HESS CORP - Quarter Report: 2011 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-1204

 

HESS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)

13-4921002
(I.R.S. Employer Identification Number)

1185 AVENUE OF THE AMERICAS, NEW YORK, N.Y.
(Address of Principal Executive Offices)
10036
(Zip Code)

(Registrant’s Telephone Number, Including Area Code is (212) 997-8500)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ		Accelerated Filer o		Non-Accelerated Filer o		Smaller Reporting Company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

At September 30, 2011, there were 339,899,800 shares of Common Stock outstanding.

 

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
		(Millions of dollars, except per share data)
REVENUES AND NON-OPERATING INCOME
Sales (excluding excise taxes) and other operating revenues		$	8,665			$	7,864			$	28,733			$	24,855
Income (loss) from equity investment in HOVENSA L.L.C.			(36	)			(83	)			(133	)			(174	)
Other, net			97				1,172				447				1,242
Total revenues and non-operating income			8,726				8,953				29,047				25,923
COSTS AND EXPENSES
Cost of products sold (excluding items shown separately below)			6,181				5,330				20,062				17,186
Production expenses			609				475				1,739				1,392
Marketing expenses			266				232				796				730
Exploration expenses, including dry holes and lease impairment			199				225				769				548
Other operating expenses			43				39				127				171
General and administrative expenses			177				151				515				465
Interest expense			94				94				290				261
Depreciation, depletion and amortization			586				584				1,732				1,684
Asset impairments			358				532				358				532
Total costs and expenses			8,513				7,662				26,388				22,969
INCOME BEFORE INCOME TAXES			213				1,291				2,659				2,954
Provision (benefit) for income taxes			(54	)			200				849				899
NET INCOME			267				1,091				1,810				2,055
Less: Net income (loss) attributable to noncontrolling interests			(31	)			(63	)			(24	)			(12	)
NET INCOME ATTRIBUTABLE TO HESS CORPORATION		$	298			$	1,154			$	1,834			$	2,067
NET INCOME PER SHARE ATTRIBUTABLE TO HESS CORPORATION
BASIC		$	.89			$	3.54			$	5.45			$	6.36
DILUTED			.88				3.52				5.40				6.31
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)			340.2				327.6				339.8				327.3
COMMON STOCK DIVIDENDS PER SHARE		$	.10			$	.10			$	.30			$	.30

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)

		September 30,				December 31,
		2011				2010
		(Millions of dollars;
		thousands of shares)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	827			$	1,608
Accounts receivable
Trade			3,828				4,478
Other			335				240
Inventories			1,516				1,452
Other current assets			973				1,002
Total current assets			7,479				8,780
INVESTMENTS IN AFFILIATES			391				443
PROPERTY, PLANT AND EQUIPMENT
Total — at cost			40,432				35,703
Less reserves for depreciation, depletion, amortization and lease impairment			16,265				14,576
Property, plant and equipment — net			24,167				21,127
GOODWILL			2,383				2,408
DEFERRED INCOME TAXES			2,322				2,167
OTHER ASSETS			597				471
TOTAL ASSETS		$	37,339			$	35,396
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable		$	3,486			$	4,274
Accrued liabilities			2,258				2,567
Taxes payable			818				726
Short-term debt and current maturities of long-term debt			44				46
Total current liabilities			6,606				7,613
LONG-TERM DEBT			5,548				5,537
DEFERRED INCOME TAXES			3,157				2,995
ASSET RETIREMENT OBLIGATIONS			1,881				1,203
OTHER LIABILITIES AND DEFERRED CREDITS			1,233				1,239
Total liabilities			18,425				18,587
EQUITY
Hess Corporation Stockholders’ Equity
Common stock, par value $1.00     Authorized — 600,000 shares     Issued — 339,900 shares at September 30, 2011;         337,681 shares at December 31, 2010			340				338
Capital in excess of par value			3,369				3,256
Retained earnings			15,991				14,254
Accumulated other comprehensive income (loss)			(867	)			(1,159	)
Total Hess Corporation stockholders’ equity			18,833				16,689
Noncontrolling interests			81				120
Total equity			18,914				16,809
TOTAL LIABILITIES AND EQUITY		$	37,339			$	35,396

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)

		Nine Months
		Ended September 30,
		2011				2010
		(Millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	1,810			$	2,055
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization			1,732				1,684
Asset impairments			358				532
Exploratory dry hole costs and lease impairment			434				308
Provision (benefit) for deferred income taxes			(224	)			(242	)
(Income) loss from equity investment in HOVENSA L.L.C.			133				174
Gains on asset sales			(446	)			(1,208	)
Stock compensation expense			77				84
Changes in operating assets and liabilities and other			(28	)			(335	)
Net cash provided by operating activities			3,846				3,052
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(4,891	)			(3,151	)
Proceeds from asset sales			490				183
Other, net			(74	)			(25	)
Net cash used in investing activities			(4,475	)			(2,993	)
CASH FLOWS FROM FINANCING ACTIVITIES
Debt with maturities of greater than 90 days
Borrowings			14				1,261
Repayments			(50	)			(168	)
Cash dividends paid			(136	)			(131	)
Other, net			20				(30	)
Net cash provided by (used in) financing activities			(152	)			932
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(781	)			991
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			1,608				1,362
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	827			$	2,353

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

1. Basis of Presentation

     The financial statements included in this report reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of Hess Corporation’s (the Corporation) consolidated financial position at September 30, 2011 and December 31, 2010 and the consolidated results of operations for the three and nine month periods ended September 30, 2011 and 2010 and the consolidated cash flows for the nine month periods ended September 30, 2011 and 2010. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.

