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HESS CORP - Quarter Report: 2012 September (Form 10-Q)

Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

x

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

For the quarter ended September 30, 2012

or

 

¨

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

For the transition period from                      to                     

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 x    No ¨

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 x    No ¨

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 x

   Accelerated Filer ¨    Non-Accelerated Filer ¨   Smaller Reporting Company ¨
   (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 ¨    No x

At September 30, 2012, there were 341,547,049 shares of Common Stock outstanding.

 

 

 


PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

                                               
     September 30,
2012
    December 31,
2011
 
     (In millions,
except share amounts)
 
ASSETS   

CURRENT ASSETS

    

Cash and cash equivalents

   $ 528     $ 351  

Accounts receivable

    

Trade

     3,908       4,761  

Other

     336       250  

Inventories

     1,218       1,423  

Other current assets

     2,167       1,554  
  

 

 

   

 

 

 

Total current assets

     8,157       8,339  
  

 

 

   

 

 

 

INVESTMENTS IN AFFILIATES

     401       384  
  

 

 

   

 

 

 

PROPERTY, PLANT AND EQUIPMENT

    

Total — at cost

     44,266       39,710  

Less: Reserves for depreciation, depletion, amortization and lease impairment

     16,122       14,998  
  

 

 

   

 

 

 

Property, plant and equipment — net

     28,144       24,712  
  

 

 

   

 

 

 

GOODWILL

     2,208       2,305  

DEFERRED INCOME TAXES

     2,872       2,941  

OTHER ASSETS

     430       455  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 42,212     $ 39,136  
  

 

 

   

 

 

 
LIABILITIES AND EQUITY   

CURRENT LIABILITIES

    

Accounts payable

   $ 2,543     $ 3,712  

Accrued liabilities

     3,905       3,524  

Taxes payable

     779       812  

Short-term debt and current maturities of long-term debt

     621       52  
  

 

 

   

 

 

 

Total current liabilities

     7,848       8,100  
  

 

 

   

 

 

 

LONG-TERM DEBT

     7,220       6,005  

DEFERRED INCOME TAXES

     2,696       2,843  

ASSET RETIREMENT OBLIGATIONS

     2,295       1,844  

OTHER LIABILITIES AND DEFERRED CREDITS

     1,501       1,752  
  

 

 

   

 

 

 

Total liabilities

     21,560       20,544  
  

 

 

   

 

 

 

EQUITY

    

Hess Corporation Stockholders’ Equity

    

Common stock, par value $1.00
Authorized — 600,000,000 shares
Issued — 341,547,049 shares at September 30, 2012;
    339,975,610 shares at December 31, 2011

     342       340  

Capital in excess of par value

     3,498       3,417  

Retained earnings

     17,377       15,826  

Accumulated other comprehensive income (loss)

     (675     (1,067
  

 

 

   

 

 

 

Total Hess Corporation stockholders’ equity

     20,542       18,516  

Noncontrolling interests

     110       76  
  

 

 

   

 

 

 

Total equity

     20,652       18,592  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 42,212     $ 39,136  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

1


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)

 

                                                                                               
     Three Months  Ended
September 30,
    Nine Months Ended
September 30,
 
     2012      2011     2012      2011  
     (In millions, except per share amounts)  

REVENUES AND NON-OPERATING INCOME

          

Sales (excluding excise taxes) and other operating revenues

   $ 9,194      $ 8,665     $ 28,180      $ 28,733  

Income (loss) from equity investment in HOVENSA L.L.C.

     —           (36     —           (133

Gains on asset sales

     376        103       412        446  

Other, net

     49        (6     83        1  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues and non-operating income

     9,619        8,726       28,675        29,047  
  

 

 

    

 

 

   

 

 

    

 

 

 

COSTS AND EXPENSES

          

Cost of products sold (excluding items shown separately below)

     6,019        6,181       18,667        20,062  

Production expenses

     712        609       2,062        1,739  

Marketing expenses

     259        266       775        796  

Exploration expenses, including dry holes and lease impairment

     259        199       708        769  

Other operating expenses

     41        43       123        127  

General and administrative expenses

     167        177       506        515  

Interest expense

     104        94       313        290  

Depreciation, depletion and amortization

     748        586       2,198        1,732  

Asset impairments

     208        358       267        358  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total costs and expenses

     8,517        8,513       25,619        26,388  
  

 

 

    

 

 

   

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     1,102        213       3,056        2,659  

Provision (benefit) for income taxes

     510        (54     1,369        849  
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME

     592        267       1,687        1,810  

Less: Net income (loss) attributable to noncontrolling interests

     35        (31     36        (24
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME ATTRIBUTABLE TO HESS CORPORATION

   $ 557      $ 298     $ 1,651      $ 1,834  
  

 

 

    

 

 

   

 

 

    

 

 

 

BASIC NET INCOME PER SHARE

   $ 1.65      $ .89     $ 4.88      $ 5.45  

DILUTED NET INCOME PER SHARE

     1.64        .88       4.85        5.40  

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)

     340.0        340.2       340.3        339.8  

COMMON STOCK DIVIDENDS PER SHARE

   $ .10      $ .10     $ .30      $ .30  

See accompanying notes to consolidated financial statements.

 

2


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

 

                                                                                               
     Three Months  Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
     (In millions)  

NET INCOME

   $ 592     $ 267     $ 1,687     $ 1,810  
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

        

Derivatives designated as cash flow hedges

        

Effect of hedge losses reclassified to income

     14       169       480       512  

Income taxes on effect of hedge losses reclassified to income

     (3     (63     (179     (191
  

 

 

   

 

 

   

 

 

   

 

 

 

Net effect of hedge losses reclassified to income

     11       106       301       321  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value of cash flow hedges

     (130     (3     (166     (13

Income taxes on change in fair value of cash flow hedges

     52       1       65       5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in fair value of cash flow hedges

     (78     (2     (101     (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in deferred gains (losses) on cash flow hedges, after-tax

     (67     104       200       313  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and other postretirement plans

        

Change in plan liabilities

     21       13       64       36  

Income taxes on change in plan liabilities

     (8     (5     (24     (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in plan liabilities, after-tax

     13       8       40       22  
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustment and other

     161       (319     153       (40
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

     107       (207     393       295  
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

     699       60       2,080       2,105  

Less: Comprehensive income (loss) attributable to noncontrolling interests

     38       (33     37       (21
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO
HESS CORPORATION

   $ 661     $ 93     $ 2,043     $ 2,126  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)

 

                                               
     Nine Months Ended
September 30,
 
     2012     2011  
     (In millions)  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 1,687     $ 1,810  

Adjustments to reconcile net income to net cash provided by operating activities

    

Depreciation, depletion and amortization

     2,198       1,732  

Asset impairments

     267       358  

Exploratory dry hole costs and lease impairment

     373       434  

Provision (benefit) for deferred income taxes

     (47     (224

(Income) loss from equity investment in HOVENSA L.L.C.

     —          133  

Gains on asset sales

     (412     (446

Stock compensation expense

     73       77  

Changes in operating assets and liabilities and other

     (49     (28
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,090       3,846  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Capital expenditures

     (6,016     (4,891

Proceeds from asset sales

     656       490  

Other, net

     (22     (74
  

 

 

   

 

 

 

Net cash used in investing activities

     (5,382     (4,475
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net borrowings of debt with maturities of 90 days or less

     1,583       —     

Debt with maturities of greater than 90 days

    

Borrowings

     448       14  

Repayments

     (432     (50

Cash dividends paid

     (136     (136

Other, net

     6       20  
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     1,469       (152
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     177       (781

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     351       1,608  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 528     $ 827  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED EQUITY (UNAUDITED)

 

                                                                                                                                                                       
    Common
Stock
    Capital in
Excess of
Par Value
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total Hess
Stockholders’
Equity
    Noncontrolling
Interests
    Total Equity  
    (In millions)  

BALANCE AT
JANUARY 1, 2012

  $ 340     $ 3,417     $ 15,826     $ (1,067   $ 18,516     $ 76       $       18,592  

Net income

        1,651         1,651       36       1,687  

Other comprehensive income (loss)

          392       392       1       393  
         

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

            2,043       37       2,080  

Activity related to restricted common stock awards, net

    2       40       —          —          42       —          42  

Employee stock options, including income tax benefits

    —          36       —          —          36       —          36  

Performance share units

    —          5       —          —          5       —          5  

Cash dividends declared

    —          —          (102     —          (102     —          (102

Noncontrolling interests, net

    —          —          2       —          2       (3     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT
SEPTEMBER 30, 2012

  $ 342     $ 3,498     $ 17,377     $ (675   $ 20,542     $ 110       $       20,652  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT
JANUARY 1, 2011

  $ 338     $ 3,256     $ 14,254     $ (1,159   $ 16,689     $ 120       $       16,809  

Net income

        1,834         1,834       (24     1,810  

Other comprehensive income (loss)

          292       292       3       295  
         

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

            2,126       (21     2,105  

Activity related to restricted common stock awards, net

    1       38       —          —          39       —          39  

Employee stock options, including income tax benefits

    1       104       —          —          105       —          105  

Cash dividends declared

    —          —          (102     —          (102     —          (102

Noncontrolling interests, net

    —          (29     5       —          (24     (18     (42
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT
SEPTEMBER 30, 2011

  $ 340     $ 3,369     $ 15,991     $ (867   $ 18,833     $ 81       $       18,914  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


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 September 30, 2012 and December 31, 2011 and the consolidated results of operations for the three and nine month periods ended September 30, 2012 and 2011 and the consolidated cash flows for the nine month periods ended September 30, 2012 and 2011. 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, 2011. Certain information in the financial statements and notes has been reclassified to conform to the current period presentation.

Effective January 1, 2012, the Corporation adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which requires comprehensive income to be presented either at the end of the income statement or as a separate statement immediately following the income statement. The Corporation elected to adopt the separate statement method.

Effective January 1, 2012, the Corporation adopted FASB ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. For the Corporation, this standard requires additional disclosures related to fair value measurements, which are included in Note 15, Risk Management and Trading Activities.

