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, 2021 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, 2020 . 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 discussed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . OverviewHess Corporation is a global E&P company engaged in exploration, development, production, transportation, purchase and sale of crude oil, natural gas liquids, 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 , in theU.S. Gulf of Mexico , and offshore Suriname andCanada . At the Stabroek Block (Hess 30%), offshoreGuyana , we and our partners have discovered a significant resource base and are executing a multi-phased development of the Block. The Liza Phase 1 development achieved first production inDecember 2019 , and has a nameplate production capacity of approximately 120,000 gross bopd. The Liza Phase 2 development was sanctioned in the second quarter of 2019 and remains on track to achieve first production by early 2022, with production capacity of approximately 220,000 gross bopd. A third development, Payara, was sanctioned in the third quarter of 2020 and is expected to achieve first production in 2024, with production capacity of approximately 220,000 gross bopd. A fourth development, Yellowtail, has been identified on the Stabroek Block with anticipated startup in 2025, pending government approvals and project sanctioning. The discovered resources to date on the Stabroek Block are expected to underpin up to ten floating production, storage and offloading vessels (FPSOs) with the first six FPSOs expected by 2027. Our Midstream operating segment, which is comprised ofHess Corporation's approximate 46% consolidated ownership interest in Hess Midstream LP atJune 30, 2021 , provides fee-based services, including gathering, compressing and processing natural gas and fractionating natural gas liquids (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 . InJuly 2021 , Hess Midstream LP announced that its subsidiary, HESM Opco, agreed to repurchase approximately 31 million HESM Opco Class B units held byHess Corporation andGlobal Infrastructure Partners for approximately$750 million . We expect to receive net proceeds of approximately$375 million . After giving effect to this transaction, which is expected to be completed in the third quarter of 2021, we will own an approximate 45% interest in Hess Midstream LP, on a consolidated basis. InAugust 2021 , HESM Opco issued$750 million in aggregate principal amount of senior unsecured notes due 2030 in a private offering to finance the repurchase. Hess Response to Global Pandemic COVID-19 continues to have a profound impact on society and industry. The Corporation's first priority in the midst of the pandemic has been the health and safety of theHess workforce and local communities where the Corporation operates. 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. 2021 Outlook In July, we repaid$500 million principal amount of our$1 billion term loan, which matures inMarch 2023 , and announced plans to add a third Bakken drilling rig inSeptember 2021 . Our E&P capital and exploratory expenditure guidance for 2021 of approximately$1.9 billion remains unchanged, including the planned increase in Bakken rig count. Oil and gas production in 2021, excludingLibya , is now forecast to be approximately 295,000 barrels of oil equivalent per day (boepd). For the remainder of 2021, we have hedged 120,000 bopd with$55 WTI put options and 30,000 bopd with$60 Brent put options. In the third quarter of 2021, we expect to receive approximately$375 million from HESM Opco related to its announced repurchase of approximately 31 million Class B units and proceeds from the sale of our interests inDenmark for total consideration of$150 million , with an effective date ofJanuary 1, 2021 . Net cash provided by operating activities was$1,376 million in the first six months of 2021, compared with$711 million in the first six months of 2020. Net cash provided by operating activities before changes in operating assets and liabilities was$1,474 million in the first six months of 2021 and$803 million in the first six months of 2020. Capital expenditures were$746 million in the first six months of 2021 and$1,173 million in the first six months of 2020. Excluding our Midstream segment, we ended the second 17
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PART I - FINANCIAL INFORMATION (CONT'D.) Overview (continued) quarter of 2021 with$2.42 billion in cash and cash equivalents. In 2021, based on current forward strip crude oil prices, we expect cash flow from operating activities, expected proceeds from the sale of our interests inDenmark and the Class B unit repurchase by HESM Opco, and cash and cash equivalents atJune 30, 2021 will be sufficient to fund our capital investment program, the July repayment of$500 million principal amount of our$1 billion term loan maturing inMarch 2023 , and dividends. Depending on market conditions, we may take any of the following steps, or a combination thereof, to improve our liquidity and financial position: reduce the planned capital program and other cash outlays, including dividends, pursue asset sales, borrow against our committed revolving credit facility, or issue debt or equity securities. Second Quarter Results In the second quarter of 2021, we incurred a net loss of$73 million , compared with a net loss of$320 million in the second quarter of 2020. Excluding items affecting comparability of earnings between periods detailed on pages 25 and 26, adjusted net income was$74 million in the second quarter of 2021. The improvement in second quarter 2021 adjusted results compared to the prior-year quarter primarily reflects higher realized selling prices. Exploration and Production Results In the second quarter of 2021, E&P had a net loss of$25 million , compared with a net loss of$249 million in the second quarter of 2020. Excluding items affecting comparability of earnings between periods, adjusted net income was$122 million in the second quarter of 2021. Total