HESS CORP - Quarter Report: 2011 June (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 June 30, 2011, there were 339,882,380 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 Ended								Six Months Ended
		June 30,								June 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		$	9,853			$	7,732			$	20,068			$	16,991
Income (loss) from equity investment in HOVENSA L.L.C.			(49	)			(6	)			(97	)			(91	)
Other, net			2				24				350				70
Total revenues and non-operating income			9,806				7,750				20,321				16,970
COSTS AND EXPENSES
Cost of products sold (excluding items shown separately below)			6,841				5,316				13,881				11,856
Production expenses			599				440				1,130				917
Marketing expenses			247				245				530				498
Exploration expenses, including dry holes and lease impairment			257				172				570				323
Other operating expenses			42				80				84				132
General and administrative expenses			174				159				338				314
Interest expense			97				83				196				167
Depreciation, depletion and amortization			588				558				1,146				1,100
Total costs and expenses			8,845				7,053				17,875				15,307
INCOME BEFORE INCOME TAXES			961				697				2,446				1,663
Provision for income taxes			392				301				903				699
NET INCOME			569				396				1,543				964
Less: Net income (loss) attributable to noncontrolling interests			(38	)			21				7				51
NET INCOME ATTRIBUTABLE TO HESS CORPORATION		$	607			$	375			$	1,536			$	913
NET INCOME PER SHARE ATTRIBUTABLE TO HESS CORPORATION
BASIC		$	1.80			$	1.15			$	4.56			$	2.81
DILUTED			1.78				1.15				4.52				2.79
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)			340.4				327.5				339.7				327.2
COMMON STOCK DIVIDENDS PER SHARE		$	.10			$	.10			$	.20			$	.20

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)

		June 30,				December 31,
		2011				2010
		(Millions of dollars; thousands of shares)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	2,194			$	1,608
Accounts receivable
Trade			4,133				4,478
Other			320				240
Inventories			1,432				1,452
Other current assets			807				1,002
Total current assets			8,886				8,780
INVESTMENTS IN AFFILIATES			417				443
PROPERTY, PLANT AND EQUIPMENT
Total — at cost			38,378				35,703
Less reserves for depreciation, depletion, amortization and lease impairment			15,850				14,576
Property, plant and equipment — net			22,528				21,127
GOODWILL			2,388				2,408
DEFERRED INCOME TAXES			2,285				2,167
OTHER ASSETS			487				471
TOTAL ASSETS		$	36,991			$	35,396
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable		$	3,761			$	4,274
Accrued liabilities			2,151				2,567
Taxes payable			849				726
Short-term debt and current maturities of long-term debt			35				46
Total current liabilities			6,796				7,613
LONG-TERM DEBT			5,506				5,537
DEFERRED INCOME TAXES			3,369				2,995
ASSET RETIREMENT OBLIGATIONS			1,218				1,203
OTHER LIABILITIES AND DEFERRED CREDITS			1,198				1,239
Total liabilities			18,087				18,587
EQUITY
Hess Corporation Stockholders’ Equity
Common stock, par value $1.00     Authorized — 600,000 shares     Issued — 339,882 shares at June 30, 2011;           337,681 shares at December 31, 2010			340				338
Capital in excess of par value			3,373				3,256
Retained earnings			15,725				14,254
Accumulated other comprehensive income (loss)			(662	)			(1,159	)
Total Hess Corporation stockholders’ equity			18,776				16,689
Noncontrolling interests			128				120
Total equity			18,904				16,809
TOTAL LIABILITIES AND EQUITY		$	36,991			$	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)

		Six Months Ended
		June 30,
		2011				2010
		(Millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	1,543			$	964
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization			1,146				1,100
Exploratory dry hole costs and lease impairment			351				188
Provision (benefit) for deferred income taxes			(1	)			(62	)
(Income) loss from equity investment in HOVENSA L.L.C.			97				91
Gains on asset sales			(343	)			(58	)
Stock compensation expense			48				54
Changes in operating assets and liabilities and other			(17	)			(471	)
Net cash provided by operating activities			2,824				1,806
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(2,457	)			(1,689	)
Proceeds from asset sales			359				183
Other, net			(57	)			(36	)
Net cash used in investing activities			(2,155	)			(1,542	)
CASH FLOWS FROM FINANCING ACTIVITIES
Debt with maturities of greater than 90 days
Borrowings			4				—
Repayments			(49	)			(157	)
Cash dividends paid			(102	)			(98	)
Other, net			64				(8	)
Net cash used in financing activities			(83	)			(263	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			586				1
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			1,608				1,362
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	2,194			$	1,363