2. Dispositions

In September 2012, the Corporation completed the sale of its interests in the Schiehallion Field (Hess 16%) in the United Kingdom North Sea, its share of the associated floating production, storage and offloading vessel, and the West of Shetland pipeline system for cash proceeds of $524 million after normal post-closing adjustments. The transaction resulted in a pre-tax gain of $376 million ($349 million after income taxes), after deducting the net book value of assets including allocated goodwill of $27 million. The Schiehallion Field was producing at a net rate of approximately 9,000 barrels of oil equivalent per day (boepd) at the time of sale.

In January 2012, the Corporation completed the sale of its interest in the Snohvit Field (Snohvit) (Hess 3%), offshore Norway, for cash proceeds of $132 million after normal post-closing adjustments. The transaction resulted in a gain of $36 million, after deducting the net book value of assets including allocated goodwill of $14 million. Snohvit was producing at a net rate of approximately 3,000 boepd at the time of sale.

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 normal post-closing adjustments. These disposals resulted in non-taxable gains totaling $103 million. These assets were producing at a combined net rate of approximately 2,500 boepd at the time of sale.

In February 2011, the Corporation completed the sale of its interests in certain natural gas producing assets in the United Kingdom North Sea for cash proceeds of $359 million after normal post-closing adjustments. These disposals resulted in pre-tax gains totaling $343 million ($310 million after income taxes). These assets had a net productive capacity of approximately 15,000 boepd at the time of sale.

 

6


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

3. Inventories

Inventories were as follows:

 

                                               
     September 30,
2012
    December 31,
2011
 
     (In millions)  

Crude oil and other charge stocks

   $ 533     $ 451  

Refined petroleum products and natural gas

     1,367       1,762  

Less: LIFO adjustment

     (1,209     (1,276
  

 

 

   

 

 

 
     691       937  

Merchandise, materials and supplies

     527       486  
  

 

 

   

 

 

 

Total inventories

   $ 1,218     $ 1,423  
  

 

 

   

 

 

 

4. Property, Plant and Equipment

Assets Held for Sale: In February 2012, the Corporation reached an agreement to sell its interest in the Bittern Field (Hess 28%) in the United Kingdom North Sea. See Note 16, Subsequent Events. In September 2012, the Corporation reached an agreement to sell its assets in Azerbaijan consisting of its interests in the Azeri-Chirag-Guneshli (ACG) fields (Hess 3%) and the associated Baku-Tbilisi-Ceyhan (BTC) pipeline (Hess 2%) for $1 billion before normal post-closing adjustments. This transaction is subject to various government approvals. In October 2012, the Corporation also announced that it had reached an agreement to sell its interests in the Beryl fields (Hess 22%) in the United Kingdom North Sea for $525 million before normal post-closing adjustments. This transaction is subject to regulatory approval.

At September 30, 2012, long-term assets totaling $1,179 million, primarily comprising the net property, plant and equipment balances and allocated goodwill of $112 million, have been classified as held for sale and reported in Other current assets. In addition, related long-term asset retirement obligations and deferred income taxes totaling $618 million were reported in Accrued liabilities.

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, 2012 (in millions):

 

                       

Balance at January 1

  $ 2,022  

Additions to capitalized exploratory well costs pending the determination of proved reserves

    406  

Reclassifications to wells, facilities and equipment based on the determination of proved reserves

    (30

Capitalized exploratory well costs charged to expense

    (124
 

 

 

 

Balance at end of period

  $ 2,274  
 

 

 

 

Capitalized exploratory well costs charged to expense in the preceding table exclude $86 million of exploratory well costs which were incurred and subsequently expensed in 2012. Capitalized exploratory well costs greater than one year old after completion of drilling were $1,770 million at September 30, 2012. Approximately 37% of the capitalized well costs in excess of one year relates to the Pony discovery on Green Canyon Block 468 in the deepwater Gulf of Mexico, where development planning is progressing. In August 2012, the Corporation signed an exchange agreement with the partners on the adjacent Block 512, which contains the Knotty Head discovery. Under this agreement, the Corporation was appointed operator and has a 20% working interest in the blocks, now collectively referred to as Stampede. Approximately 37% relates to Block WA-390-P, offshore Western Australia, where development planning and commercial activities, including negotiations with potential liquefaction partners, are ongoing. Approximately 15% relates to Area 54, offshore Libya, where force majeure was withdrawn in March 2012 and the Corporation is pursuing commercial options. Approximately 7% relates to offshore Ghana where further drilling is ongoing. 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


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

5. Asset Impairments

In the third quarter of 2012, the Corporation recorded impairment charges of $208 million ($116 million after income taxes) due to increases in the Corporation’s estimated abandonment liabilities for non-producing properties, which resulted in the book value of the properties exceeding their fair value. See Note 7, Asset Retirement Obligations. In the second quarter of 2012, the Corporation recorded a charge of $59 million ($36 million after-tax) to reduce the carrying value of certain properties in the Eagle Ford shale in Texas to their fair value (a Level 3 fair value measurement). 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. For both years, these asset impairments related to the Exploration and Production (E&P) segment.

6. Libyan Operations

In response to civil unrest in Libya and the resulting imposition of sanctions, production at the Waha fields was suspended in the first quarter of 2011. During the fourth quarter of 2011, the sanctions were lifted, force majeure was withdrawn and production resumed. The Corporation’s Libyan production averaged 23,000 boepd in the third quarter of 2012. The force majeure covering the Corporation’s offshore exploration interests was withdrawn in March 2012.

7. Asset Retirement Obligations

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

 

                                               
    September 30,
2012
    December 31,
2011
 
    (In millions)  

Asset retirement obligations at beginning of period

  $ 2,071     $ 1,358  

Liabilities incurred

    229       25  

Liabilities settled or disposed of

    (274     (334

Accretion expense

    101       96  

Revisions of estimated liabilities

    505       947  

Foreign currency translation

    42       (21
 

 

 

   

 

 

 

Asset retirement obligations at end of period

    2,674       2,071  

Less: current obligations

    379       227  
 

 

 

   

 

 

 

Long-term obligations at end of period

  $ 2,295     $ 1,844  
 

 

 

   

 

 

 

The revisions in 2012 reflect overall increases in estimated abandonment obligations resulting from changes in the expected scope of operations, increases in the time expected to complete dismantlement activities and updates to service rates.

8. HOVENSA L.L.C. Joint Venture

In January 2012, HOVENSA L.L.C. (HOVENSA) announced a decision to shut down its refinery in St. Croix, U.S. Virgin Islands. As a result, the Corporation recorded an accrued liability of $487 million at December 31, 2011 for its share of future funding commitments for costs to shut down HOVENSA’s refinery. The Corporation and its partner fully funded their estimated commitments in the first quarter of 2012.

9. Debt

In the first nine months of 2012, the Corporation borrowed a net total of $1,599 million which consisted of borrowings of $1 billion from its syndicated revolving credit facility, $583 million from its short-term credit facilities and $68 million from its asset-backed credit facility, partially offset by net repayments of other debt of $52 million. At September 30, 2012, the

 

8


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Corporation classified $521 million of outstanding borrowings under short-term and asset-backed credit facilities as long-term, based on availability under its $4 billion syndicated revolving credit facility.

During 2012, the Corporation recorded a net increase of $138 million in long-term debt principally related to progress on construction of a leased floating production system to be used at the Tubular Bells project. In addition, during the third quarter, the Corporation assumed $47 million of capital lease obligations applicable to retail gasoline stations.

10. Foreign Currency

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

 

                                                                                               
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2012      2011     2012      2011  
    (In millions)  

Pre-tax foreign currency gains (losses)

  $ 17      $ (9   $ 25      $ (18
 

 

 

    

 

 

   

 

 

    

 

 

 

11. Retirement Plans

Components of net periodic pension cost consisted of the following:

 

                                                                                               
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
     (In millions)  

Service cost

   $ 19     $ 15     $ 55     $ 43  

Interest cost

     22       23       66       67  

Expected return on plan assets

     (29     (28     (87     (82

Amortization of net loss

     21       13       63       35  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension expense

   $ 33     $ 23     $ 97     $ 63  
  

 

 

   

 

 

   

 

 

   

 

 

 

For the full year of 2012, the Corporation expects to contribute approximately $150 million to its funded pension plans. Through September 30, 2012, the Corporation contributed $116 million of this amount.

12. Income Taxes

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

 

                                                                                               
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2012     2011     2012     2011  
    (In millions)  

Current

  $ 509     $ 169     $ 1,416     $ 1,073  

Deferred

    (114     (252     (162     (253

Adjustment to deferred tax liabilities for foreign income tax rate change (*)

    115       29       115       29  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total provision (benefit) for income taxes

  $ 510     $ (54   $ 1,369     $ 849  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

The 2012 adjustment represents the effect of the United Kingdom (U.K.) supplemental income tax rate change to 20% from 32% on dismantlement expenditures in July 2012. The 2011 adjustment represents the July 2011 increase in the supplementary tax rate on petroleum operations to 32% from 20% in the U.K.

 

9


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

13. Weighted Average Common Shares

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

 

                                                                                               
    Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
    2012      2011      2012      2011  
    (In thousands)  

Common shares — basic

    338,570        337,380        338,325        336,721  

Effect of dilutive securities

          

Restricted common stock

    963        1,268        1,029        1,372  

Stock options

    417        1,574        916        1,745  
 

 

 

    

 

 

    

 

 

    

 

 

 

Common shares — diluted

    339,950        340,222        340,270        339,838  
 

 

 

    

 

 

    

 

 

    

 

 

 

In March 2012, the Corporation changed the long-term incentive award program for its officers such that 50% of the shares awarded annually are performance share units (PSU’s) and the other 50% are in the form of restricted stock. The number of shares of common stock to be issued under the PSU agreement is based on a comparison of the Corporation’s total shareholder return (TSR) to the TSR of a predetermined group of fifteen peer companies over a three-year performance period ending December 31, 2014. Payouts of the 2012 performance share awards will range from 0% to 200% of the target awards based on the Corporation’s TSR ranking within the peer group. Dividend equivalents for the performance period will accrue on performance shares and will only be paid out on earned shares after the performance period.