     The financial statements were prepared in accordance with the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain notes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) have been condensed or omitted from these interim financial statements. These statements, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Corporation’s Form 10-K for the year ended December 31, 2010.

2. Libyan Operations

     In response to civil unrest in Libya, a number of measures were taken by the international community in the first quarter of 2011, including the imposition of economic sanctions. As a consequence of the civil unrest and the sanctions, the Corporation delivered force majeure notices to the Libyan government relating to the agreements covering its exploration and production interests in order to protect its rights while it is temporarily prevented from fulfilling its obligations and benefiting from the rights granted by those agreements. During the third quarter, the United States Department of the Treasury’s Office of Foreign Assets Control issued general licenses which permit the Corporation to engage with the Libyan National Oil Company, with certain exceptions. Due to continuing security concerns, these force majeure declarations remain in place and the Corporation is currently unable to determine when or if it will resume operations in Libya. The Corporation’s Libyan production averaged 23,000 barrels of oil equivalent per day (boepd) for the full year of 2010 and 14,000 boepd for the first quarter of 2011. Production was suspended in the first quarter of 2011. The Corporation had proved reserves of 167 million barrels of oil equivalent in Libya at December 31, 2010. At September 30, 2011, the net book value of the Corporation’s exploration and production assets in Libya was approximately $400 million.

3. Acquisitions and Divestitures

     The Corporation entered into agreements to acquire approximately 85,000 net acres in the Utica Shale play in eastern Ohio for $750 million, principally through the acquisition of Marquette Exploration LLC (Marquette), which closed in August 2011. This acquisition strengthens the Corporation’s portfolio of unconventional assets. The acquisition of Marquette has been accounted for as a business combination and the assets acquired and the liabilities assumed were recorded at fair value. The estimated fair value was based on a valuation approach using market related data which is a Level 3 measurement. The majority of the purchase price was assigned to unproved properties and the remainder to producing wells and working capital. This transaction is subject to normal post closing adjustments. See also Note 17, Subsequent Events.

     In August 2011, the Corporation completed the sale of its interests in the Snorre Field (Hess 1%), offshore Norway and the Cook Field (Hess 28%) in the United Kingdom North Sea for cash proceeds of $131 million, after closing adjustments. These disposals resulted in non-taxable gains totalling $103 million, which have been included in Other, net in the Statement of Consolidated Income. These assets were producing at a combined net rate of approximately 2,500 boepd at the time of sale. The total combined net book value of the disposed assets prior to the sale was $28 million, including allocated goodwill of $11 million.

     In February 2011, the Corporation completed the sale of its interests in the Easington Catchment Area (Hess 30%), the Bacton Area (Hess 23%), the Everest Field (Hess 19%) and the Lomond Field (Hess 17%) in the United Kingdom North Sea for cash proceeds of $359 million, after closing adjustments. These disposals resulted in pre-tax gains totalling $343 million ($310 million after income taxes), which have been included in Other, net in the Statement of Consolidated Income. These assets had a productive capacity of approximately 15,000 boepd. The total combined net book value of the disposed assets prior to the sale was $16 million, including allocated goodwill of $14 million.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     In September 2010, the Corporation completed the exchange of its interests in Gabon and the Clair Field in the United Kingdom for additional interests of 28% and 25%, respectively, in the Valhall and Hod fields in Norway. This exchange was recorded at fair value and resulted in a pre-tax gain of $1,150 million ($1,072 million after income taxes) which has been included in Other, net in the Statement of Consolidated Income. In September 2010, the Corporation also separately acquired additional interests of 8% and 13% in the Valhall and Hod fields, respectively, for $507 million in cash.

4. Inventories

     Inventories consist of the following:

		September 30,				December 31,
		2011				2010
		(Millions of dollars)
Crude oil and other charge stocks		$	589			$	496
Refined petroleum products and natural gas			1,747				1,528
Less: LIFO adjustment			(1,318	)			(995	)
			1,018				1,029
Merchandise, materials and supplies			498				423
Total inventories		$	1,516			$	1,452

5. Refining Joint Venture

     The Corporation accounts for its investment in HOVENSA L.L.C. (HOVENSA), which is included in Investments in affiliates in the Consolidated Balance Sheet, using the equity method. Summarized financial information for HOVENSA follows:

		September 30,				December 31,
		2011				2010
		(Millions of dollars)
Summarized balance sheet
Cash and cash equivalents		$	3			$	45
Other current assets			535				668
Net fixed assets			1,926				1,987
Other assets			23				27
Current liabilities			(1,230	)			(1,001	)
Long-term debt			(523	)			(706	)
Deferred liabilities and credits			(126	)			(135	)
Members’ equity		$	608			$	885
Carrying value of Hess Corporation’s equity investment (*)		$	26			$	158