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

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 June 30, 2011 and December 31, 2010 and the consolidated results of operations for the three and six month periods ended June 30, 2011 and 2010 and the consolidated cash flows for the six month periods ended June 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, including the imposition of sanctions by the United States, the United Nations, the United Kingdom and the European Union. The sanctions blocked and froze the assets of, and any payments to, the Libyan government and any entities owned or controlled by the Libyan government, as well as designated entities and individuals. 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. Because of the on-going events, including the sanctions, the Corporation is unable to determine when or if it will resume operations in Libya. 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 June 30, 2011, the net book value of the Corporation’s exploration and production assets in Libya was approximately $400 million.

3. Inventories

     Inventories consist of the following:

		June 30,				December 31,
		2011				2010
		(Millions of dollars)
Crude oil and other charge stocks		$	494			$	496
Refined petroleum products and natural gas			1,788				1,528
Less: LIFO adjustment			(1,302	)			(995	)
			980				1,029
Merchandise, materials and supplies			452				423
Total inventories		$	1,432			$	1,452

PART I — FINANCIAL INFORMATION (CONT’D.)

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

4. 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:

		June 30,				December 31,
		2011				2010
		(Millions of dollars)
Summarized balance sheet
Cash and cash equivalents		$	32			$	45
Other current assets			656				668
Net fixed assets			1,948				1,987
Other assets			26				27
Current liabilities			(1,260	)			(1,001	)
Long-term debt			(586	)			(706	)
Deferred liabilities and credits			(132	)			(135	)
Members’ equity		$	684			$	885
Carrying value of Hess Corporation’s equity investment		$	62			$	158

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(Millions of dollars)
Summarized income statement
Total revenues		$	3,719			$	3,146			$	6,581			$	5,912
Cost and expenses			(3,822	)			(3,158	)			(6,784	)			(6,092	)
Net income (loss)		$	(103	)		$	(12	)		$	(203	)		$	(180	)
Hess Corporation’s income (loss) from equity investment in HOVENSA L.L.C. (*)		$	(49	)		$	(6	)		$	(97	)		$	(91	)

5. Acquisitions and Divestitures

     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 a pre-tax gain of $343 million ($310 million after income taxes), which has been included in Other, net in the Statement of Consolidated Income. The total combined net book value of the disposed assets prior to the sale was $16 million, including allocated goodwill of $14 million.

6. Capitalized Exploratory Well Costs

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

Balance at January 1		$	1,783
Additions to capitalized exploratory well costs pending the determination of proved reserves			428
Reclassification to wells, facilities, and equipment based on the determination of proved reserves			(68	)
Capitalized exploratory well costs charged to expense			(70	)
Dispositions			(11	)
Balance at end of period		$	2,062

PART I — FINANCIAL INFORMATION (CONT’D.)

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

     Capitalized exploratory well costs charged to expense in the preceding table excludes $134 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 $1,341 million at June 30, 2011. Approximately 45% of the capitalized well costs in excess of one year relates to two separate projects in the deepwater Gulf of Mexico, Tubular Bells and Pony, where development planning is progressing, with sanction anticipated later in 2011 for Tubular Bells and 2012 for Pony. Approximately 22% relates to Block WA-390-P, offshore Western Australia, where further drilling, other appraisal activities and commercial analysis are ongoing. Approximately 20% relates to Area 54, offshore Libya, where force majeure has been declared following the imposition of sanctions against 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. 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.

8. Foreign Currency

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(Millions of dollars)
Pre-tax foreign currency gains (losses)		$	(8	)		$	(10	)		$	(9	)		$	(16	)

9. Retirement Plans

     Components of net periodic pension cost consisted of the following:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(Millions of dollars)
Service cost		$	14			$	12			$	28			$	24
Interest cost			22				21				44				43
Expected return on plan assets			(27	)			(21	)			(54	)			(42	)
Amortization of net loss			11				12				22				24
Pension expense		$	20			$	24			$	40			$	49

     In 2011, the Corporation expects to contribute approximately $190 million to its pension plans. Through June 30, 2011, the Corporation contributed $107 million to its pension plans.