The Corporation granted 1,561,300 shares of restricted stock and 420,628 PSU’s during the nine months ended September 30, 2012. For the nine months ended September 30, 2011, the Corporation granted 734,005 shares of restricted stock and 2,201,445 of stock options. The weighted average common shares used in the diluted earnings per share calculations exclude the effect of 11,519,000 and 8,810,000 of out-of-the-money stock options for the three and nine months ended September 30, 2012, respectively, and 412,977 of PSU’s for the three and nine months ended September 30, 2012. The calculations also exclude the effect of 4,180,000 and 2,763,000 of out-of-the-money stock options for the three and nine month periods ended September 30, 2011, respectively.

14. Segment Information

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

 

                                                                                               
    Three Months  Ended
September 30,
    Nine Months Ended
September 30,
 
    2012     2011     2012     2011  
    (In millions)  

Operating revenues

       

Exploration and Production

  $ 3,072     $ 2,217     $ 9,292     $ 7,760  

Marketing and Refining

    6,140       6,479       18,933       21,071  

Less: Transfers between affiliates

    (18     (31     (45     (98
 

 

 

   

 

 

   

 

 

   

 

 

 

Total (*)

  $ 9,194     $ 8,665     $ 28,180     $ 28,733  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Hess Corporation

       

Exploration and Production

  $ 608     $ 422     $ 1,887     $ 2,148  

Marketing and Refining

    53       (23     72       (23

Corporate, including interest

    (104     (101     (308     (291
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 557     $ 298     $ 1,651     $ 1,834  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

Operating revenues exclude excise and similar taxes of approximately $640 million and $600 million for the three months ended September 30, 2012 and 2011, respectively, and $1,930 million and $1,750 million for the nine months ended September 30, 2012 and 2011, respectively.

 

10


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Identifiable assets by operating segment were as follows:

 

                                               
    September 30,
2012
     December 31,
2011
 
    (In millions)  

Exploration and Production

  $ 36,031      $ 32,323  

Marketing and Refining

    5,211        6,302  

Corporate

    970        511  
 

 

 

    

 

 

 

Total

  $ 42,212      $ 39,136  
 

 

 

    

 

 

 

15. 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.

The Corporation maintains a control environment under the direction of its chief risk officer and through its corporate risk policy, which the Corporation’s senior management has approved. Controls include volumetric, term and value at risk limits. The chief risk officer must approve the trading of new instruments or commodities. Risk limits are monitored and reported on a daily basis to business units and senior management. The Corporation’s risk management department also performs independent price verifications (IPV’s) of sources of fair values, validations of valuation models and analyzes changes in fair value measurements on a daily, monthly and/or quarterly basis. These controls apply to all of the Corporation’s risk management and trading activities, including the consolidated trading partnership. The Corporation’s treasury department is responsible for administering foreign exchange rate and interest rate hedging programs using similar controls and processes, where applicable.

The Corporation’s risk management department, in performing the IPV procedures, utilizes independent sources and valuation models that are specific to the individual contracts and pricing locations to identify positions that require adjustments to better reflect the market. This review is performed quarterly and the results are presented to the chief risk officer and senior management. The IPV process considers the reliability of the pricing services through assessing the number of available quotes, the frequency at which data is available and, where appropriate, the comparability between pricing sources.

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.

 

11


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 Corporation’s energy marketing commodity contracts outstanding:

 

                                               
    September 30,
2012
     December 31,
2011
 

Crude oil and refined petroleum products (millions of barrels)

    28        28  

Natural gas (millions of mcf)

    2,961        2,616  

Electricity (millions of megawatt hours)

    336        244  

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 in the Statement of Consolidated Income, while supply contract purchases and net settlements from financial derivatives related to these energy marketing activities are recognized in Cost of products sold in the Statement of Consolidated Income. Net realized and unrealized pre-tax gains on derivative contracts not designated as hedges amounted to $66 million and $8 million for the three months ended September 30, 2012 and 2011, respectively, and $145 million and $36 million for the nine months ended September 30, 2012 and 2011, respectively.

At September 30, 2012, a portion of energy marketing commodity contracts were designated as cash flow hedges to hedge the 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 one year or less. For contracts outstanding at September 30, 2012, the maximum duration was approximately two years.

The Corporation records the effective portion of changes in the fair value of cash flow hedges as a component of Accumulated other comprehensive income (loss) in the Consolidated Balance Sheet and then reclassifies amounts to Cost of products sold in the Statement of Consolidated Income as the hedged transactions are recognized in earnings. At September 30, 2012, the after-tax deferred losses relating to energy marketing activities recorded in Accumulated other comprehensive income (loss) were $35 million ($64 million at December 31, 2011). The Corporation estimates that after-tax losses of approximately $22 million will be reclassified into earnings over the next twelve months. During the three months ended September 30, 2012 and 2011, the Corporation reclassified from Accumulated other comprehensive income (loss) an after-tax gain of $6 million and an after-tax loss of $24 million, respectively, and after-tax losses of $45 million and $77 million for the nine months ended September 30, 2012 and 2011, respectively.

The amounts of ineffectiveness recognized immediately in Cost of products sold were losses of approximately $1 million and $2 million for the three months ended September 30, 2012 and 2011, respectively, and $1 million and $4 million for the nine months ended September 30, 2012 and 2011, respectively. The pre-tax amount of deferred hedge losses is reflected in Accounts payable and the related income tax benefits are recorded as deferred income tax assets, which are included in Other current assets in the Consolidated Balance Sheet.

As a result of changes in the fair value of energy marketing cash flow hedge positions, after-tax deferred losses decreased by $11 million and increased by $4 million for the three months ended September 30, 2012 and 2011, respectively, and increased by $16 million and $1 million for the nine months ended September 30, 2012 and 2011, 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.

 

12


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 contracts outstanding:

 

                                               
    September 30,
2012
     December 31,
2011
 

Commodity, primarily crude oil (millions of barrels)

    21        51  

Foreign exchange (millions of U.S. Dollars)

  $ 998      $ 900  

Interest rate swaps (millions of U.S. Dollars)

  $ 880      $ 895  

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 losses as of the date that the hedges were closed are being recorded in earnings as the hedged transactions occur. For 2012, the Corporation has entered into Brent crude oil hedges using fixed-price swap contracts to hedge the variability of forecasted future cash flows from 120,000 barrels per day of crude oil sales volumes for the full year. The average price for these hedges is $107.70 per barrel.

Realized losses from E&P hedging activities reduced Sales and other operating revenues by $148 million and $131 million for the three months ended September 30, 2012 and 2011, respectively ($94 million and $82 million after-tax, respectively), and $533 million and $387 million for the nine months ended September 30, 2012 and 2011, respectively ($334 million and $244 million after-tax, respectively).

At September 30, 2012, the after-tax deferred losses in Accumulated other comprehensive income (loss) related to Brent crude oil hedges were $115 million ($286 million at December 31, 2011), which will be reclassified into earnings during the remainder of 2012 as the hedged crude oil sales are recognized. The amount of ineffectiveness from Brent crude oil hedges that was recognized immediately in Sales and other operating revenues was a loss of $2 million for the three months ended September 30, 2012 and $10 million for the nine months ended September 30, 2012.

At September 30, 2012, the Corporation had interest rate swaps with a gross notional amount of $880 million, which were designated as fair value hedges. Changes in the fair value of interest rate swaps and the hedged fixed-rate debt are recorded in Interest expense in the Statement of Consolidated Income. The Corporation recorded an increase of $7 million and $42 million (excluding accrued interest) for the three months ended September 30, 2012 and 2011, respectively, and an increase of $17 million and $45 million (excluding accrued interest) for the nine months ended September 30, 2012 and 2011, respectively, in the fair value of interest rate swaps and a corresponding adjustment in the carrying value of the hedged fixed-rate debt.

Gains or losses on foreign exchange contracts that are not designated as hedges are recognized immediately in Other, net in Revenues and non-operating income in the Statement of Consolidated Income.

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 Ended
September 30,
    Nine Months Ended
September 30,
 
    2012      2011     2012      2011  
    (In millions)  

Commodity

  $       $      $       $ 1  

Foreign exchange

    31        (25     35        (12
 

 

 

    

 

 

   

 

 

    

 

 

 

Total

  $ 31      $ (25   $ 35      $ (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.