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
						(Millions of dollars)
Summarized income statement
Total revenues		$	3,617			$	3,276			$	10,198			$	9,188
Cost and expenses			(3,693	)			(3,439	)			(10,477	)			(9,531	)
Net income (loss)		$	(76	)		$	(163	)		$	(279	)		$	(343	)
Hess Corporation’s income (loss) from equity investment in HOVENSA L.L.C. (*)		$	(36	)		$	(83	)		$	(133	)		$	(174	)

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6. Capitalized Exploratory Well Costs

     The following table discloses the net changes in capitalized exploratory well costs pending determination of proved reserves for the nine months ended September 30, 2011 (in millions):

Balance at January 1		$	1,783
Additions to capitalized exploratory well costs pending the determination of proved reserves			534
Reclassification to wells, facilities, and equipment based on the determination of proved reserves			(168	)
Capitalized exploratory well costs charged to expense			(70	)
Dispositions			(12	)
Balance at end of period		$	2,067

     Capitalized exploratory well costs charged to expense in the preceding table excludes $132 million of exploratory well costs which were incurred and subsequently expensed in 2011. Capitalized exploratory well costs greater than one year old after completion of drilling were $1,320 million at September 30, 2011. Approximately 38% of the capitalized well costs in excess of one year relates to the Pony project in the deepwater Gulf of Mexico, where development planning is progressing with sanction targeted for 2012. Approximately 30% relates to Block WA-390-P, offshore Western Australia, where further drilling and other appraisal and commercial activities are ongoing. Approximately 20% relates to Area 54, offshore Libya, where force majeure has been declared following the civil unrest in Libya. The remainder of the capitalized well costs in excess of one year relates to projects where further drilling is planned or development planning and other assessment activities are ongoing to determine the economic and operating viability of the projects.

7. Asset Impairments

     In the third quarter of 2011, the Corporation recorded impairment charges of $358 million ($140 million after income taxes) related to increases in the Corporation’s estimated abandonment liabilities primarily for non-producing properties which resulted in the book value of the properties exceeding their fair value. See Note 8, Asset Retirement Obligations. The Corporation’s estimated fair values for these properties were determined using a valuation approach based on market related data (Level 3 fair value measurement). In September 2010, the Corporation recorded a charge of $532 million ($334 million after income taxes) to fully impair the carrying value of its 55% interest in the West Mediterranean Block 1 concession, located offshore Egypt.

8. Asset Retirement Obligations

     The following table describes changes to the Corporation’s asset retirement obligations:

		September 30,				December 31,
		2011				2010
		(Millions of dollars)
Asset retirement obligations at beginning of period		$	1,358			$	1,297
Liabilities incurred			25				255
Liabilities settled or disposed of			(75	)			(282	)
Accretion expense			70				78
Revisions of estimates			757				(6	)
Foreign currency translation			(10	)			16
Asset retirement obligations at end of period			2,125				1,358
Less: current obligations			244				155
Long-term obligations at end of period		$	1,881			$	1,203

     The revisions in 2011 reflect changes in estimated abandonment obligations resulting from certain changes to expected decommissioning procedures and increases to services and equipment costs.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9. Long-term Debt

     In April 2011, the Corporation entered into a new $4 billion syndicated revolving credit facility that matures in April 2016. The new facility, which replaced a $3 billion facility that was scheduled to mature in May 2012, can be used for borrowings and letters of credit. Borrowings on the facility bear interest at 1.25% above the London Interbank Offered Rate. A facility fee of 0.25% per annum is also payable on the amount of the facility. The interest rate and facility fee are subject to adjustment if the Corporation’s credit rating changes. The restrictions on the amount of total borrowings and secured debt are consistent with the previous facility.

10. Foreign Currency

     Pre-tax foreign currency gains (losses) amounted to the following:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
						(Millions of dollars)
Pre-tax foreign currency gains (losses)		$	(9	)		$	5			$	(18	)		$	(10	)

11. Retirement Plans

     Components of net periodic pension cost consisted of the following:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
						(Millions of dollars)
Service cost		$	15			$	12			$	43			$	36
Interest cost			23				22				67				66
Expected return on plan assets			(28	)			(21	)			(82	)			(63	)
Amortization of net loss			13				12				35				36
Pension expense		$	23			$	25			$	63			$	75

     In 2011, the Corporation expects to contribute approximately $190 million to its pension plans. Through September 30, 2011, the Corporation contributed $148 million of this amount.

12. Income Taxes

The provision (benefit) for income taxes consisted of the following:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
						(Millions of dollars)
Current		$	169			$	380			$	1,073			$	1,141
Deferred			(252	)			(180	)			(253	)			(242	)
Adjustment to deferred tax liability for foreign income tax rate change (*)			29				—				29				—
Total provision (benefit) for incomes taxes		$	(54	)		$	200			$	849			$	899

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

13. Risk Management and Trading Activities

     In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the prices of crude oil, natural gas, refined petroleum products and electricity, as well as to changes in interest rates and foreign currency values. In the disclosures that follow risk management activities are referred to as energy marketing and corporate risk management activities. The Corporation also has trading operations, principally through a 50% voting interest in a consolidated partnership, that trades energy-related commodities, securities and derivatives. These activities are also exposed to commodity price risks primarily related to the prices of crude oil, natural gas, refined petroleum products and electricity.