10. 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.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

     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:

		June 30,				December 31,
		2011				2010
Commodity Contracts
Crude oil and refined petroleum products (millions of barrels)			29				30
Natural gas (millions of mcf)			2,120				2,210
Electricity (millions of megawatt hours)			343				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 $31 million and $38 million for the three months ended June 30, 2011 and 2010, respectively, and $28 million and $112 million for the six months ended June 30, 2011 and 2010, respectively.

     At June 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 June 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 June 30, 2011, the after-tax deferred losses relating to energy marketing activities recorded in Accumulated other comprehensive income were $91 million ($147 million at December 31, 2010). The Corporation estimates that approximately $59 million of this amount will be reclassified into earnings over the next twelve months. During the three months ended June 30, 2011 and 2010, the Corporation reclassified after-tax losses from Accumulated other comprehensive income of $33 million and $110 million, respectively, and $53 million and $201 million for the six months ended June 30, 2011 and 2010, respectively. The amounts reflected in earnings due to hedge ineffectiveness were a gain of less than $1 million and a gain of $1 million for the three months ended June 30, 2011 and 2010, respectively, and a loss of $2 million and a gain of less than $1 million for the six months ended June 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 $1 million and $67 million for the three months ended June 30, 2011 and 2010, respectively, and increased by $3 million and decreased by $159 million for the six months ended June 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.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

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

		June 30,				December 31,
		2011				2010
Commodity contracts, primarily crude oil (millions of barrels)			29				35
Foreign exchange contracts (millions of U.S. Dollars)			976				1,025
Interest rate swap contracts (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. There were no other open hedges of crude oil or natural gas production at June 30, 2011. Hedging activities decreased Exploration and Production Sales and other operating revenues by $128 million and $133 million for the three months ended June 30, 2011 and 2010, respectively ($81 million and $84 million after-tax, respectively), and $256 million and $264 million for the six months ended June 30, 2011 and 2010, respectively ($162 million and $167 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 June 30, 2011, the after-tax deferred losses in Accumulated other comprehensive income relating to the closed Brent crude oil hedges were $483 million ($638 million at December 31, 2010). The Corporation estimates that approximately $325 million of this amount will be reclassified into earnings over the next twelve months.

     At June 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 June 30, 2011 and 2010, the Corporation recorded an increase of $5 million and $8 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 six months ended June 30, 2011 and 2010, the Corporation recorded an increase of $3 million and $9 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.

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(Millions of dollars)
Commodity		$	—			$	(8	)		$	1			$	(7	)
Foreign exchange			(6	)			(15	)			13				(52	)
Total		$	(6	)		$	(23	)		$	14			$	(59	)

     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 instruments outstanding relating to trading activities:

		June 30,				December 31,
		2011				2010
Commodity Contracts
Crude oil and refined petroleum products (millions of barrels)			3,212				3,328
Natural gas (millions of mcf)			5,299				4,699
Electricity (millions of megawatt hours)			230				79
Foreign Exchange (millions of U.S. Dollars)			683				506
Other Contracts
Interest rate (millions of U.S. Dollars)			273				205
Equity securities (millions of shares)			32				35

PART I — FINANCIAL INFORMATION (CONT’D.)

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

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(Millions of dollars)
Commodity		$	(72	)		$	39			$	50			$	144
Foreign exchange			(3	)			8				(8	)			6
Other			(3	)			(9	)			10				(17	)
Total		$	(78	)		$	38			$	52			$	133

     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.

     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)
June 30, 2011
Assets
Derivative contracts
Commodity		$	224			$	627			$	796			$	(197	)		$	1,450
Foreign exchange			—				—				—				—				—
Other			—				21				1				(1	)			21
Collateral and counterparty netting			(31	)			(88	)			(6	)			(163	)			(288	)
Total derivative contracts			193				560				791				(361	)			1,183
Other assets measured at fair value on a recurring basis			12				53				—				—				65
Total assets		$	205			$	613			$	791			$	(361	)		$	1,248
Liabilities
Derivative contracts
Commodity		$	(121	)		$	(2,095	)		$	(424	)		$	197			$	(2,443	)
Foreign exchange			—				(32	)			—				—				(32	)
Other			—				(13	)			(1	)			1				(13	)
Collateral and counterparty netting			31				88				6				42				167
Total derivative contracts			(90	)			(2,052	)			(419	)			240				(2,321	)
Other liabilities measured at fair value on a recurring basis			—				—				—				—				—
Total liabilities		$	(90	)		$	(2,052	)		$	(419	)		$	240			$	(2,321	)

PART I — FINANCIAL INFORMATION (CONT’D.)

