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 June 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 ended December 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 ended December 31, 2020.
Overview
Hess 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 in the United
States (U.S.), Guyana, the Malaysia/Thailand Joint Development Area (JDA),
Malaysia, and Denmark. We conduct exploration activities primarily offshore
Guyana, in the U.S. Gulf of Mexico, and offshore Suriname and Canada. At the
Stabroek Block (Hess 30%), offshore Guyana, 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 in December 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 of Hess Corporation's
approximate 46% consolidated ownership interest in Hess Midstream LP at June 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 the
Williston Basin area of North Dakota.
In July 2021, Hess Midstream LP announced that its subsidiary, HESM Opco, agreed
to repurchase approximately 31 million HESM Opco Class B units held by Hess
Corporation and Global 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. In August 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 the Hess workforce and local communities where the Corporation
operates. 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.
2021 Outlook
In July, we repaid $500 million principal amount of our $1 billion term loan,
which matures in March 2023, and announced plans to add a third Bakken drilling
rig in September 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, excluding Libya,
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 in Denmark for total
consideration of $150 million, with an effective date of January 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
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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 in Denmark and the
Class B unit repurchase by HESM Opco, and cash and cash equivalents at June 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
in March 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, excluding
Libya, 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 in
February 2021 and drilled 17 wells, completed 9 wells, and brought 9 new wells
online during the second quarter. In September 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 quarter Tioga
gas plant turnaround, and in the range of 155,000 boepd to 160,000 boepd for the
full year 2021.
On April 30, 2021, we completed the sale of our previously announced Little
Knife and Murphy 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 the Gulf 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%), offshore Guyana, 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
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                    PART I - FINANCIAL INFORMATION (CONT'D.)
Overview (continued)
miles southeast of the Uaru-1 discovery that was announced in January 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 of Thailand, 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 in Malaysia, while net production from North
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
and North 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 in Denmark for
total consideration of $150 million, with an effective date of January 1, 2021.
Net production from Denmark 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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