     Following is a description of the Corporation’s activities that use derivatives as part of their operations and strategies. Derivatives include both financial instruments and forward purchase and sale contracts. Gross notional amounts of both long and short positions are presented in the volume tables below. These amounts include long and short positions that offset in closed positions and have not reached contractual maturity. Gross notional amounts do not quantify risk or represent assets or liabilities of the Corporation, but are used in the calculation of cash settlements under the contracts.

     Energy Marketing Activities: In its energy marketing activities the Corporation sells refined petroleum products, natural gas and electricity principally to commercial and industrial businesses at fixed and floating prices for varying periods of time. Commodity contracts such as futures, forwards, swaps and options, together with physical assets such as storage and pipeline capacity, are used to obtain supply and reduce margin volatility or lower costs related to sales contracts with customers.

     The table below shows the gross volume of the Corporation’s energy marketing commodity contracts outstanding:

		September 30,				December 31,
		2011				2010
Crude oil and refined petroleum products (millions of barrels)			27				30
Natural gas (millions of mcf)			2,532				2,210
Electricity (millions of megawatt hours)			242				301

     The changes in fair value of certain energy marketing commodity contracts that are not designated as hedges are recognized currently in earnings. Revenues from the sales contracts are recognized in Sales and other operating revenues, while supply contract purchases and net settlements from financial derivatives related to these energy marketing activities are recognized in Cost of products sold. Net realized and unrealized pre-tax gains on derivative contracts not designated as hedges amounted to $8 million and $50 million for the three months ended September 30, 2011 and 2010, respectively, and $36 million and $162 million for the nine months ended September 30, 2011 and 2010, respectively.

     At September 30, 2011, a portion of energy marketing commodity contracts are designated as cash flow hedges to hedge variability of expected future cash flows of forecasted supply transactions. The length of time over which the Corporation hedges exposure to variability in future cash flows is predominantly two years or less. For contracts outstanding at September 30, 2011, the maximum duration was approximately three years. The Corporation records the effective portion of changes in the fair value of cash flow hedges as a component of other comprehensive income. Amounts recorded in Accumulated other comprehensive income are reclassified into Cost of products sold in the same period that the hedged item is recognized in earnings. The ineffective portion of changes in the fair value of cash flow hedges is recognized immediately in Cost of products sold.

     At September 30, 2011, the after-tax deferred losses relating to energy marketing activities recorded in Accumulated other comprehensive income were $71 million ($147 million at December 31, 2010). The Corporation estimates that a loss of approximately $48 million will be reclassified into earnings over the next twelve months. During the three months ended September 30, 2011 and 2010, the Corporation reclassified after-tax losses from Accumulated other comprehensive income of $24 million and $56 million, respectively, and $77 million and $257 million for the nine months ended September 30, 2011 and 2010, respectively. The amounts reflected in earnings due to hedge ineffectiveness were a loss of $2 million and a gain of approximately $1 million for the three months ended September 30, 2011 and 2010, respectively, and a loss of $4 million and a gain of approximately $1 million for the nine months ended September 30, 2011 and 2010, respectively. As a result of changes in the fair value of energy marketing cash flow hedge positions, after-tax deferred losses increased by

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

$4 million and $34 million for the three months ended September 30, 2011 and 2010, respectively, and $1 million and $193 million for the nine months ended September 30, 2011 and 2010, respectively.

     Corporate Risk Management Activities: Corporate risk management activities include transactions designed to reduce risk in the selling prices of crude oil, refined petroleum products or natural gas produced by the Corporation or to reduce exposure to foreign currency or interest rate movements. Generally, futures, swaps or option strategies may be used to fix the forward selling price of a portion of the Corporation’s crude oil, refined petroleum products or natural gas production. Forward contracts may also be used to purchase certain currencies in which the Corporation does business with the intent of reducing exposure to foreign currency fluctuations. These forward contracts comprise various currencies including the British Pound and Thai Baht. Interest rate swaps may be used to convert interest payments on certain long-term debt from fixed to floating rates.

     The table below shows the gross volume of the Corporate risk management derivative contracts outstanding:

		September 30,				December 31,
		2011				2010
Commodity, primarily crude oil (millions of barrels)			22				35
Foreign exchange (millions of U.S. Dollars)		$	940			$	1,025
Interest rate swaps (millions of U.S. Dollars)		$	895			$	310

     During 2008, the Corporation closed Brent crude oil cash flow hedges covering 24,000 barrels per day through 2012, by entering into offsetting contracts with the same counterparty. As a result, the valuation of those contracts is no longer subject to change due to price fluctuations. The deferred hedge loss as of the date that the hedges were closed is being recorded in earnings as the hedged transactions occur. There were no other open hedges of crude oil or natural gas production at September 30, 2011. Hedging activities decreased Exploration and Production Sales and other operating revenues by $131 million and $134 million for the three months ended September 30, 2011 and 2010, respectively ($82 million and $85 million after-tax, respectively), and $387 million and $398 million for the nine months ended September 30, 2011 and 2010, respectively ($244 million and $252 million after-tax, respectively). Hedging activities decreased Exploration and Production Sales and other operating revenues by $533 million for the year ended December 31, 2010 ($338 million after-tax). At September 30, 2011, the after-tax deferred losses in Accumulated other comprehensive income relating to the closed Brent crude oil hedges were $400 million ($638 million at December 31, 2010). The Corporation estimates that a loss of approximately $325 million will be reclassified into earnings over the next twelve months.