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

														Collateral
														and
														counterparty
		Level 1				Level 2				Level 3				netting				Balance
		(Millions of dollars)
December 31, 2010
Assets
Derivative contracts
Commodity		$	65			$	1,308			$	883			$	(304	)		$	1,952
Foreign exchange			—				1				—				—				1
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	)

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(Millions of dollars)
Balance at beginning of period		$	787			$	(46	)		$	412			$	84
Unrealized gains (losses)
Included in earnings			(208	)			(45	)			104				58
Included in other comprehensive income			7				94				17				80
Purchases			702				343				1,517				435
Sales			(776	)			(245	)			(1,595	)			(348	)
Settlements			(52	)			(14	)			(32	)			(45	)
Transfers into Level 3			(72	)			1				11				(158	)
Transfers out of Level 3			(16	)			(47	)			(62	)			(65	)
Balance at end of period		$	372			$	41			$	372			$	41

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

PART I — FINANCIAL INFORMATION (CONT’D.)

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

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(Millions of dollars)
Transfers into Level 1		$	18			$	3			$	(8	)		$	28
Transfers out of Level 1			65				(81	)			279				(66	)
		$	83			$	(78	)		$	271			$	(38	)
Transfers into Level 2		$	(2	)		$	129			$	6			$	129
Transfers out of Level 2			7				(5	)			(226	)			132
		$	5			$	124			$	(220	)		$	261
Transfers into Level 3		$	(72	)		$	1			$	11			$	(158	)
Transfers out of Level 3			(16	)			(47	)			(62	)			(65	)
		$	(88	)		$	(46	)		$	(51	)		$	(223	)

     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 June 30, 2011 and December 31, 2010. Fixed-rate long-term debt had a carrying value of $5,539 million, compared with a fair value of $6,285 million at June 30, 2011, and a carrying value of $5,569 million, compared with a fair value of $6,353 million at December 31, 2010.

     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)
June 30, 2011
Derivative contracts designated as hedging instruments
Commodity		$	105			$	(299	)
Other			15				(4	)
Total derivative contracts designated as hedging instruments			120				(303	)
Derivative contracts not designated as hedging instruments (*)
Commodity			13,046				(13,845	)
Foreign exchange			8				(40	)
Other			29				(32	)
Total derivative contracts not designated as hedging instruments			13,083				(13,917	)
Gross fair value of derivative contracts			13,203				(14,220	)
Master netting arrangements			(11,857	)			11,857
Cash collateral (received) posted			(163	)			42
Net fair value of derivative contracts		$	1,183			$	(2,321	)

PART I — FINANCIAL INFORMATION (CONT’D.)

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

		Accounts				Accounts
		Receivable				Payable
		(Millions of dollars)
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 June 30, 2011 are concentrated with the following counterparty and customer industry segments: Integrated Oil Companies — 30%, Government Entities — 9%, Manufacturing — 8%, Trading Companies — 8%, Real Estate — 7% and Services — 7%. 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 June 30, 2011 and December 31, 2010, the Corporation held cash from counterparties of $163 million and $213 million, respectively. The Corporation posted cash to counterparties at June 30, 2011 and December 31, 2010 of $42 million and $34 million, respectively.

     At June 30, 2011, the Corporation had a total of $2,132 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 June 30, 2011, the net liability related to derivatives with contingent collateral provisions was approximately $1,175 million before cash collateral posted of $2 million. At June 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 June 30, 2011, the Corporation would be required to post additional collateral of approximately $300 million.

11. Weighted Average Common Shares

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(In thousands)
Common shares — basic			337,235				325,383				336,435				325,037
Effect of dilutive securities
Restricted common stock			1,187				1,251				1,412				1,341
Stock options			2,001				848				1,867				815
Common shares — diluted			340,423				327,482				339,714				327,193

PART I — FINANCIAL INFORMATION (CONT’D.)

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

     The Corporation issued 2,142,270 stock options and 713,280 shares of restricted stock during the six months ended June 30, 2011 (2,738,625 and 927,470 shares, respectively, for the same period in 2010). The weighted average common shares used in the diluted earnings per share calculations excludes the effect of 1,618,000 shares and 2,153,000 shares related to out-of-the-money options for the three and six months ended June 30, 2011 (4,224,000 and 4,230,000 shares for the same period in 2010).