 

13


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 derivative contracts outstanding relating to trading activities:

 

                                               
    September 30,
2012
     December 31,
2011
 

Commodity

    

Crude oil and refined petroleum products (millions of barrels)

    1,662        2,169  

Natural gas (millions of mcf)

    4,109        4,203  

Electricity (millions of megawatt hours)

    84        304  

Foreign exchange (millions of U.S. Dollars)

  $ 374      $ 581  

Other

    

Interest rate (millions of U.S. Dollars)

  $ 176      $ 182  

Equity securities (millions of shares)

    12        16  

Pre-tax unrealized and realized gains (losses) recorded in Sales and other operating revenues in the Statement of Consolidated Income from trading activities amounted to the following:

 

                                                                                               
    Three Months  Ended
September 30,
    Nine Months Ended
September 30,
 
    2012      2011     2012      2011  
    (In millions)  

Commodity

  $ 75      $ (5   $ 83      $ 45  

Foreign exchange

    1        7       3        (1

Other

    9        (52     8        (42
 

 

 

    

 

 

   

 

 

    

 

 

 

Total

  $ 85      $ (50   $ 94      $ 2  
 

 

 

    

 

 

   

 

 

    

 

 

 

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

 

                                               
     Accounts
Receivable
    Accounts
Payable
 
     (In millions)  

September 30, 2012

  

Derivative contracts designated as hedging instruments

    

Commodity

   $ 61     $ (144

Interest rate and other

     72       (2
  

 

 

   

 

 

 

Total derivative contracts designated as hedging instruments

     133       (146
  

 

 

   

 

 

 

Derivative contracts not designated as hedging instruments (*)

    

Commodity

     5,505       (5,499

Foreign exchange

     26       (1

Other

     16       (7
  

 

 

   

 

 

 

Total derivative contracts not designated as hedging instruments

     5,547       (5,507
  

 

 

   

 

 

 

Gross fair value of derivative contracts

     5,680       (5,653

Master netting arrangements

     (4,666     4,666  

Cash collateral (received) posted

     (98     22  
  

 

 

   

 

 

 

Net fair value of derivative contracts

   $ 916     $ (965
  

 

 

   

 

 

 

 

14


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

                                               
     Accounts
Receivable
    Accounts
Payable
 
     (In millions)  

December 31, 2011

    

Derivative contracts designated as hedging instruments

    

Commodity

   $ 181     $ (216

Other

     61       (3
  

 

 

   

 

 

 

Total derivative contracts designated as hedging instruments

     242       (219
  

 

 

   

 

 

 

Derivative contracts not designated as hedging instruments (*)

    

Commodity

     9,350       (9,823

Foreign exchange

     6       (21

Other

     12       (24
  

 

 

   

 

 

 

Total derivative contracts not designated as hedging instruments

     9,368       (9,868
  

 

 

   

 

 

 

Gross fair value of derivative contracts

     9,610       (10,087

Master netting arrangements

     (7,962     7,962  

Cash collateral (received) posted

     (121     117  
  

 

 

   

 

 

 

Net fair value of derivative contracts

   $ 1,527     $ (2,008
  

 

 

   

 

 

 

 

(*)

Includes trading derivatives and derivatives used for risk management.

The Corporation generally enters into master netting arrangements to mitigate counterparty credit risk. Master netting arrangements are standardized contracts that govern all specified transactions with the same counterparty and allow the Corporation to terminate all contracts upon occurrence of certain events, such as a counterparty’s default or bankruptcy. Where these arrangements provide the right of offset and the Corporation’s intent and practice is to offset amounts in the case of contract terminations, the Corporation’s policy is to record the fair value of derivative assets and liabilities on a net basis.

The Corporation determines fair value in accordance with the fair value measurements accounting standard (Accounting Standards Codification (Topic 820): Fair Value Measurements and Disclosures), 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). Measurements derived indirectly from observable inputs or from quoted prices from markets that are less liquid are considered Level 2.

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 or interpolation, 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 physical derivative and financial asset or liability presented below is based on the lowest significant input level within this fair value hierarchy.

 

15


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following table provides the fair values for the Corporation’s net physical derivative and financial assets and (liabilities) that are based on this hierarchy:

 

                                                                                                                       
     Level 1     Level 2     Level 3     Collateral
and
counterparty
netting
    Balance  
     (In millions)  

September 30, 2012

          

Assets

          

Derivative contracts

          

Commodity

   $ 168     $ 668     $ 240     $ (88   $ 988  

Foreign exchange

            26                     26  

Interest rate and other

     6       73       3              82  

Collateral and counterparty netting

     (2     (73     (7     (98     (180
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative contracts

     172       694       236       (186     916  

Other assets measured at fair value on a recurring basis

     1       3                     4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value on a recurring basis

   $ 173     $ 697     $ 236     $ (186   $ 920  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

          

Derivative contracts

          

Commodity

   $ (144   $ (884   $ (125   $ 88     $ (1,065

Foreign exchange

            (1                   (1

Other

     (1     (2                   (3

Collateral and counterparty netting

     2       73       7       22       104  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative contracts

     (143     (814     (118     110       (965

Other liabilities measured at fair value on a recurring basis

     (31     (4     (1            (36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured at fair value on a recurring basis

   $ (174   $ (818   $ (119   $ 110     $ (1,001
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other fair value measurement disclosures

          

Long-term debt

   $      $ (8,737   $      $      $ (8,737
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011

          

Assets

          

Derivative contracts

          

Commodity

   $ 135     $ 1,188     $ 511     $ (67   $ 1,767  

Interest rate and other

            66                     66  

Collateral and counterparty netting

     (33     (148     (4     (121     (306
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative contracts

     102       1,106       507       (188     1,527  

Other assets measured at fair value on a recurring basis

     7       34              (2     39  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value on a recurring basis

   $ 109     $ 1,140     $ 507     $ (190   $ 1,566  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

                                                                                                                       
     Level 1     Level 2     Level 3     Collateral
and
counterparty
netting
     Balance  
     (In millions)  

December 31, 2011

           

Liabilities

           

Derivative contracts

           

Commodity

   $ (191   $ (1,501   $ (650   $ 67      $ (2,275

Foreign exchange

            (15                    (15

Other

            (18     (2             (20

Collateral and counterparty netting

     33       148       4       117        302  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total derivative contracts

     (158     (1,386     (648     184        (2,008

Other liabilities measured at fair value on a recurring basis

            (52     (2     2        (52
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total liabilities measured at fair value on a recurring basis

   $ (158   $ (1,438   $ (650   $ 186      $ (2,060
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other fair value measurement disclosures

           

Long-term debt

   $      $ (7,317   $      $       $ (7,317
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

 

                                                                                               
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2012     2011     2012     2011  
    (In millions)  

Balance at beginning of period

  $ 87     $ 372     $ (143   $ 412  

Unrealized pre-tax gains (losses)

       

Included in earnings (a)

    (26     (85     (72     19  

Included in other comprehensive income (b)

           13       43       30  

Purchases (c)

    14       415       244       1,932  

Sales (c)

    (9     (536     (266     (2,131

Settlements (d)

    15       (162     232       (194

Transfers into Level 3

    50       (222     100       (211

Transfers out of Level 3

    (14     (39     (21     (101
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 117     $ (244   $ 117     $ (244
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

The unrealized pre-tax gains (losses) included in earnings that are reflected in Sales and other operating revenues in the Statement of Consolidated Income amounted to $8 million and $(40) million for the three and nine months ended September 30, 2012, respectively. The unrealized pre-tax gains (losses) included in earnings that are reflected in Cost of products sold in the Statement of Consolidated Income amounted to $(34) million and $(32) million for the three and nine months ended September 30, 2012, respectively.

(b)

The unrealized pre-tax gains (losses) included in Other comprehensive income are reflected in the Change in fair value of cash flow hedges in the Statement of Consolidated Comprehensive Income.

(c)

Purchases and sales primarily represent option premiums paid or received, respectively, during the reporting period.

(d)

Settlements represent realized gains and (losses) on derivatives settled during the reporting period.

 

17


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 Ended
September 30,
    Nine Months Ended
September 30,
 
    2012     2011     2012     2011  
    (In millions)  

Transfers into Level 1

  $ 85     $ (4   $ 244     $ (12

Transfers out of Level 1

    (38     39       210       318  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 47     $ 35     $ 454     $ 306  
 

 

 

   

 

 

   

 

 

   

 

 

 

Transfers into Level 2

  $ 48     $ 28     $ (245   $ 34  

Transfers out of Level 2

    (131     198       (288     (28
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ (83   $ 226     $ (533   $ 6  
 

 

 

   

 

 

   

 

 

   

 

 

 

Transfers into Level 3

  $ 50     $ (222   $ 100     $ (211

Transfers out of Level 3

    (14     (39     (21     (101
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 36     $ (261   $ 79     $ (312
 

 

 

   

 

 

   

 

 

   

 

 

 

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.

The significant unobservable inputs used in Level 3 fair value measurements for the Corporation’s physical commodity contracts and derivative instruments primarily include less liquid delivered locations for physical commodity contracts or volatility assumptions for out-of-the-money options. The following table provides information about the Corporation’s significant recurring unobservable inputs used in the Level 3 fair value measurements. Natural gas contracts are usually quoted and transacted using basis pricing relative to an active pricing location (e.g. Henry Hub) for which price inputs represent the approximate value of differences in geography and local market conditions. All other price inputs below represent full contract prices. Significant changes in any of the inputs below, independently or correlated, may result in a different fair value.

 

                                               
    Unit of
Measurement
     Range /
Weighted Average
 

September 30, 2012

      

Assets

      

Commodity contracts with a fair value of $240 million
Contract prices

      

Crude oil and refined petroleum products

  $ / bbl      $  86.99 - 151.52 / 115.69   

Electricity

  $ / MWH      $  24.65 - 84.38 / 50.69       
 

 

 

Basis prices

      

Natural gas

  $ / MMBTU      $  (0.60) - 4.59 / 0.33          
 

 

 

Contract volatilities

      

Crude oil and refined petroleum products

  %        22.00 - 31.00 / 29.00   

Natural gas

  %        22.00 - 23.00 / 22.00   

Electricity

  %        18.00 - 31.00 / 26.00   
 

 

 

 

18


PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

                                               
    Unit of
Measurement
     Range /
Weighted Average
 

September 30, 2012

      

Liabilities

      

Commodity contracts with a fair value of $125 million
Contract prices

      

Crude oil and refined petroleum products

  $ / bbl      $  86.98 - 156.53 / 116.25   

Electricity

  $ / MWH      $  24.65 - 84.38 / 51.09       
 

 

 

Basis prices

      

Natural gas

  $ / MMBTU      $  (0.55) - 4.55 / 0.86          
 

 

 

Contract volatilities

      

Crude oil and refined petroleum products

  %        28.00 - 31.00 / 30.00   

Natural gas

  %        22.00 - 41.00 / 29.00   
 

 

 

 

Note:

Fair value measurement for all recurring inputs was performed using an income approach technique.

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, 2012 are concentrated with the following counterparty and customer industry segments: Integrated Oil Companies — 23%, Refiners — 12%, Services — 9%, Government Entities — 8%, Trading Companies — 7% and Real Estate — 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 September 30, 2012 and December 31, 2011, the Corporation held cash from counterparties of $98 million and $121 million, respectively. The Corporation posted cash to counterparties at September 30, 2012 and December 31, 2011 of $22 million and $117 million, respectively.