     At September 30, 2011, the Corporation had interest rate swaps with a gross notional amount of $895 million, which were designated as fair value hedges. Changes in fair value of interest rate swaps and the hedged fixed-rate debt are recorded in Interest expense. During the three months ended September 30, 2011 and 2010, the Corporation recorded an increase of $42 million and $5 million (excluding accrued interest), respectively, in the fair value of interest rate swaps and a corresponding adjustment in the carrying value of the hedged fixed-rate debt. During the nine months ended September 30, 2011 and 2010, the Corporation recorded an increase of $45 million and $12 million (excluding accrued interest), respectively, in the fair value of interest rate swaps and a corresponding adjustment in the carrying value of the hedged fixed-rate debt.

     Foreign exchange contracts are not designated as hedges. Gains or losses on foreign exchange contracts are recognized immediately in Other, net in Revenues and non-operating income.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     Net realized and unrealized pre-tax gains (losses) on derivative contracts used for corporate risk management activities and not designated as hedges amounted to the following:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
						(Millions of dollars)
Commodity		$	—			$	—			$	1			$	(7	)
Foreign exchange			(25	)			48				(12	)			(4	)
Total		$	(25	)		$	48			$	(11	)		$	(11	)

     Trading Activities: Trading activities are conducted principally through a trading partnership in which the Corporation has a 50% voting interest. This consolidated entity intends to generate earnings through various strategies primarily using energy-related commodities, securities and derivatives. The Corporation also takes trading positions for its own account. The information that follows represents 100% of the trading partnership and the Corporation’s proprietary trading accounts.

     The table below shows the gross volume of derivative contracts outstanding relating to trading activities:

		September 30,				December 31,
		2011				2010
Commodity
Crude oil and refined petroleum products (millions of barrels)			2,966				3,328
Natural gas (millions of mcf)			4,910				4,699
Electricity (millions of megawatt hours)			268				79
Foreign exchange (millions of U.S. Dollars)		$	621			$	506
Other
Interest rate (millions of U.S. Dollars)		$	127			$	205
Equity securities (millions of shares)			34				35

     Pre-tax gains (losses) recorded in Sales and other operating revenues from trading activities amounted to the following:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
						(Millions of dollars)
Commodity		$	(5	)		$	(118	)		$	45			$	26
Foreign exchange			7				2				(1	)			8
Other			(52	)			12				(42	)			(5	)
Total		$	(50	)		$	(104	)		$	2			$	29

     Fair Value Measurements: The Corporation determines fair value in accordance with the fair value measurements accounting standard which established a hierarchy that categorizes the sources of inputs, which generally range from quoted prices for identical instruments in a principal trading market (Level 1) to estimates determined using related market data (Level 3). When Level 1 inputs are available within a particular market, those inputs are selected for determination of fair value over Level 2 or 3 inputs in the same market. To value derivatives that are characterized as Level 2 and 3, the Corporation uses observable inputs for similar instruments that are available from exchanges, pricing services or broker quotes. These observable inputs may be supplemented with other methods, including internal extrapolation, that result in the most representative prices for instruments with similar characteristics. Multiple inputs may be used to measure fair value, however, the level of fair value for each financial asset or liability presented below is based on the lowest significant input level within this fair value hierarchy.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     The following table provides the Corporation’s net financial assets and (liabilities) that are measured at fair value based on this hierarchy:

														Collateral
														and
														counterparty
		Level 1				Level 2				Level 3				netting				Balance
						(Millions of dollars)
September 30, 2011
Assets
Derivative contracts
Commodity		$	283			$	1,288			$	320			$	(305	)		$	1,586
Foreign exchange			—				1				—				—				1
Interest rate and other			2				71				1				(1	)			73
Collateral and counterparty netting			(58	)			(220	)			(20	)			(133	)			(431	)
Total derivative contracts			227				1,140				301				(439	)			1,229
Other assets measured at fair value on a recurring basis			10				90				—				(1	)			99
Total assets		$	237			$	1,230			$	301			$	(440	)		$	1,328
Liabilities
Derivative contracts
Commodity		$	(490	)		$	(1,645	)		$	(557	)		$	305			$	(2,387	)
Foreign exchange			—				(36	)			—				—				(36	)
Other			—				(61	)			(7	)			1				(67	)
Collateral and counterparty netting			58				220				20				85				383
Total derivative contracts			(432	)			(1,522	)			(544	)			391				(2,107	)
Other liabilities measured at fair value on a recurring basis			—				(58	)			(1	)			1				(58	)
Total liabilities		$	(432	)		$	(1,580	)		$	(545	)		$	392			$	(2,165	)
December 31, 2010
Assets
Derivative contracts
Commodity		$	65			$	1,308			$	883			$	(304	)		$	1,952
Foreign exchange			—				1				—				—				1
Interest rate and other			—				17				—				—				17
Collateral and counterparty netting			(1	)			(274	)			(19	)			(213	)			(507	)
Total derivative contracts			64				1,052				864				(517	)			1,463
Other assets measured at fair value on a recurring basis			20				49				3				—				72
Total assets		$	84			$	1,101			$	867			$	(517	)		$	1,535
Liabilities
Derivative contracts
Commodity		$	(324	)		$	(2,519	)		$	(474	)		$	304			$	(3,013	)
Foreign exchange			—				(12	)			—				—				(12	)
Other			—				(10	)			—				—				(10	)
Collateral and counterparty netting			1				274				19				34				328
Total derivative contracts			(323	)			(2,267	)			(455	)			338				(2,707	)
Other liabilities measured at fair value on a recurring basis			—				—				—				—				—
Total liabilities		$	(323	)		$	(2,267	)		$	(455	)		$	338			$	(2,707	)