12. 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)			1,536				7				1,543
Deferred gains (losses) on cash flow hedges, after-tax
Effect of hedge losses recognized in income			215				—				215
Net change in fair value of cash flow hedges			(6	)			—				(6	)
Change in post retirement plan liabilities, after-tax			14				—				14
Change in foreign currency translation adjustment and other			274				5				279
Comprehensive income (loss)			2,033				12				2,045
Activity related to restricted common stock awards, net			25				—				25
Employee stock options, including income tax benefits			90				—				90
Cash dividends declared			(68	)			—				(68	)
Noncontrolling interests, net			7				(4	)			3
Balance at June 30, 2011		$	18,776			$	128			$	18,904
Balance at January 1, 2010		$	13,384			$	144			$	13,528
Net income (loss)			913				51				964
Deferred gains (losses) on cash flow hedges, after-tax
Effect of hedge losses recognized in income			368				—				368
Net change in fair value of cash flow hedges			(182	)			—				(182	)
Change in post retirement plan liabilities, after-tax			15				—				15
Change in foreign currency translation adjustment and other			(129	)			(4	)			(133	)
Comprehensive income (loss)			985				47				1,032
Activity related to restricted common stock awards, net			28				—				28
Employee stock options, including income tax benefits			38				—				38
Cash dividends declared			(66	)			—				(66	)
Noncontrolling interests, net			(4	)			(26	)			(30	)
Balance at June 30, 2010		$	14,365			$	165			$	14,530

13. Segment Information

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(Millions of dollars)
Operating revenues
Exploration and Production		$	2,856			$	2,252			$	5,543			$	4,393
Marketing and Refining			7,029				5,513				14,592				12,670
Less: Transfers between affiliates			(32	)			(33	)			(67	)			(72	)
Total (*)		$	9,853			$	7,732			$	20,068			$	16,991

PART I — FINANCIAL INFORMATION (CONT’D.)

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(Millions of dollars)
Net income (loss) attributable to Hess Corporation
Exploration and Production		$	747			$	488			$	1,726			$	1,039
Marketing and Refining			(39	)			(19	)			—				68
Corporate, including interest			(101	)			(94	)			(190	)			(194	)
Total		$	607			$	375			$	1,536			$	913

     Identifiable assets by operating segment were as follows:

		June 30,				December 31,
		2011				2010
		(Millions of dollars)
Exploration and Production		$	30,208			$	28,242
Marketing and Refining			5,760				6,377
Corporate			1,023				777
Total		$	36,991			$	35,396

PART I — FINANCIAL INFORMATION (CONT’D.)

     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 $607 million in the second quarter of 2011 compared to $375 million in the second quarter of 2010.

     Exploration and Production

     E&P reported net income of $747 million in the second quarter of 2011 compared to $488 million in the second quarter of 2010. In the second quarter of 2011, the Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $97.20 per barrel up from $64.81 per barrel in the second quarter of 2010. The Corporation’s average worldwide natural gas selling price was $5.93 per thousand cubic feet (mcf) in the second quarter of 2011 compared with $5.57 per mcf in the second quarter of 2010. Worldwide crude oil and natural gas production was 372,000 barrels of oil equivalent per day (boepd) in the second quarter of 2011 down from 415,000 boepd in the same period of 2010, due to lower production from Africa, primarily reflecting the suspension of production in Libya due to civil unrest, and the sale of certain natural gas producing assets in the United Kingdom in February 2011. The Corporation has lowered its full year production guidance to a range of 375,000 to 385,000 boepd, from 385,000 to 395,000 boepd, as a result of severe weather conditions that affected production operations in the Bakken oil shale play in North Dakota, a shut-in well at the outside operated Llano Field in the Gulf of Mexico and a fire in July 2011 at the Valhall Field, offshore Norway.

     The following is an update of E&P activities:

	•		In North Dakota, net production from the Bakken oil shale play was 25,000 boepd during the second quarter, the same as in the first quarter. Production operations have been adversely impacted by harsh winter weather and severe spring flooding. The Corporation currently has 17 rigs dedicated to drilling Bakken wells.
	•		The Corporation filed a Notice of Discovery with the Ministry for Energy of Ghana for the Paradise-1 exploration well in the Deepwater Tano Cape Three Points block. The well encountered an estimated 490 net feet of oil and gas condensate pay over three separate intervals. The Corporation is the operator and has a 90% working interest in the license. The Corporation anticipates commencing appraisal drilling in early 2012, subject to government approvals and rig availability.
	•		In July 2011, the Corporation spud the Andalan well on the Semai V block, offshore Indonesia. The Corporation has a 100% working interest in this block.
	•		In July 2011, the Corporation signed production sharing contracts with the Kurdistan Regional Government of Iraq for the Dinarta and Shakrok exploration blocks. The Corporation is the operator and has an 80% paying interest (64% working interest) in the blocks, which have a combined area of more than 670 square miles. The terms of the contracts require the acquisition of 2D seismic and drilling of at least one well on each of the blocks over the three year license period. Based on the anticipated work programs, the Corporation’s total financial commitment is expected to be approximately $290 million.