At September 30, 2012, the Corporation had outstanding letters of credit totaling $1.1 billion, 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, 2012, the net liability related to derivatives with contingent collateral provisions was $467 million before cash collateral posted of $6 million. At September 30, 2012, 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, 2012, the Corporation would be required to post additional collateral of approximately $270 million.

16. Subsequent Events

In October 2012, the Corporation completed the sale of its interests in the Bittern Field (Hess 28%) in the United Kingdom North Sea and the associated Triton floating production, storage and offloading vessel for cash proceeds of approximately $190 million after normal post-closing adjustments.

In October 2012, the Corporation announced an agreement to sell its interests in the Beryl fields (Hess 22%) in the United Kingdom North Sea for $525 million before normal post-closing adjustments. The transaction is expected to close in the first quarter of 2013.

 

19


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 $557 million in the third quarter of 2012 up from $298 million in the third quarter of 2011. See page 21 for the items affecting comparability of results between periods.

Exploration and Production

E&P reported net income of $608 million in the third quarter of 2012 compared to $422 million in the third quarter of 2011. Excluding the items affecting comparability, E&P net income was $546 million in the third quarter of 2012 and $503 million in the same period of 2011. In the third quarter of 2012, the Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $86.69 per barrel up from $85.81 per barrel in the third quarter of 2011. The Corporation’s average worldwide natural gas selling price was $5.88 per thousand cubic feet (mcf) in the third quarter of 2012, and $5.74 per mcf in the third quarter of 2011. Worldwide crude oil and natural gas production was 402,000 barrels of oil equivalent per day (boepd) in the third quarter of 2012, up from 344,000 boepd in the same period of 2011, principally reflecting an increase in production from the Bakken oil shale play and the resumption of operations in Libya. The Corporation expects its full year production to average between 395,000 and 405,000 boepd.

The following is an update of E&P activities during the third quarter of 2012:

 

   

In North Dakota, net production from the Bakken oil shale play was 62,000 boepd for the third quarter of 2012, up from 32,000 boepd in the third quarter of 2011. The Corporation continues to expect its net production for full year 2012 to average between 54,000 and 58,000 boepd.

 

   

The Corporation will substantially complete its “held by production” drilling in the Bakken in the fourth quarter of 2012 and is transitioning to pad drilling, which involves sequentially drilling a number of wells on a pad followed by sequential fracturing of the wells. This pad drilling process is expected to lead to a temporary flattening of the Bakken production profile until mid-2013, at which point steady-state operations will allow an upward growth trajectory.

 

   

The Corporation completed the sale of its interest in the Schiehallion Field (Hess 16%) and associated assets for cash proceeds of $524 million after normal post-closing adjustments. The transaction resulted in a pre-tax gain of $376 million ($349 million after income taxes).

 

   

The Corporation recorded impairment charges of $208 million ($116 million after income taxes) due to increases in the Corporation’s estimated abandonment liabilities for non-producing properties, which resulted in the book value of the properties exceeding their fair value.

 

   

The Corporation decided during the quarter to cease further development and appraisal activities in Peru. As a result, the Corporation recorded exploration expenses totaling $86 million ($56 million after income taxes) to write off its exploration assets in the country.

 

   

The Corporation reached an agreement to sell its assets in Azerbaijan consisting of its interests in the Azeri-Chirag-Guneshli (ACG) fields (Hess 3%) and the associated Baku-Tbilisi-Ceyhan (BTC) pipeline (Hess 2%) to ONGC Videsh Ltd. for $1 billion before normal post-closing adjustments. This transaction, which is expected to close in the first quarter of 2013, is subject to Indian and other government and regulatory approvals.

 

   

The Corporation signed an exchange agreement with the partners of Green Canyon Block 512, which contains the Knotty Head discovery and is adjacent to the Corporation’s Pony discovery on Block 468. Under this agreement, the Corporation was appointed operator and has a 20% working interest in the blocks, now collectively referred to as Stampede.

 

20


PART I — FINANCIAL INFORMATION (CONT’D.)

 

Overview (continued)

 

Status of Libyan Operations

In response to civil unrest in Libya and the resulting imposition of sanctions, production at the Waha fields was suspended in the first quarter of 2011. During the fourth quarter of 2011, the sanctions were lifted, force majeure was withdrawn and production resumed. The Corporation’s Libyan production averaged 23,000 boepd in the third quarter of 2012. The force majeure covering the Corporation’s offshore exploration interests was withdrawn in March 2012.

Marketing and Refining

M&R generated income of $53 million in the third quarter of 2012, compared to a loss of $23 million in the third quarter of 2011. The increase in earnings was primarily due to improved refining and trading results, partially offset by lower marketing earnings. In the first quarter of 2012, HOVENSA L.L.C. (HOVENSA) shut down its refinery in St. Croix, U.S. Virgin Islands, and started the transition to operating the complex as an oil storage terminal.

Hurricane Sandy

In the last week of October 2012, Hurricane Sandy hit the Northeast Coast of the United States and caused significant damage, particularly to the coastal areas of New Jersey and New York. In advance of the hurricane, the Corporation arranged to have available 85 electrical generators to allow its retail gasoline stations to continue to serve customers in the event of lost power. Within two days of the storm, 177 of the 186 stations in the area were open; however, many of these stations have been operating intermittently due to shortages of supply. The Port Reading refining facility in New Jersey is currently shut down and it is expected that operations will restart approximately one week after power is restored. The Bayonne Energy Center (Hess 50%), a 512-megawatt natural gas fueled electric generating station that provides power to New York City, is expected to restart by mid-November 2012.

Results of Operations

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

 

                                                                                               
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2012     2011     2012     2011  
    (In millions, except per share amounts)  

Exploration and Production

  $ 608     $ 422     $ 1,887     $ 2,148  

Marketing and Refining

    53       (23     72       (23

Corporate

    (38     (44     (115     (114

Interest expense

    (66     (57     (193     (177
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Hess Corporation

  $ 557     $ 298     $ 1,651     $ 1,834  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share (diluted)

  $ 1.64     $ .88     $ 4.85     $ 5.40  
 

 

 

   

 

 

   

 

 

   

 

 

 

Items Affecting Comparability Between Periods

The following table summarizes, on an after-tax basis, items of income (expense) that are included in net income and affect comparability between periods. The items in the table below are explained and the pre-tax amounts are shown on pages 25 and 26.

 

                                                                                               
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
     (In millions)  

Exploration and Production

        

Gains on asset sales

   $ 349     $ 103     $ 385     $ 413  

Asset impairments

     (116     (140     (152     (140

Dry hole and other expenses

     (56            (56       

United Kingdom tax adjustments

     (115     (44     (115     (29
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Exploration and Production

   $ 62     $ (81   $ 62     $ 244  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

21


PART I — FINANCIAL INFORMATION (CONT’D.)

 

Results of Operations (continued)

 

In the following discussion and elsewhere in this report, 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 these after-tax amounts 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.

Comparison of Results

Exploration and Production

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

 

                                                                                               
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2012      2011     2012      2011  
    (In millions)  

Sales and other operating revenues (*)

  $ 2,707      $ 2,137     $ 8,316      $ 7,448  

Gains on asset sales

    376        103       412        446  

Other, net

    44        (6     72        (10
 

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues and non-operating income

    3,127        2,234       8,800        7,884  
 

 

 

    

 

 

   

 

 

    

 

 

 

Costs and expenses

         

Production expenses, including related taxes

    712        609       2,062        1,739  

Exploration expenses, including dry holes and lease impairment

    259        199       708        769  

General, administrative and other expenses

    79        71       223        231  

Depreciation, depletion and amortization

    725        564       2,127        1,654  

Asset impairments

    208        358       267        358  
 

 

 

    

 

 

   

 

 

    

 

 

 

Total costs and expenses

    1,983        1,801       5,387        4,751  
 

 

 

    

 

 

   

 

 

    

 

 

 

Results of operations before income taxes

    1,144        433       3,413        3,133  

Provision for income taxes

    536        11       1,526        985  
 

 

 

    

 

 

   

 

 

    

 

 

 

Results of operations attributable to Hess Corporation

  $ 608      $ 422     $ 1,887      $ 2,148  
 

 

 

    

 

 

   

 

 

    

 

 

 

 

(*)

Amounts differ from E&P operating revenues in Note 14, Segment Information, primarily due to the exclusion of sales of hydrocarbons purchased from third parties.

The changes in E&P earnings are primarily attributable to changes in selling prices, sales volumes, costs and expenses and items affecting comparability between periods as described below:

Selling prices: Lower average overall realized selling prices decreased E&P revenues by approximately $15 million in the third quarter of 2012 compared to the same period of 2011. Lower average realized selling prices, primarily of crude oil including the effects of hedging, decreased E&P revenues by approximately $225 million in the first nine months in 2012, compared to the corresponding period of 2011.

The Corporation’s average selling prices were as follows:

 

                                                                                               
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Crude oil — per barrel (including hedging)

           

United States

   $ 90.17      $ 95.12      $ 92.53      $ 97.71  

Europe

     75.08        65.92        77.13        81.19  

Africa

     90.78        89.41        89.56        89.85  

Asia

     102.85        112.31        107.88        112.03  

Worldwide

     86.69        85.81        87.71        90.22  

 

22


PART I — FINANCIAL INFORMATION (CONT’D.)

 

Results of Operations (continued)

 

                                                                                               
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Crude oil — per barrel (excluding hedging)

           

United States

   $ 90.87      $ 95.12      $ 94.46      $ 97.71  

Europe

     75.36        65.92        78.18        81.19  

Africa

     110.33        113.03        111.28        111.20  

Asia

     103.20        112.31        109.92        112.03  

Worldwide

     92.35        92.33        94.58        95.89  

Natural gas liquids — per barrel

           

United States

   $ 38.35      $ 57.72      $ 42.60      $ 58.86  

Europe

     56.82        82.18        75.67        78.09  

Asia

     64.67        71.30        75.95        74.18  

Worldwide

     41.71        63.64        49.05        63.70  

Natural gas — per mcf

           

United States

   $ 2.18      $ 3.43      $ 1.83      $ 3.66  

Europe

     9.15        8.93        9.56        8.64  

Asia and other

     6.56        5.86        6.64        5.85  

Worldwide

     5.88        5.74        6.01        5.84  

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 losses as of the date that the hedges were closed are being recorded in earnings as the hedged transactions occur. For 2012, the Corporation has entered into Brent crude oil hedges using fixed-price swap contracts to hedge the variability of forecasted future cash flows from 120,000 barrels per day of crude oil sales volumes for the full year. The average price for these hedges is $107.70 per barrel.

