Hess - 10-Q quarterly report FY

 

 

(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 preceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ     No  o

Indicate by check mark whether the registrant 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. (Check one):

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

          At June 30, 2008, there were 325,335,776 shares of Common Stock outstanding.

 

 

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

     The pre-tax amount of foreign currency gains (losses) is included in other, net within revenues and non-operating income.

Other: The after-tax foreign currency gain related to Exploration and Production activities was $1 million in the second quarter of 2008 compared with a loss of $6 million in the second quarter of 2007. The after-tax foreign currency gain was $12 million for the six months ended June 30, 2008 and a loss of $9 million for the six months ended June 30, 2007.

     The Corporation’s future Exploration and Production earnings may be impacted by external factors, such as volatility in the selling prices of crude oil and natural gas, reserve and production changes, industry cost inflation, exploration expenses, changes in foreign exchange and income tax rates, political risk and the effects of weather.

     Results from Marketing and Refining activities amounted to a loss of $52 million and $36 million in the second quarter and first half of 2008, respectively, compared with income of $122 million and $223 million in the second quarter and first half of 2007, respectively. The Corporation’s downstream operations include HOVENSA L.L.C. (HOVENSA), a 50% owned refining joint venture with a subsidiary of Petroleos de Venezuela S.A. (PDVSA), which is accounted for using the equity method. Additional Marketing and Refining activities include a fluid catalytic cracking facility in Port Reading, New Jersey, as well as retail gasoline stations, energy marketing and trading operations.

Refining: Refining operations generated income of $3 million in the second quarter of 2008 and were breakeven in the first half of 2008 compared with income of $87 million in the second quarter of 2007 and $141 million in the first half of 2007. The Corporation’s share of HOVENSA’s results, after income taxes, was a loss of $12 million in the second quarter of 2008 compared with income of $49 million in the second quarter of 2007. The Corporation’s share of HOVENSA’s results, after income taxes, was a loss of $18 million in the first half of 2008 compared with income of $84 million in 2007, principally reflecting lower refining margins.

     At June 30, 2008, the remaining balance of the PDVSA note was $46 million, which is scheduled to be fully repaid by February 2009. Interest income on the PDVSA note after income taxes was $1 million in the second quarter and $2 million in the first half of 2008 compared with $1 million in the second quarter and $3 million in the first half of 2007.

     Port Reading’s after tax earnings were $14 million and $16 million in the second quarter and first half of 2008 compared with $35 million and $52 million in the corresponding periods of 2007, reflecting lower margins.

     The following table summarizes refinery capacity and utilization rates:

Marketing: Marketing operations, which consist principally of energy marketing and retail gasoline operations, generated a loss of $40 million in the second quarter of 2008 compared with breakeven results in the second quarter of 2007. Marketing operations had a loss of $8 million in the first half of 2008 compared with earnings of $43 million in the first half of 2007. The decreases principally reflect lower margins on refined product sales. Total refined product sales volumes were 475,000 barrels per day in the first half of 2008 and 452,000 barrels per day in the first half of 2007.

     The Corporation has a 50% voting interest in a consolidated partnership that trades energy commodities and energy 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 earnings of the trading partnership, amounted to a loss of $15 million in the second quarter and $28 million in the first half of 2008 compared with income of $35 million in the second quarter of 2007 and $39 million in the first half of 2007.

     Marketing expenses increased in the second quarter and first half of 2008 compared with the corresponding periods of 2007, principally reflecting growth in energy marketing activities, higher credit card fees in retail gasoline operations and increased transportation costs.

     The Corporation’s future Marketing and Refining earnings may be impacted by volatility in marketing and refining margins, competitive industry conditions, government regulatory changes, credit risk and supply and demand factors, including the effects of weather.

     After-tax corporate expenses were $33 million in the second quarter of 2008 and $72 million in the first half of 2008 compared with $32 million in the second quarter and $63 million in the first half of 2007. The increase principally reflects higher employee related expenses and professional fees.

     Interest expense was as follows (in millions):

     The decrease in interest incurred in 2008 principally reflects lower average debt. The decrease in capitalized interest in 2008 reflects the completion of several development projects in 2007.

     Sales and other operating revenues increased by 58% in the second quarter and 52% in the first half of 2008 compared with the corresponding periods of 2007, primarily due to higher crude oil and refined product selling prices and increased sales of electricity. The increase in cost of goods sold principally reflects higher refined product costs and increased purchases of electricity.