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     The following table provides changes in financial assets and liabilities that are measured at fair value based on Level 3 inputs:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
						(Millions of dollars)
Balance at beginning of period		$	372			$	41			$	412			$	84
Unrealized gains (losses)
Included in earnings			(85	)			105				19				163
Included in other comprehensive income			13				(18	)			30				62
Purchases			415				347				1,932				782
Sales			(536	)			(397	)			(2,131	)			(745	)
Settlements			(162	)			(1	)			(194	)			(46	)
Transfers into Level 3			(222	)			215				(211	)			57
Transfers out of Level 3			(39	)			12				(101	)			(53	)
Balance at end of period		$	(244	)		$	304			$	(244	)		$	304

     Purchases and sales in the table above primarily represent option premiums paid or received, respectively, during the reporting period. Settlements represent realized gains and losses on derivatives settled during the reporting period.

     The following table provides net transfers into and out of each level of the fair value hierarchy:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
						(Millions of dollars)
Transfers into Level 1		$	(4	)		$	95			$	(12	)		$	123
Transfers out of Level 1			39				89				318				23
		$	35			$	184			$	306			$	146
Transfers into Level 2		$	28			$	(8	)		$	34			$	121
Transfers out of Level 2			198				(403	)			(28	)			(271	)
		$	226			$	(411	)		$	6			$	(150	)
Transfers into Level 3		$	(222	)		$	215			$	(211	)		$	57
Transfers out of Level 3			(39	)			12				(101	)			(53	)
		$	(261	)		$	227			$	(312	)		$	4

     The Corporation’s policy is to recognize transfers in and transfers out as of the end of the reporting period. Transfers between levels result from the passage of time as contracts move closer to their maturities, fluctuations in the market liquidity for certain contracts and/or changes in the level of significance of fair value measurement inputs.

     In addition to the financial assets and liabilities disclosed in the tables above, the Corporation had other short-term financial instruments, primarily cash equivalents and accounts receivable and payable, for which the carrying value approximated their fair value at September 30, 2011 and December 31, 2010. Fixed-rate long-term debt had a carrying value of $5,583 million, compared with a fair value of $6,723 million at September 30, 2011, and a carrying value of $5,569 million, compared with a fair value of $6,353 million at December 31, 2010.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     The table below reflects the gross and net fair values of the Corporation’s risk management and trading derivative instruments:

		Accounts				Accounts
		Receivable				Payable
		(Millions of dollars)
September 30, 2011
Derivative contracts designated as hedging instruments
Commodity		$	97			$	(281	)
Other			56				(3	)
Total derivative contracts designated as hedging instruments			153				(284	)
Derivative contracts not designated as hedging instruments (*)
Commodity			12,040				(12,657	)
Foreign exchange			6				(41	)
Other			60				(107	)
Total derivative contracts not designated as hedging instruments			12,106				(12,805	)
Gross fair value of derivative contracts			12,259				(13,089	)
Master netting arrangements			(10,897	)			10,897
Cash collateral (received) posted			(133	)			85
Net fair value of derivative contracts		$	1,229			$	(2,107	)
December 31, 2010
Derivative contracts designated as hedging instruments
Commodity		$	225			$	(483	)
Other			10				(2	)
Total derivative contracts designated as hedging instruments			235				(485	)
Derivative contracts not designated as hedging instruments (*)
Commodity			11,581				(12,383	)
Foreign exchange			7				(19	)
Other			31				(32	)
Total derivative contracts not designated as hedging instruments			11,619				(12,434	)
Gross fair value of derivative contracts			11,854				(12,919	)
Master netting arrangements			(10,178	)			10,178
Cash collateral (received) posted			(213	)			34
Net fair value of derivative contracts		$	1,463			$	(2,707	)

     Credit Risk: The Corporation is exposed to credit risks that may at times be concentrated with certain counterparties, groups of counterparties or customers. Accounts receivable are generated from a diverse domestic and international customer base. The Corporation’s net receivables at September 30, 2011 are concentrated with the following counterparty and customer industry segments: Integrated Oil Companies — 26%, Government Entities — 9%, Manufacturing — 8%, Financial Institutions — 7%, Refiners — 7%, Services — 7%, Trading Companies — 7% and Real Estate — 6%. The Corporation reduces its risk related to certain counterparties by using master netting arrangements and requiring collateral, generally cash or letters of credit. The Corporation records the cash collateral received or posted as an offset to the fair value of derivatives executed with the same counterparty. At September 30, 2011 and December 31, 2010, the Corporation held cash from counterparties of $133 million and $213 million, respectively. The Corporation posted cash to counterparties at September 30, 2011 and December 31, 2010 of $85 million and $34 million, respectively.

