
We have chartered three VLCCs to load a total of approximately 6 million barrels
of oil during May through August to improve 2020 cash flow and enhance the value
of our Bakken production. During the second quarter, we loaded 3.7 million
barrels of crude oil on VLCCs and plan to load an additional 2.3 million barrels
during the third quarter. The first VLCC cargo of 2 million barrels has been
sold for delivery in China in September at a premium to Brent prices. The
additional 4 million barrels of oil are expected to be sold in Asia in the
fourth quarter of 2020.
We have committed capacity on Dakota Access Pipeline (DAPL) of approximately
55,000 bopd. On July 6, 2020 , the United States District Court for the District
of Columbia (District Court) ordered that the easement granted by the United
States Army Corps of Engineers (Corps) for DAPL be vacated due to a failure of
the Corps to produce an environmental impact statement and that DAPL be shut
down and emptied of oil within 30 days. Dakota Access, LLC and the Corps are
appealing the District Court's decision on the merits to the United States Court
of Appeals for the District of Columbia Circuit (Appeals Court) and requesting a
stay of the District Court's decision while the appeal is pending. On August 5,
2020 , the Appeals Court stayed the District Court's order insofar as it required
that DAPL be shut down and emptied of oil, but declined to stay the portion of
the order that vacated the easement granted by the Corps for DAPL . The partial
stay of the District Court's order will be in place until further proceedings
are completed at the District Court and Appeals Court. If DAPL is ultimately
required to shut in for any period of time, we expect to have capacity to move
all of our Bakken production via alternative routes because of the flexibility
provided by multiple takeaway alternatives, including rail and long term
pipeline commitments, although the cost of moving any displaced DAPL barrels may
increase by a few dollars per barrel.
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PART I - FINANCIAL INFORMATION (CONT'D.)
Overview (continued)
•In the Gulf of Mexico , net production for the second quarter of 2020 averaged
68,000 boepd (2019 Q2: 65,000 boepd). The Esox-1 well, which commenced
production in February, is expected to reach its gross peak rate of
approximately 17,000 boepd, or 9,000 boepd net to Hess in the third quarter and
is expected to average approximately 5,000 boepd net to Hess in 2020. The
Corporation is participating in the BP operated Galapagos Deep exploration well
(Hess 25%) which is a hub-class, Cretaceous-aged opportunity in the Mississippi
Canyon area. The well spud in May and is still drilling.
•At the Stabroek Block (Hess 30%), offshore Guyana , net production from the Liza
Phase 1 development averaged 22,000 bopd for the second quarter of 2020
following first production in December 2019 . The operator, Esso Exploration and
Production Guyana Limited , is currently commissioning water injection equipment
and bringing natural gas injection fully online that should enable the Liza
Destiny floating production, offloading and storage vessel (FPSO) to reach its
capacity of 120,000 gross bopd in August. Phase 2 of the Liza Field development,
which will utilize the Liza Unity FPSO with an expected capacity of 220,000
gross bopd, remains on target to achieve first oil in early 2022. As previously
announced, some activities for a third development, Payara, with expected
production capacity of 220,000 gross bopd, have been deferred pending government
approval of the project creating a potential delay in production startup of six
to twelve months.
As a result of COVID-19 related travel restrictions in Guyana , the operator
temporarily idled two drillships but both drillships resumed drilling operations
by the end of the second quarter. The Stena Carron rig recently completed
appraisal drilling at Yellowtail-2, located 1 mile southeast of Yellowtail-1.
The well identified two additional high quality reservoirs, one adjacent to, and
the other below the Yellowtail field. The well results are being evaluated and
are expected to help form the basis for a potential future development. The
Noble Don Taylor commenced drilling of the Redtail exploration well, which is
1.25 miles northwest of Yellowtail-1, in July. The other two drillships, the
Noble Bob Douglas and the Noble Tom Madden, are drilling and completing Liza
Phase 1 and Phase 2 development wells.
•In the Gulf of Thailand , net production from Block A-18 of the JDA averaged
23,000 boepd for the second quarter of 2020 (2019 Q2: 35,000 boepd), including
contribution from unitized acreage in Malaysia , while net production from North
Malay Basin , offshore Peninsular Malaysia, averaged 21,000 boepd for the second
quarter of 2020 (2019 Q2: 24,000 boepd). Net production was lower at the JDA and
North Malay Basin due to reduced natural gas nominations caused by COVID-19
impacts on economic activity.
•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 20,000 boepd for the second
quarter of 2019.
Consolidated Results of Operations
The after-tax income (loss) by major operating activity is summarized below:
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