net production, excludingLibya , averaged 307,000 boepd in the second quarter 2021, compared with 334,000 boepd in the second quarter of 2020, or 322,000 boepd pro forma for assets sold. The average realized crude oil selling price, including hedging, was$59.79 per barrel in the second quarter of 2021, compared with$38.46 per barrel in the second quarter of 2020. The average realized NGL selling price in the second quarter of 2021 was$23.12 per barrel, compared with$7.32 per barrel in the prior-year quarter, while the average realized natural gas selling price was$4.05 per thousand cubic feet (mcf) in the second quarter of 2021, compared with$2.41 per mcf in the second quarter of 2020. The following is an update of our ongoing E&P activities: •In North Dakota, net production from the Bakken oil shale play averaged 159,000 boepd for the second quarter of 2021 (2020 Q2: 194,000 boepd), primarily due to lower drilling activity caused by a reduction in rig count from six to one last year, and lower NGL and natural gas volumes received under percentage of proceeds contracts due to higher commodity prices. Net oil production was 79,000 bopd in the second quarter of 2021 and 108,000 bopd in the prior year quarter. NGL and natural gas volumes received under percentage of proceeds contracts were 14,000 boepd in the second quarter of 2021 compared with 22,000 boepd in the second quarter of 2020 due to higher realized NGL prices lowering volumes received as consideration for gas processing fees. We added a second rig inFebruary 2021 and drilled 17 wells, completed 9 wells, and brought 9 new wells online during the second quarter. InSeptember 2021 , we plan to add a third rig in the field. We forecast net production to average approximately 145,000 boepd for the third quarter of 2021, which reflects the planned third quarterTioga gas plant turnaround, and in the range of 155,000 boepd to 160,000 boepd for the full year 2021. OnApril 30, 2021 , we completed the sale of our previously announcedLittle Knife andMurphy Creek nonstrategic acreage interests in the Bakken for net cash consideration of$297 million , after closing adjustments. The sale included approximately 78,700 net acres, which are located in the southernmost portion of the Corporation's Bakken position and not connected to Hess Midstream LP infrastructure. •In theGulf of Mexico , net production for the second quarter of 2021 averaged 52,000 boepd (2020 Q2: 68,000 boepd), primarily due to the sale of our interest in the Shenzi Field in the fourth quarter of 2020. Net production from the Shenzi Field was 12,000 boepd in the second quarter of 2020. •At the Stabroek Block (Hess 30%), offshoreGuyana , net production from the Liza Phase 1 development averaged 26,000 bopd for the second quarter of 2021 (2020 Q2: 22,000 bopd). Startup of 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 track for early 2022. The third development, Payara, will utilize the Prosperity FPSO with an expected capacity of 220,000 gross bopd; first oil is expected in 2024. A fourth development, Yellowtail, has been identified on the Stabroek Block with anticipated startup in 2025, pending government approvals and project sanctioning. The Mako-2 appraisal well completed in the second quarter confirmed the quality, thickness and areal extent of the reservoir. When integrated with the previously announced results at Uaru-2, the combined discovered resource at Mako and Uaru is expected to support a fifth FPSO on the Stabroek Block. The recently announced Whiptail-1 well encountered 246 feet (75 meters) of net pay in high quality oil bearing sandstone reservoirs. Drilling is also ongoing at the Whiptail-2 well, which is located three miles northeast of Whiptail-1 and has encountered 167 feet (51 meters) of net pay in high quality oil bearing sandstone reservoirs. Drilling continues at both wells to test deeper targets, and results will be evaluated for future development. The Whiptail discovery is located approximately four 18
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PART I - FINANCIAL INFORMATION (CONT'D.) Overview (continued) miles southeast of the Uaru-1 discovery that was announced inJanuary 2020 and approximately three miles west of the Yellowtail Field. In the second quarter, the Longtail-3 well encountered 230 feet of net pay, including newly identified, high quality hydrocarbon bearing reservoirs below the original Longtail-1 discovery intervals. The well is located approximately two miles south of the Longtail-1 well. The Koebi-1 exploration well was drilled to a depth of 20,700 feet and did not encounter commercial quantities of hydrocarbons. Second quarter results include a charge of$12 million in exploration expenses for well costs incurred. The Stena DrillMax is continuing drilling operations at Whiptail-1 and the Noble Don Taylor is continuing drilling operations at Whiptail-2. The Stena Carron is performing a drill stem test on the Uaru-1 well. The Noble Tom Madden, the Noble Bob Douglas and the Noble Sam Croft are drilling and completing Phase 2 development wells. •In the Gulf ofThailand , net production from Block A-18 of the JDA averaged 38,000 boepd for the second quarter of 2021 (2020 Q2: 23,000 boepd), including contribution from unitized acreage inMalaysia , while net production fromNorth Malay Basin , offshore Peninsular Malaysia, averaged 28,000 boepd for the second quarter of 2021 (2020 Q2: 21,000 boepd). Net production was higher at the JDA andNorth Malay Basin due to higher natural gas nominations resulting from a recovery in economic activity. •In March, we entered into an agreement to sell our interests inDenmark for total consideration of$150 million , with an effective date ofJanuary 1, 2021 . Net production fromDenmark during the second quarter of 2021 was 4,000 boepd (2020 Q2: 6,000 boepd). The sale is expected to close during the third quarter of 2021. Consolidated Results of Operations The after-tax income (loss) by major operating activity is summarized below:
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