Realized losses from E&P hedging activities reduced Sales and other operating revenues by $148 million in the third quarter and $533 million for the nine months ended September 30, 2012 ($94 million and $334 million after-taxes, respectively) and $131 million and $387 million in the third quarter and first nine months of 2011, respectively ($82 million and $244 million after-taxes, respectively). At September 30, 2012, the after-tax deferred losses in Accumulated other comprehensive income (loss) related to Brent crude oil hedges were $115 million, which will be reclassified into earnings in the fourth quarter of 2012 as the hedged crude oil sales are recognized in earnings.

Production and sales volumes: The Corporation’s crude oil and natural gas production was 402,000 boepd in the third quarter and 409,000 boepd in the first nine months of 2012, up from 344,000 boepd and 371,000 boepd for the same periods in 2011. The increase in production in 2012 was mainly due to higher production from the Bakken oil shale play and the resumption of operations in Libya. The Corporation expects its full year 2012 production to average between 395,000 and 405,000 boepd.

 

23


PART I — FINANCIAL INFORMATION (CONT’D.)

 

Results of Operations (continued)

 

The Corporation’s net daily worldwide production by region was as follows:

 

                                                                                               
    Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
    2012      2011      2012      2011  
    (In thousands)  

Crude oil — barrels per day

          

United States

    109        82        104        78  

Europe

    80        68        91        86  

Africa

    75        59        75        70  

Asia

    17        15        17        14  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total

    281        224        287        248  
 

 

 

    

 

 

    

 

 

    

 

 

 

Natural gas liquids — barrels per day

          

United States

    16        13        15        13  

Europe

    2        3        3        3  

Asia

    1        1        1        1  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total

    19        17        19        17  
 

 

 

    

 

 

    

 

 

    

 

 

 

Natural gas — mcf per day

          

United States

    116        102        112        103  

Europe

    36        55        50        78  

Asia and other

    462        458        459        453  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total

    614        615        621        634  
 

 

 

    

 

 

    

 

 

    

 

 

 

Barrels of oil equivalent per day (*)

    402        344        409        371  
 

 

 

    

 

 

    

 

 

    

 

 

 

 

(*)

Reflects natural gas production converted on the basis of relative energy content (six mcf equals one barrel). Barrel of oil equivalence does not necessarily result in price equivalence as the equivalent price of natural gas on a barrel of oil equivalent basis has been substantially lower than the corresponding price for crude oil over the recent past. See the average selling prices in the table that begins on page 22.

United States: Production in the United States was higher in the third quarter and first nine months of 2012 compared to the corresponding periods in 2011, primarily due to increased production from the Bakken oil shale play.

Europe: Crude oil production in the third quarter and first nine months of 2012 was higher than the same periods in 2011, largely due to new wells in Russia and improved operating performance at the Schiehallion Field in the United Kingdom North Sea, which more than offset lower production from the Valhall Field, offshore Norway, resulting from planned downtime. The Schiehallion Field was sold at the end of the third quarter of 2012.

Natural gas production in the third quarter of 2012 was lower than the corresponding period in 2011, principally due to the sale in January 2012 of the Snohvit Field located offshore Norway, natural decline at the Beryl Field, and planned downtime at the Valhall Field. Natural gas production was lower in the first nine months of 2012 compared to the same period in 2011, mainly due to the sale in January 2012 of the Snohvit Field, the sale in February 2011 of certain natural gas producing assets in the United Kingdom North Sea and planned downtime of the Valhall Field.

Africa: Crude oil production in Africa was higher in the third quarter and first nine months of 2012 compared to the corresponding periods in 2011, mainly due to the resumption of operations in Libya following the civil unrest, partially offset by natural field declines in the Okume Complex in Equatorial Guinea.

Asia: Crude oil production in the third quarter and first nine months of 2012 was higher than the corresponding periods in 2011 due to new wells at the Pangkah Field in Indonesia.

Sales volumes: Higher sales volumes, primarily relating to crude oil, increased revenue by approximately $585 million and $1,095 million in the third quarter and first nine months of 2012, respectively, compared with the corresponding periods of 2011.

 

24


PART I — FINANCIAL INFORMATION (CONT’D.)

 

Results of Operations (continued)

 

Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, increased by approximately $110 million and $315 million in the third quarter and first nine months of 2012 compared with the same periods in 2011. The increase in third quarter expenses principally reflects higher operating and maintenance expenses, higher general and administrative expenses, together with increased production taxes. The increase in the costs for the first nine months of 2012 and 2011 was due to the cost drivers described above and higher workover expenses.

Depreciation, depletion and amortization expenses were higher in the third quarter and first nine months of 2012 compared to the same periods in 2011, principally reflecting increased production volumes from the Bakken and Eagle Ford fields and a higher average per barrel rate.

For the third quarter of 2012, E&P total production unit costs were $40.98 per barrel, consisting of cash operating costs of $21.37 per barrel and depreciation, depletion and amortization expenses of $19.61 per barrel. For the first nine months of 2012, E&P total production unit costs were $39.32 per barrel, consisting of cash operating costs of $20.36 per barrel and depreciation, depletion and amortization expenses of $18.96 per barrel.

E&P total production unit costs are expected to be in the range of $39.00 to $41.00 per barrel for the full year of 2012. E&P cash operating costs are expected to be in the range of $20.00 to $21.00 per barrel and depreciation, depletion and amortization expenses are expected to be in the range of $19.00 to $20.00 per barrel.

Asset impairments: In the third quarter of 2012, the Corporation recorded impairment charges of $208 million ($116 million after income taxes) due to increases in the Corporation’s estimated abandonment liabilities for non-producing properties, which resulted in the book value of the properties exceeding their fair value. See Note 7, Asset Retirement Obligations. In the second quarter of 2012, the Corporation recorded a charge of $59 million ($36 million after-tax) to reduce the carrying value of certain properties in the Eagle Ford shale in Texas to their fair value. These properties were part of an asset exchange with a joint venture partner that was completed in the third quarter of 2012.

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. These charges are all included in the table of items affecting comparability between periods on page 21.

Exploration expenses: Exploration expenses in the third quarter of 2012 were higher than the third quarter of 2011, due to the write off of the Corporation’s assets in Peru following the decision in the quarter by the operator and the Corporation to cease future appraisal and development activities. Exploration expenses in the first nine months of 2012 were lower than the corresponding period in 2011, primarily due to lower lease impairment expenses. The amounts for the write off of assets in Peru are included as an item affecting comparability of earnings between periods shown on page 21.

Income taxes: Excluding items affecting comparability of earnings between periods, the effective income tax rate for E&P operations was 49% in the third quarter of 2012 compared to 27% for the third quarter of 2011, and was 46% for the first nine months of 2012 compared to 37% for the first nine months in 2011. These increases reflect the resumption of operations in Libya in 2012, following the civil unrest in 2011. For the full year of 2012, the Corporation expects the E&P effective tax rate, excluding items affecting comparability, to be in the range of 44% to 48%.

In July 2012, the government of the United Kingdom changed the supplementary income tax rate applicable to deductions for dismantlement expenditures to 20% from 32%. As a result, the Corporation recorded a one-time charge in the third quarter of 2012 of approximately $115 million for deferred taxes related to asset retirement obligations in the United Kingdom. In July 2011, the United Kingdom increased the supplementary tax rate on petroleum operations to 32% from 20% with an effective date of March 24, 2011. As a result, the Corporation recorded a charge of approximately $44 million in the third quarter. This charge consisted of a provision of $15 million representing the incremental tax on earnings from the effective date to the end of the second quarter and a charge of $29 million to increase the deferred tax liability in the United Kingdom. Both of these charges are reflected in the table of items affecting comparability on page 21.

 

25


PART I — FINANCIAL INFORMATION (CONT’D.)

 

Results of Operations (continued)

 

Foreign exchange: The following currency gains (losses) related to E&P activities amounted to the following:

 

                                                                                               
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2012      2011     2012      2011  
    (In millions)  

Pre-tax

  $ 17      $ (9   $ 24      $ (18

After-tax

    7        (2     10        (7

Gains on asset sales: In the third quarter of 2012, the Corporation sold its interests in the Schiehallion Field (Hess 16%) in the United Kingdom North Sea, its share in the associated floating production, storage and offloading vessel, and the West of Shetland pipeline system, which resulted in a pre-tax gain of $376 million ($349 million after income taxes). First quarter of 2012 results included a non-taxable gain of $36 million related to the completion of the sale of the Corporation’s interest in the Snohvit Field (Hess 3%). In the third quarter of 2011, the Corporation sold its interests in the Snorre Field, offshore Norway and the Cook Field in the United Kingdom North Sea, which resulted in non-taxable gains totaling $103 million. First quarter of 2011 results included pre-tax gains of $343 million ($310 million after income taxes) related to the completion of the sale of the Corporation’s interests in certain natural gas producing assets located in the United Kingdom North Sea. All of these gains on asset sales are reflected in the table of items affecting comparability between periods on page 21.

The Corporation’s future E&P earnings may be impacted by external factors, such as volatility in the selling prices of crude oil and natural gas, reserve and production changes, exploration expenses, industry cost inflation, changes in foreign exchange rates and income tax rates, the effects of weather, political risk, environmental risk and catastrophic risk. For a more comprehensive description of the risks that may affect the Corporation’s E&P business see Item 1A. Risk Factors Related to Our Business and Operations in the December 31, 2011 Annual Report on Form 10-K.