     Status of Libyan Operations: In response to civil unrest in Libya, a number of measures were taken by the international community, including the imposition of sanctions by the United States, the United Nations, the United Kingdom and the European Union. The sanctions blocked and froze the assets of, and any payments to, the Libyan government and any entities owned or controlled by the Libyan government, as well as designated entities and individuals. 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. Because of the on-going events, including the sanctions, the Corporation is unable to determine when or if it will resume operations in Libya. The loss of Libyan production is not expected to have a material adverse impact on operating cash flows. Libyan production averaged 23,000 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 June 30, 2011, the net book value of the Corporation’s exploration and production assets in Libya was approximately $400 million.

PART I — FINANCIAL INFORMATION (CONT’D.)

     Overview (continued)

     Gulf of Mexico Update: The Corporation has filed Suspension of Operations (SOO) applications with the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) for licenses covering a total of 183 exploration blocks in the Gulf of Mexico as permitted by a recent BOEMRE National Notice to Lessees. These SOO applications seek approval for extension of the lease expiration terms for licenses where activities required to hold the licenses have been delayed due to circumstances outside of the control of the Corporation. The Corporation has also applied for, and is waiting for approval of, drilling permits on three exploration blocks. In addition, the Corporation has responded to the BOEMRE’s requested revisions to its previously submitted oil spill response plan for its Gulf of Mexico operations and is awaiting approval.

     Marketing and Refining

     M&R generated a loss of $39 million for the second quarter of 2011 compared to a loss of $19 million in the second quarter of 2010, primarily reflecting increased losses from refining and trading, which were partly offset by higher earnings from marketing operations.

     Results of Operations

     The after-tax results by major operating activity are summarized below:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(Millions of dollars, except per share data)
Exploration and Production		$	747			$	488			$	1,726			$	1,039
Marketing and Refining			(39	)			(19	)			—				68
Corporate			(42	)			(42	)			(70	)			(90	)
Interest expense			(59	)			(52	)			(120	)			(104	)
Net income attributable to Hess Corporation		$	607			$	375			$	1,536			$	913
Net income per share (diluted)		$	1.78			$	1.15			$	4.52			$	2.79

     Items Affecting the Comparability Between Periods

     The following table summarizes, on an after-tax basis, items of income (expense) that are included in net income and affect the comparability between periods. The items in the table below are explained and the pre-tax amounts are shown on pages 20 and 22.

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(Millions of dollars)
Exploration and Production		$	—			$	—			$	310			$	58
Corporate			—				—				—				(7	)
Total		$	—			$	—			$	310			$	51

     In the discussion that follows, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings. Management believes that after-tax amounts are preferable for explaining variances in earnings, since they show the entire effect of a transaction rather than only the pre-tax amount. After-tax amounts are determined by applying the income tax rate in each tax jurisdiction to pre-tax amounts.

PART I — FINANCIAL INFORMATION (CONT’D.)

     Results of Operations (continued)

     Comparison of Results

     Exploration and Production

     Following is a summarized income statement of the Corporation’s E&P operations:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2011				2010				2011				2010
		(Millions of dollars)
Sales and other operating revenues (*)		$	2,698			$	2,059			$	5,311			$	4,173
Other, net			(5	)			14				339				68
Total revenues and non-operating income			2,693				2,073				5,650				4,241
Cost and expenses
Production expenses, including related taxes			599				440				1,130				917
Exploration expenses, including dry holes and lease impairment			257				172				570				323
General, administrative and other expenses			76				65				160				132
Depreciation, depletion and amortization			553				534				1,090				1,053
Total costs and expenses			1,485				1,211				2,950				2,425
Results of operations before income taxes			1,208				862				2,700				1,816
Provision for income taxes			461				374				974				777
Results of operations attributable to Hess Corporation		$	747			$	488			$	1,726			$	1,039