     The following table sets forth certain relevant measures of the Corporation’s liquidity and capital resources (in millions, except ratios):

     The following table sets forth a summary of the Corporation’s cash flows (in millions):

Operating Activities: Net cash provided by operating activities, including changes in operating assets and liabilities, amounted to $2,867 million in the first half of 2008 compared with $1,838 million in 2007, reflecting increased earnings. In the first half of 2008, the Corporation received a cash distribution of $50 million from HOVENSA compared with $125 million in 2007.

Investing Activities: The following table summarizes the Corporation’s capital expenditures (in millions):

     In the first half of 2007, proceeds from the sale of the Corporation’s interests in the Scott and Telford fields in the United Kingdom were $93 million.

Financing Activities: In the first half of 2008, there was a net decrease in borrowings of $35 million from year-end 2007. Dividends paid were $97 million in the first half of 2008 ($95 million in the first half of 2007). During the first half of 2008, the Corporation received proceeds from the exercise of stock options totaling $103 million ($85 million in the same period of 2007).

     The Corporation anticipates investing a total of approximately $5 billion in capital and exploratory expenditures during 2008, of which $4.9 billion relates to Exploration and Production operations. The Corporation expects that it will fund its 2008 operations, including capital expenditures, dividends, pension contributions and required debt repayments, with existing cash on-hand, cash flow from operations and its available credit facilities.

     At June 30, 2008, the Corporation has $2,718 million of available borrowing capacity under its $3 billion syndicated revolving credit facility (the Revolver), substantially all of which is committed through May 2012. Outstanding borrowings under the Revolver were $281 million at June 30, 2008 compared with $220 million at December 31, 2007. In addition, at June 30, 2008, the Corporation had $336 million in outstanding borrowings and $534 million of outstanding letters of credit under its 364-day asset-backed credit facility (the Asset-backed Facility) compared with $250 million and $534 million, respectively, at December 31, 2007. The borrowings and outstanding letters of credit under the Asset-backed Facility were collateralized by approximately $1,360 million of Marketing and Refining accounts receivable. These receivables are not available to pay the general obligations of the Corporation before satisfaction of the Corporation’s obligations under the Asset-backed Facility. At June 30, 2008, the Corporation classified an aggregate of $536 million of borrowings under short-term credit facilities and the Asset-backed Facility as long-term debt, based on the available capacity under the Revolver.

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

     Outstanding letters of credit were as follows (in millions):

     A loan agreement covenant based on the Corporation’s debt to equity ratio allows the Corporation to borrow up to an additional $14.6 billion for the construction or acquisition of assets at June 30, 2008. The Corporation has the ability to borrow up to an additional $2.8 billion of secured debt at June 30, 2008 under the loan agreement covenants.

     The Corporation has leveraged leases not included in its balance sheet, primarily related to retail gasoline stations that the Corporation operates. The net present value of these leases is $491 million at June 30, 2008. The Corporation’s June 30, 2008 debt to capitalization ratio would increase from 26.2% to 28.5% if the leases were included as debt.

     The Corporation guarantees the payment of up to 50% of HOVENSA’s crude oil purchases from suppliers other than PDVSA. At June 30, 2008, the guarantee amounted to $192 million. This amount fluctuates based on the volume of crude oil purchased and related prices. In addition, the Corporation has agreed to provide funding up to a maximum of $15 million to the extent HOVENSA does not have funds to meet its senior debt obligations.

     Effective January 1, 2008, the Corporation adopted Financial Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements (FAS 157) for financial assets and liabilities that are required to be measured at fair value. FAS 157 established a framework for measuring fair value and requires disclosure of a fair value hierarchy (see Note 8, “Fair Value Measurements”). The impact of adopting FAS 157 was not material to the Corporation’s results of operations. Upon adoption, the Corporation recorded a reduction in the net deferred hedge losses reflected in accumulated other comprehensive income, which increased stockholders’ equity by approximately $190 million, after income taxes.

     In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (FAS 160). FAS 160 changes the accounting for and reporting of noncontrolling interests in a subsidiary. The Corporation is currently evaluating the impact of adoption on its financial statements and, as required, will adopt the provisions of FAS 160 effective January 1, 2009.

     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 products and electricity, as well as to changes in interest rates and foreign currency values. In the disclosures that follow, these operations are referred to as non-trading activities. The Corporation also has trading operations, principally through a 50% voting interest in a trading partnership. These activities are also exposed to commodity risks primarily related to the prices of crude oil, natural gas and refined products.

Instruments: The Corporation primarily uses forward commodity contracts, foreign exchange forward contracts, futures, swaps, options and energy commodity based securities in its non-trading and trading activities. Generally, these contracts are widely traded instruments with standardized terms.