Marketing and Refining

M&R activities generated income of $53 million in the third quarter and $72 million in the first nine months of 2012, compared to a loss of $23 million in both the third quarter and the first nine months of 2011. The Corporation’s downstream operations include marketing, refining and trading operations. In June 2012, operations commenced at the Bayonne Energy Center, LLC (Hess 50%), a joint venture established to build and operate a 512-megawatt natural gas fueled electric generating station in Bayonne, New Jersey, which provides power to New York City. In August 2012, the Corporation formed a joint venture (Hess 50%) to build a 655-megawatt natural gas fueled electric generating facility in Newark, New Jersey.

Marketing: Marketing operations, which consist principally of energy marketing, retail gasoline stations (most of which have convenience stores), terminals and supply operations, generated earnings of $17 million and $57 million in the third quarter and first nine months of 2012, respectively, compared to $41 million and $137 million in the corresponding periods of 2011. The reduction in quarter on quarter and year-to-date earnings for 2012 compared to 2011 was due to lower margins and volumes. Earnings for the first nine months of 2012 also included a second quarter after-tax charge of $11 million for environmental liabilities.

 

26


PART I — FINANCIAL INFORMATION (CONT’D.)

 

Results of Operations (continued)

 

The table below summarizes marketing sales volumes:

 

                                                                                               
    Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
    2012      2011      2012      2011  

Refined petroleum product sales (thousands of barrels per day)

          

Gasoline

    214        222        212        226  

Distillates

    102        100        109        116  

Residuals

    48        53        54        65  

Other

    10        14        15        20  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total refined petroleum product sales

    374        389        390        427  
 

 

 

    

 

 

    

 

 

    

 

 

 

Natural gas (thousands of mcf per day)

    1,900        1,800        2,105        2,200  

Electricity (megawatts round the clock)

    4,765        4,900        4,475        4,500  

Refining: Following the shutdown of the HOVENSA refinery in St. Croix, U.S. Virgin Islands in the first quarter of 2012, the Corporation’s refining operations now consist of the Port Reading refining facility, which has a refining capacity of 70,000 barrels per day. Port Reading generated earnings of $18 million in the third quarter of 2012 and was break even in the third quarter of 2011 reflecting improved margins. Earnings were $20 million in the first nine months of 2012 and $7 million in the first nine months of 2011. During the first quarter of 2012, the Port Reading refining facility was shut down for 15 days due to unplanned maintenance.

As a result of fully accruing the Corporation’s estimated funding commitments for HOVENSA’s refinery shutdown at December 31, 2011, no incremental equity loss was recorded in the third quarter and first nine months of 2012. The Corporation’s equity share of HOVENSA’s losses was $36 million for the third quarter of 2011 and $133 million for the first nine months of 2011.

The Corporation has a 50% voting interest in a consolidated partnership that trades energy-related commodities, securities and derivatives. The Corporation also takes trading positions for its own account. The Corporation’s after-tax results from trading activities, including its share of the results from the trading partnership, amounted to income of $18 million and a loss of $5 million in the third quarter and first nine months of 2012, respectively, compared with losses of $26 million and $30 million in the corresponding periods of 2011.

Marketing expenses were lower in the first nine months of 2012 compared with the same period in 2011, primarily reflecting lower repair and maintenance expenses and retail credit card fees, partially offset by higher environmental expenses.

The Corporation’s future M&R earnings may be impacted by supply and demand factors, volatility in margins, credit risks, the effects of weather, competitive industry conditions, political risk, environmental risk and catastrophic risk. For a more comprehensive description of the risks that may affect the Corporation’s M&R business, see Item 1A. Risk Factors Related to Our Business and Operations in the December 31, 2011 Annual Report on Form 10-K.

Corporate

The following table summarizes corporate expenses:

 

                                                                                               
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2012     2011     2012     2011  
    (In millions)  

Corporate expenses

  $ 56     $ 72     $ 191     $ 188  

Income tax (benefits)

    (18     (28     (76     (74
 

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate expenses, after-tax

  $ 38     $ 44     $ 115     $ 114  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

27


PART I — FINANCIAL INFORMATION (CONT’D.)

 

Results of Operations (continued)

 

Corporate expenses were lower in the third quarter of 2012 compared with the same period a year ago, primarily due to lower environmental expenses. Corporate expenses were comparable in the first nine months of 2012 and 2011 as higher insurance costs were offset by lower environmental expenses.

Interest Expense

Interest expense was as follows:

 

                                                                                               
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2012     2011     2012     2011  
    (In millions)  

Total interest incurred

  $ 112     $ 98     $ 331     $ 298  

Less: capitalized interest

    (8     (4     (18     (8
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense before income taxes

    104       94       313       290  

Income tax (benefits)

    (38     (37     (120     (113
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense, after-tax

  $ 66     $ 57     $ 193     $ 177  
 

 

 

   

 

 

   

 

 

   

 

 

 

The increase in interest incurred in the three and nine months ended September 30, 2012 compared to the corresponding periods of 2011, principally reflects higher average debt and bank facility fees.

Consolidated Sales and Cost of Products Sold

Sales and other operating revenues increased by 6% in the third quarter of 2012, compared with the third quarter of 2011, primarily due to higher crude oil sales volumes and selling prices. Sales and other operating revenues decreased by 2% in the first nine months of 2012, compared with the same period of a year ago, reflecting lower sales volumes for refined petroleum products and lower crude oil selling prices, partially offset by higher crude oil sales volumes. The decrease in Cost of products sold principally reflects the lower energy marketing sales volumes, partially offset by higher prices for purchased refined petroleum products.

Liquidity and Capital Resources

The following table sets forth certain relevant measures of the Corporation’s liquidity and capital resources:

 

                                               
    September 30,
2012
    December 31,
2011
 
    (In millions, except ratios)  

Cash and cash equivalents

  $ 528     $ 351  

Short-term debt and current maturities of long-term debt

  $ 621     $ 52  

Total debt

  $ 7,841     $ 6,057  

Total equity

  $ 20,652     $ 18,592  

Debt to capitalization ratio (*)

    27.5     24.6

 

(*)

Total debt as a percentage of the sum of total debt plus total equity.

 

28


PART I — FINANCIAL INFORMATION (CONT’D.)

 

Liquidity and Capital Resources (continued)

 

Cash Flows

The following table summarizes the Corporation’s cash flows:

 

                                               
    Nine Months Ended
September 30,
 
    2012     2011  
    (In millions)  

Net cash provided by (used in):

   

Operating activities

  $ 4,090     $ 3,846  

Investing activities

    (5,382     (4,475

Financing activities

    1,469       (152
 

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  $ 177     $ (781
 

 

 

   

 

 

 

Operating Activities: Net cash provided by operating activities, including changes in operating assets and liabilities, amounted to $4,090 million in the first nine months of 2012 compared to $3,846 million in the first nine months of 2011, reflecting higher non-cash charges to net income, primarily depreciation, depletion and amortization, that partially drove lower operating earnings. In the first quarter of 2012, the Corporation fully funded its accrued liability to HOVENSA of $487 million, which represents its estimated funding commitment for costs to shut down HOVENSA’s refinery.

Investing Activities: The following table summarizes the Corporation’s capital expenditures:

 

                                               
    Nine Months Ended
September 30,
 
    2012      2011  
    (In millions)  

Exploration and Production

  $ 5,924      $ 4,824  

Marketing, Refining and Corporate

    92        67  
 

 

 

    

 

 

 

Total

  $ 6,016      $ 4,891  
 

 

 

    

 

 

 

Capital expenditures for the first nine months of 2012 compared to the same period a year ago reflect additional spending of approximately $1 billion related to the Bakken oil shale play for the drilling of new wells and higher working interest wells, together with increased spending on field infrastructure projects.

In the first nine months of 2012, the Corporation received total proceeds of $656 million from the sale of assets in the E&P segment. In 2011, total proceeds from E&P asset sales amounted to $490 million.

Financing Activities: In the first nine months of 2012, the Corporation borrowed a net total of $1,599 million which consisted of borrowings of $1 billion from its syndicated revolving credit facility, $583 million from its short-term credit facilities and $68 million from its asset-backed credit facility, partially offset by net repayments of other debt of $52 million. Dividends paid were $136 million in both the first nine months of 2012 and 2011.

Future Capital Requirements and Resources

The Corporation anticipates investing a total of approximately $8.5 billion in capital and exploratory expenditures during 2012, substantially all of which is targeted for E&P operations. This reflects an increase of $1.7 billion above the initial 2012 guidance of $6.8 billion. This increase is substantially attributable to the following factors: (1) $1.1 billion of additional spending in the Bakken primarily driven by drilling in higher working interest areas, additional wells and increased well costs, (2) $250 million related to the recently sanctioned project in the North Malay Basin, (3) cost increases of $200 million for the Valhall redevelopment project and (4) accelerated spend of $100 million at the Tubular Bells deepwater development due to the early arrival of the rig.

 

29


PART I — FINANCIAL INFORMATION (CONT’D.)

 

Liquidity and Capital Resources (continued)

 

Through the first nine months of 2012, the Corporation has funded its capital spending through cash flows from operations, incremental borrowings and proceeds from asset sales. The gap between full year cash flows from operations and capital expenditures is expected to reach approximately $3 billion in 2012 and is expected to moderate in 2013 based on current commodity prices. The Corporation has announced asset sales totaling $2.4 billion, of which $656 million closed in the first nine months of 2012 and another $190 million closed in October 2012. The Corporation is pursuing or is in the early stages of planning for significant additional divestitures. In the interim, the Corporation expects to fund capital expenditures and ongoing operations, including dividends, pension contributions and required debt repayments with existing cash on-hand, cash flows from operations, proceeds from asset sales and available credit facilities. In 2013, the Corporation expects that capital and exploratory expenditures will be significantly lower than the 2012 expenditures.