     At September 30, 2011, the Corporation had a total of $1,671 million of outstanding letters of credit, primarily issued to satisfy margin requirements. Certain of the Corporation’s agreements also contain contingent collateral provisions that could require the Corporation to post additional collateral if the Corporation’s credit rating declines. As of September 30, 2011, the

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

net liability related to derivatives with contingent collateral provisions was approximately $1,059 million before cash collateral posted of $11 million. At September 30, 2011, all three major credit rating agencies that rate the Corporation’s debt had assigned an investment grade rating. If two of the three agencies were to downgrade the Corporation’s rating to below investment grade, as of September 30, 2011, the Corporation would be required to post additional collateral of approximately $333 million.

14. Weighted Average Common Shares

     The weighted average number of common shares used in the basic and diluted earnings per share computations are as follows:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
						(In thousands)
Common shares — basic			337,380				325,452				336,721				325,166
Effect of dilutive securities
Restricted common stock			1,268				1,369				1,372				1,354
Stock options			1,574				813				1,745				822
Common shares — diluted			340,222				327,634				339,838				327,342

     The Corporation issued 2,201,445 stock options and 734,005 shares of restricted stock during the nine months ended September 30, 2011 and 2,768,715 stock options and 944,250 shares of restricted stock for the same period in 2010. The weighted average common shares used in the diluted earnings per share calculations excludes the effect of 4,180,000 and 2,763,000 out-of-the-money stock options for the three and nine months ended September 30, 2011 and 8,932,000 and 5,797,000 out-of-the-money stock options for the same periods in 2010.

15. Equity and Comprehensive Income

     The table below summarizes changes in equity:

		Hess
		Stockholders’				Noncontrolling
		Equity				Interests				Total Equity
		(Millions of dollars)
Balance at January 1, 2011		$	16,689			$	120			$	16,809
Net income (loss)			1,834				(24	)			1,810
Deferred gains (losses) on cash flow hedges, after-tax
Effect of hedge losses recognized in income			321				—				321
Net change in fair value of cash flow hedges			(8	)			—				(8	)
Change in post retirement plan liabilities, after-tax			22				—				22
Change in foreign currency translation adjustment and other			(43	)			3				(40	)
Comprehensive income (loss)			2,126				(21	)			2,105
Activity related to restricted common stock awards, net			39				—				39
Employee stock options, including income tax benefits			105				—				105
Cash dividends declared			(102	)			—				(102	)
Noncontrolling interests, net			(24	)			(18	)			(42	)
Balance at September 30, 2011		$	18,833			$	81			$	18,914

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

		Hess
		Stockholders’				Noncontrolling
		Equity				Interests				Total Equity
		(Millions of dollars)
Balance at January 1, 2010		$	13,384			$	144			$	13,528
Net income (loss)			2,067				(12	)			2,055
Deferred gains (losses) on cash flow hedges, after-tax
Effect of hedge losses recognized in income			508				—				508
Net change in fair value of cash flow hedges			(226	)			—				(226	)
Change in post retirement plan liabilities, after-tax			24				—				24
Change in foreign currency translation adjustment and other			(8	)			2				(6	)
Comprehensive income (loss)			2,365				(10	)			2,355
Activity related to restricted common stock awards, net			44				—				44
Employee stock options, including income tax benefits			54				—				54
Cash dividends declared			(98	)			—				(98	)
Noncontrolling interests, net			(19	)			(36	)			(55	)
Balance at September 30, 2010		$	15,730			$	98			$	15,828

16. Segment Information

     The Corporation’s results by operating segment were as follows:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2011				2010				2011				2010
						(Millions of dollars)
Operating revenues
Exploration and Production		$	2,217			$	2,368			$	7,760			$	6,761
Marketing and Refining			6,479				5,535				21,071				18,205
Less: Transfers between affiliates			(31	)			(39	)			(98	)			(111	)
Total (*)		$	8,665			$	7,864			$	28,733			$	24,855
Net income (loss) attributable to Hess Corporation
Exploration and Production		$	422			$	1,277			$	2,148			$	2,316
Marketing and Refining			(23	)			(38	)			(23	)			30
Corporate, including interest			(101	)			(85	)			(291	)			(279	)
Total		$	298			$	1,154			$	1,834			$	2,067

     Identifiable assets by operating segment were as follows:

		September 30,				December 31,
		2011				2010
		(Millions of dollars)
Exploration and Production		$	31,122			$	28,242
Marketing and Refining			5,663				6,377
Corporate			554				777
Total		$	37,339			$	35,396

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

17. Subsequent Events

     In October 2011, the Corporation completed the acquisition of a 50% undivided interest in CONSOL Energy Inc.’s (CONSOL) approximately 200,000 acres, in the Utica Shale in eastern Ohio, for $59 million in cash at closing and funding of 50% of CONSOL’s share of the drilling costs up to $534 million within a 5-year period. Also, in October 2011, the Corporation acquired for $116 million in cash an additional 4% interest in the South Arne Field, offshore Denmark, increasing its interest to 62% from 58%.