Value-at-Risk: The Corporation uses value-at-risk to monitor and control commodity risk within its trading and non-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. The potential change in fair value based on commodity price risk is presented in the non-trading and trading sections below.

Non-Trading: The Corporation’s Exploration and Production segment uses futures and swaps to fix the selling prices of a portion of its future production and the related gains or losses are an integral part of its selling prices. Following is a summary of the Corporation’s outstanding Brent crude oil hedges at June 30, 2008:

     There were no hedges of WTI crude oil at June 30, 2008. At June 30, 2008, the Corporation also had outstanding United Kingdom natural gas hedges of 50 thousand Mcf per day through October 2008 at an average selling price of approximately $11.05 per Mcf. As market conditions change, the Corporation may adjust its hedge positions. The Corporation also markets energy commodities including refined petroleum products, natural gas and electricity. The Corporation uses derivatives to manage the risk in its marketing activities.

     Accumulated other comprehensive income (loss) at June 30, 2008 includes after-tax unrealized deferred losses of $2,138 million primarily related to crude oil contracts used as hedges of Exploration and Production sales. The pre-tax amount of deferred hedge losses is reflected in accounts payable and the related income tax benefits are recorded as deferred tax assets on the balance sheet.

     The Corporation estimates that at June 30, 2008, the value-at-risk for commodity related derivatives used in non-trading activities was $135 million compared with $72 million at December 31, 2007. The results may vary from time to time as hedge levels change.

Trading: In trading activities, the Corporation is exposed to changes in crude oil, natural gas and refined product prices. The trading partnership, in which the Corporation has a 50% voting interest, trades energy commodities and derivatives. The accounts of the partnership are consolidated with those of the Corporation. 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.

     Total net realized losses for the first half of 2008 amounted to $259 million ($60 million of realized gains for the first half of 2007). The following table provides an assessment of the factors affecting the changes in fair value of trading activities (in millions):

     The Corporation uses observable market values for determining the fair value of its trading instruments. In cases where actively quoted prices are not available, other external sources are used which incorporate information about commodity prices in actively quoted markets, quoted prices in less active markets and other market fundamental analysis. Internal estimates are based on internal models incorporating underlying market information such as commodity volatilities and correlations. The Corporation’s risk management department regularly compares valuations to independent sources and models. The following table summarizes the sources of fair values of derivatives used in the Corporation’s trading activities at June 30, 2008 (in millions):

     The Corporation estimates that at June 30, 2008, the value-at-risk for trading activities, including commodities, was $11 million compared with $10 million at December 31, 2007. The results may change from time to time as strategies change to capture potential market rate movements.

     The following table summarizes the fair values of net receivables relating to the Corporation’s trading activities and the credit ratings of counterparties at June 30, 2008 (in millions):

     Certain sections of Management’s Discussion and Analysis of Results of Operations and Financial Condition, including references to the Corporation’s future results of operations and financial position, liquidity and capital resources, capital expenditures, oil and gas production, tax rates, debt repayment, hedging, derivative and market risk disclosures and off-balance sheet arrangements include forward-looking information. 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.

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

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 June 30, 2008, John B. Hess, Chief Executive Officer, and John P. Rielly, Chief Financial Officer, concluded that these disclosure controls and procedures were effective as of June 30, 2008.

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 June 30, 2008 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

     The Annual Meeting of Stockholders of the Registrant was held on May 7, 2008. The Inspectors of Election reported that 284,667,801 shares of common stock of the Registrant were represented in person or by proxy at the meeting, constituting 88% of the votes entitled to be cast. At the meeting, stockholders voted on:

     The inspectors reported that 281,043,829 votes were cast for the ratification of the selection of Ernst & Young LLP as the independent auditors of the Registrant for the fiscal year ending December 31, 2008, 1,923,224 votes were cast against said ratification and holders of 1,700,748 votes abstained.

     The inspectors reported that 245,741,757 votes were cast for the proposal to amend the certificate of incorporation and by-laws to declassify the board, constituting 76.25% of the outstanding shares and less than the 80% required for amendment, 37,112,017 votes were cast against said proposal and holders of 1,814,027 votes abstained. There were no broker non-votes with respect to this matter.

     The inspectors reported that 255,032,299 votes were cast for the approval of the 2008 Long-Term Incentive Plan, 14,432,410 votes were cast against said proposal and holders of 1,798,830 votes abstained. There were 13,404,262 broker non-votes with respect to this matter.

     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.