Crude oil and natural gas prices are volatile and difficult to predict. In addition, unplanned increases in the Corporation’s capital expenditure program could occur. If conditions were to change, such as a significant decrease in commodity prices, an unexpected increase in capital expenditures or we are unable to complete the planned asset sales, the Corporation would take further steps to protect its financial flexibility and may pursue other sources of liquidity, including the issuance of debt securities, the issuance of equity securities and/or additional asset sales.

The table below summarizes the capacity, usage, and available capacity of the Corporation’s borrowing and letter of credit facilities at September 30, 2012:

 

                                                                                                                                               
    Expiration
Date
     Capacity      Borrowings      Letters of
Credit Issued
     Total Used      Available
Capacity
 
           (In millions)  

Revolving credit facility

  April 2016      $ 4,000      $ 1,000      $       $ 1,000      $ 3,000  

Asset-backed credit facility

  July 2013 (a)        459        418                418        41  

Committed lines

  Various (b)        2,750        500        639        1,139        1,611  

Uncommitted lines

  Various (b)        651        183        468        651          
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

       $ 7,860      $ 2,101      $ 1,107      $ 3,208      $ 4,652  
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Total capacity of $1 billion subject to the amount of eligible receivables posted as collateral.

(b)

Committed and uncommitted lines have expiration dates through 2014.

The Corporation maintains a $4 billion syndicated revolving credit facility, which can be used for borrowings and letters of credit. At September 30, 2012, available capacity under the facility was $3 billion.

The Corporation has a 364-day asset-backed credit facility securitized by certain accounts receivable from its Marketing and Refining operations. Under the terms of this financing arrangement, the Corporation has the ability to borrow or issue letters of credit of up to $1 billion subject to the availability of sufficient levels of eligible receivables. At September 30, 2012, outstanding borrowings under this facility of $418 million were collateralized by a total of $861 million of accounts receivable, which are held by a wholly owned subsidiary. These receivables are only available to pay the general obligations of the Corporation after satisfaction of the outstanding obligations under the asset-backed facility.

The Corporation also has a shelf registration under which it may issue additional debt securities, warrants, common stock or preferred stock.

The Corporation’s long-term debt agreements contain a financial covenant that restricts the amount of total borrowings and secured debt. At September 30, 2012, the Corporation is permitted to borrow up to an additional $26.5 billion for the construction or acquisition of assets. The Corporation has the ability to borrow up to an additional $5 billion of secured debt at September 30, 2012.

The Corporation’s $1.1 billion of letters of credit outstanding at September 30, 2012 were primarily issued to satisfy margin requirements. See also Note 15, Risk Management and Trading Activities.

 

30


PART I — FINANCIAL INFORMATION (CONT’D.)

 

Liquidity and Capital Resources (continued)

 

Off-balance Sheet Arrangements

The Corporation has leveraged leases not included in its Consolidated Balance Sheet, primarily related to retail gasoline stations that the Corporation operates. The net present value of these leases is $342 million at September 30, 2012 compared to $388 million at December 31, 2011. If these leases were included as debt, the Corporation’s debt to capitalization ratio at September 30, 2012 would increase to 28.4% from 27.5%.

Subsequent Events

In October 2012, the Corporation completed the sale of its interests in the Bittern Field (Hess 28%) in the United Kingdom North Sea and the associated Triton floating production, storage and offloading vessel for cash proceeds of approximately $190 million after normal post-closing adjustments.

In October 2012, the Corporation announced an agreement to sell its interests in the Beryl fields (Hess 22%) in the United Kingdom North Sea for $525 million before normal closing adjustments. The transaction is expected to close in the first quarter of 2013.

Market Risk Disclosures

As discussed in Note 15, 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 risks primarily related to the prices of crude oil, natural gas, electricity and refined petroleum products.

Value at Risk: The Corporation uses value at risk to monitor and control commodity risk within its risk management and trading activities. The value at risk model uses historical simulation and the results represent the potential loss in fair value over one day at a 95% confidence level. The model captures both first and second order sensitivities for options. Results may vary from time to time as strategies change in trading activities or hedging levels change in risk management activities. The potential change in fair value based on commodity price risk is presented in the energy marketing and corporate risk management activities and trading activities sections below.

Energy Marketing and Corporate Risk Management Activities

The Corporation uses energy commodity derivatives in its energy marketing and corporate risk management activities. The Corporation estimates that the value at risk for these activities, which is primarily related to the Brent crude oil hedges, was $38 million at September 30, 2012 and $94 million at December 31, 2011. The results may vary from time to time as hedge levels change.

Long-term debt had a carrying value of $7,261 million, compared with a fair value of $8,737 million at September 30, 2012. A 15% decrease in the rate of interest would increase the fair value of long-term debt by approximately $224 million at September 30, 2012.

The Corporation’s risk exposure to foreign currency movements did not differ significantly from the levels shown in Item 7A of the Corporation’s 2011 Form 10-K.

Trading Activities

The information that follows represents 100% of the trading partnership and the Corporation’s proprietary trading accounts. Derivative trading transactions are marked-to-market and unrealized gains or losses are recognized currently in earnings. Gains or losses from sales of physical products are recorded at the time of sale. Net realized gains and losses for the three and nine months ending September 30, 2012 amounted to losses of $170 million and $1 million, respectively, compared to a loss of $20 million and a gain of $39 million for the corresponding periods in 2011.

 

31


PART I — FINANCIAL INFORMATION (CONT’D.)

 

Market Risk Disclosures (continued)

 

The following table provides an assessment of the factors affecting the changes in the fair value of net assets (liabilities) relating to financial instruments and derivative commodity contracts used in trading activities:

 

                                               
    Nine Months Ended
September 30,
 
    2012     2011  
    (In millions)  

Fair value of contracts outstanding at January 1

  $ (86   $ 94  

Change in fair value of contracts outstanding at the
beginning of the year and still outstanding at September 30

    130       (103

Reversal of fair value for contracts closed during the period

    40       90  

Fair value of contracts entered into during the period and still outstanding

    (75     (230
 

 

 

   

 

 

 

Fair value of contracts outstanding at September 30

  $ 9     $ (149
 

 

 

   

 

 

 

The following table summarizes the sources of fair values of net assets (liabilities) relating to financial instruments and derivative commodity contracts by year of maturity used in the Corporation’s trading activities at September 30, 2012:

 

                                                                                                                       
    Total     2012     2013     2014     2015 and
beyond
 
    (In millions)  

Source of fair value

         

Level 1

  $ 11     $ 18     $ 20     $ 4     $ (31

Level 2

    2       60       (5     (42     (11

Level 3

    (4     (46     13       3       26  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 9     $ 32     $ 28     $ (35   $ (16
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation estimates that the value at risk for trading activities, including commodities, was $6 million at September 30, 2012 and $4 million at December 31, 2011. The value at risk for trading activities may vary from time to time as strategies change to capture potential market rate movements.

The following table summarizes the fair values of receivables net of cash margin and letters of credit relating to the Corporation’s trading activities and the credit ratings of counterparties at September 30, 2012 (in millions):

 

                       

Investment grade determined by outside sources

  $ 263  

Investment grade determined internally (*)

    230  

Less than investment grade

    89  
 

 

 

 

Fair value of net receivables outstanding at end of period

  $ 582  
 

 

 

 

 

(*)

Based on information provided by counterparties and other available sources.

Forward-looking Information

Certain sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, including references to the Corporation’s future results of operations and financial position, liquidity and capital resources, capital expenditures, asset sales, oil and gas production, tax rates, debt repayment, hedging, derivative and market risk disclosures and off-balance sheet arrangements, include forward-looking information. These sections typically include statements with words such as “anticipate”, “estimate”, “expect”, “forecast”, “guidance”, “could”, “may”, “should”, “would” or similar words, indicating that future outcomes are uncertain. Forward-looking disclosures are based on the Corporation’s current understanding and assessment of these activities and reasonable assumptions about the future. Actual results may differ from these disclosures because of changes in market conditions, government actions and other factors.

 

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PART I — FINANCIAL INFORMATION (CONT’D.)

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The information required by this item is presented under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk Disclosures.”

 

Item 4. Controls and Procedures.

Based upon their evaluation of the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2012, John B. Hess, Chief Executive Officer, and John P. Rielly, Chief Financial Officer, concluded that these disclosure controls and procedures were effective as of September 30, 2012.

There was no change in internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 in the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

 

33


PART II — OTHER INFORMATION

 

Item 6. Exhibits and Reports on Form 8-K.

 

  a.

Exhibits

31(1)   Certification required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a)).
31(2)   Certification required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a)).
32(1)   Certification required by Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
32(2)   Certification required by Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
101(INS)   XBRL Instance Document
101(SCH)   XBRL Schema Document
101(CAL)   XBRL Calculation Linkbase Document
101(LAB)   XBRL Labels Linkbase Document
101(PRE)   XBRL Presentation Linkbase Document
101(DEF)   XBRL Definition Linkbase Document

 

  b.

Reports on Form 8-K

During the quarter ended September 30, 2012, Registrant filed the following reports on Form 8-K:

  (i)

Filing dated August 3, 2012 reporting under Item 5.02 reporting the election of Samuel A. Nunn as a director of the Registrant and furnishing under Item 9.01 a related press release.

  (ii)

Filing dated July 25, 2012 reporting under Items 2.02 and 9.01 a news release dated July 25, 2012 reporting results for the second quarter of 2012 and furnishing under Items 7.01 and 9.01 the prepared remarks of John B. Hess, Chairman of the Board of Directors and Chief Executive Officer of Hess Corporation, and John P. Rielly, Senior Vice President and Chief Financial Officer of Hess Corporation, at a public conference call held July 25, 2012.

 

34


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

HESS CORPORATION

(REGISTRANT)

By   /s/ John B. Hess
  JOHN B. HESS
 

CHAIRMAN OF THE BOARD AND

CHIEF EXECUTIVE OFFICER

By   /s/ John P. Rielly
  JOHN P. RIELLY
 

SENIOR VICE PRESIDENT AND

CHIEF FINANCIAL OFFICER

Date: November 8, 2012

 

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