PART I — FINANCIAL INFORMATION (CONT’D.)

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

     Hess Corporation (the Corporation) is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. The M&R segment manufactures refined petroleum products and purchases, markets and trades refined petroleum products, natural gas and electricity. The Corporation reported net income of $298 million in the third quarter of 2011 compared to $1,154 million in the third quarter of 2010. Net income for the third quarter of 2011 included net after-tax charges of $81 million and net income for the third quarter of 2010 had a net after-tax gain of $725 million, which affected the comparability of earnings between periods. For further discussion of the items affecting comparability, see pages 22 and 24.

Exploration and Production

     E&P reported net income of $422 million in the third quarter of 2011 compared to $1,277 million in the third quarter of 2010. Excluding items affecting comparability referenced above, E&P net income was $503 million and $552 million, respectively, for the same periods. In the third quarter of 2011, the Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $85.81 per barrel up from $64.81 per barrel in the third quarter of 2010. The Corporation’s average worldwide natural gas selling price was $5.74 per thousand cubic feet (mcf) in the third quarter of 2011 compared with $5.73 per mcf in the third quarter of 2010. Worldwide crude oil and natural gas production was 344,000 barrels of oil equivalent per day (boepd) in the third quarter of 2011 compared with 413,000 boepd in the same period of 2010, due to the suspension of production in Libya, production interruptions at the Valhall and Llano fields, the sale of certain natural gas producing assets in the United Kingdom in February 2011 and natural field declines, partially offset by higher production from the Bakken oil shale play in North Dakota. The Corporation forecasts its full year production to be at the low end of the previous guidance of 375,000 to 385,000 boepd.

     The following is an update of E&P activities:

•

In North Dakota, net production from the Bakken oil shale play was 32,000 boepd during the third quarter up from 25,000 boepd in the second quarter. The Corporation forecasts Bakken production will increase to 60,000 boepd in 2012 and 120,000 boepd in 2015.

•

The Corporation announced the acquisition of 185,000 net acres in the Utica Shale play in eastern Ohio. The Corporation entered into agreements to acquire approximately 85,000 net acres for $750 million, principally through the acquisition of Marquette Exploration LLC, which closed in August 2011. In October 2011, the Corporation completed the acquisition of a 50% undivided interest in CONSOL Energy Inc.’s (CONSOL) almost 200,000 acres in the Utica Shale play for $59 million in cash at closing and funding of 50% of CONSOL’s share of the drilling costs up to $534 million within a 5-year period. Appraisal activities on the Utica acreage are due to commence in the fourth quarter of 2011.

•

The Corporation and its partner sanctioned the development of the Tubular Bells Field in the deepwater Gulf of Mexico. The Corporation was also assigned an additional interest in the field increasing its interest to 57% from 40%, subject to government approval, and remains operator of the field.

•

In July 2011, the Corporation spud the Andalan well on the Semai V block, offshore Indonesia (Hess 100%). In September 2011, the operator of Block CA-1 in Brunei (Hess 14%) spud the Julong Centre well. These wells are expected to reach target depth in the fourth quarter.

     Status of Libyan Operations: In response to civil unrest in Libya, a number of measures were taken by the international community in the first quarter of 2011, including the imposition of economic sanctions. As a consequence of the civil unrest and the sanctions, the Corporation delivered force majeure notices to the Libyan government relating to the agreements covering its exploration and production interests in order to protect its rights while it is temporarily prevented from fulfilling its obligations and benefiting from the rights granted by those agreements. During the third quarter, the United States Department of the Treasury’s Office of Foreign Assets Control issued general licenses which permit the Corporation to engage with the Libyan National Oil Company, with certain exceptions. Due to continuing security concerns, these force majeure declarations remain in place and the Corporation is currently unable to determine when or if it will resume operations in Libya. The Corporation’s Libyan production averaged 23,000 barrels of oil equivalent per day (boepd) for the

PART I — FINANCIAL INFORMATION (CONT’D.)

Overview (continued)

full year of 2010 and 14,000 boepd for the first quarter of 2011. Production was suspended in the first quarter of 2011. The Corporation had proved reserves of 167 million barrels of oil equivalent in Libya at December 31, 2010. At September 30, 2011, the net book value of the Corporation’s exploration and production assets in Libya was approximately $400 million.

     Gulf of Mexico Update: The Corporation has filed 183 Suspension of Operations (SOO) requests with the Bureau of Safety and Environmental Enforcement (BSEE). The BSEE and the Bureau of Ocean Energy Management (BOEM) were established on October 1, 2011 thereby replacing the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE). Of those 183 SOO requests, 159 one year extensions have been approved. The remaining SOO requests are still pending. These SOO requests seek the BSEE’s approval for the extension of leases beyond their initial period where operations required to hold the leases have been delayed due to circumstances beyond the control of the Corporation. In addition, the Corporation has applied and received approval for exploration plans for two deepwater prospects and has applied for permits to drill these prospects. Further discussions have also been held with the BSEE concerning the Corporation’s oil spill response plan for its Gulf of Mexico operations, which is also awaiting approval.

Marketing and Refining