Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

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

For the quarter ended June 30, 2014

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 þ    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 þ    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 þ

   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 þ

At June 30, 2014, there were 307,724,553 shares of Common Stock outstanding.

 

 

 


Table of Contents

HESS CORPORATION

Form 10-Q

TABLE OF CONTENTS

 

Item No.

       Page
Number
 

PART I FINANCIAL INFORMATION

  
1.  

Financial Statements

  
 

Consolidated Balance Sheet at June 30, 2014 and December 31, 2013

   2
 

Statement of Consolidated Income for the three months and six months ended June 30, 2014 and 2013

   3
 

Statement of Consolidated Comprehensive Income for the three months and
six months ended June 30, 2014 and 2013

   4
 

Statement of Consolidated Cash Flows for the six months ended June 30, 2014 and 2013

   5
 

Statement of Consolidated Equity for the periods ended June 30, 2014 and 2013

   6
 

Notes to Consolidated Financial Statements

   7
2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   26
3.  

Quantitative and Qualitative Disclosures about Market Risk

   42
4.  

Controls and Procedures

   42
 

PART II OTHER INFORMATION

  
1.  

Legal Proceedings

   43
2.  

Share Repurchase Activities

   43
6.  

Exhibits and Reports on Form 8-K

   44
 

Signatures

   45
 

Certifications

  


Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

                                           
    June 30,
2014
    December 31,
2013
 
   

(In millions,

except share amounts)

 
ASSETS   

CURRENT ASSETS

   

Cash and cash equivalents

  $ 2,205     $ 1,814  

Accounts receivable

   

Trade

    2,348       3,093  

Other

    350       432  

Inventories

    842       954  

Assets held for sale

    2,151       1,097  

Other current assets

    871       1,209  
 

 

 

   

 

 

 

Total current assets

    8,767       8,599  
 

 

 

   

 

 

 

INVESTMENTS IN AFFILIATES

    213       687  
 

 

 

   

 

 

 

PROPERTY, PLANT AND EQUIPMENT

   

Total — at cost

    45,157       45,950  

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

    17,921       17,179  
 

 

 

   

 

 

 

Property, plant and equipment — net

    27,236       28,771  
 

 

 

   

 

 

 

GOODWILL

    1,858       1,869  

DEFERRED INCOME TAXES

    2,499       2,319  

OTHER ASSETS

    498       509  
 

 

 

   

 

 

 

TOTAL ASSETS

  $ 41,071     $ 42,754  
 

 

 

   

 

 

 
LIABILITIES AND EQUITY   

CURRENT LIABILITIES

   

Accounts payable

  $ 1,529     $ 2,109  

Accrued liabilities

    3,063       3,265  

Taxes payable

    278       520  

Liabilities associated with assets held for sale

    263       286  

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

    124       378  
 

 

 

   

 

 

 

Total current liabilities

    5,257       6,558  
 

 

 

   

 

 

 

LONG-TERM DEBT

    5,953       5,420  

DEFERRED INCOME TAXES

    2,416       2,292  

ASSET RETIREMENT OBLIGATIONS

    2,117       2,249  

OTHER LIABILITIES AND DEFERRED CREDITS

    974       1,451  
 

 

 

   

 

 

 

Total liabilities

    16,717       17,970  
 

 

 

   

 

 

 

EQUITY

   

Hess Corporation stockholders’ equity

   

Common stock, par value $1.00
Authorized — 600,000,000 shares
Issued — 307,724,553 shares at June 30, 2014;
    325,314,177 shares at December 31, 2013

    308       325  

Capital in excess of par value

    3,454       3,498  

Retained earnings

    20,879       21,235  

Accumulated other comprehensive income (loss)

    (384     (338
 

 

 

   

 

 

 

Total Hess Corporation stockholders’ equity

    24,257       24,720  

Noncontrolling interests

    97       64  
 

 

 

   

 

 

 

Total equity

    24,354       24,784  
 

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

  $ 41,071     $ 42,754  
 

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)

 

                                                                                               
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2014     2013     2014     2013  
    (In millions, except per share amounts)  

REVENUES AND NON-OPERATING INCOME

       

Sales and other operating revenues

  $ 2,846     $ 3,069     $ 5,618     $ 6,537  

Gains on asset sales, net

    779       1,111       789       1,799  

Other, net

    (25     (18     (115     (55
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and non-operating income

    3,600       4,162       6,292       8,281  
 

 

 

   

 

 

   

 

 

   

 

 

 

COSTS AND EXPENSES

       

Cost of products sold (excluding items shown separately below)

    444       421       837       1,017  

Operating costs and expenses

    522       510       988       1,095  

Production and severance taxes

    78       97       140       227  

Marketing expenses

    25       28       65       60  

Exploration expenses, including dry holes and lease impairment

    460       200       579       419  

General and administrative expenses

    143       168       285       317  

Interest expense

    85       117       166       223  

Depreciation, depletion and amortization

    787       614       1,512       1,293  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    2,544       2,155       4,572       4,651  
 

 

 

   

 

 

   

 

 

   

 

 

 

INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES

    1,056       2,007       1,720       3,630  

Provision for income taxes

    89       407       338       868  
 

 

 

   

 

 

   

 

 

   

 

 

 

INCOME FROM CONTINUING OPERATIONS

    967       1,600       1,382       2,762  

INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES

    (37     16       (31     127  
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

    930       1,616       1,351       2,889  

Less: Net income (loss) attributable to noncontrolling interests

    (1     185       34       182  
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO HESS CORPORATION

  $ 931     $ 1,431     $ 1,317     $ 2,707  
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO HESS CORPORATION PER SHARE

       

BASIC:

       

Continuing operations

  $ 3.13     $ 4.16     $ 4.29     $ 7.60  

Discontinued operations

    (0.12     0.05       (0.10     0.37  
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME PER SHARE

  $ 3.01     $ 4.21     $ 4.19     $ 7.97  
 

 

 

   

 

 

   

 

 

   

 

 

 

DILUTED:

       

Continuing operations

  $ 3.08     $ 4.11     $ 4.23     $ 7.51  

Discontinued operations

    (0.12     0.05       (0.10     0.37  
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME PER SHARE

  $ 2.96     $ 4.16     $ 4.13     $ 7.88  
 

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)

    314.1       344.0       318.7       343.4  

COMMON STOCK DIVIDENDS PER SHARE

  $ 0.25     $ 0.10     $ 0.50     $ 0.20  

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

 

                                                                                               
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2014     2013     2014     2013  
    (In millions)  

NET INCOME

  $ 930     $ 1,616     $ 1,351     $ 2,889  
 

 

 

   

 

 

   

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

       

Derivatives designated as cash flow hedges

       

Effect of hedge (gains) losses reclassified to income

    (5     (45     (10     (41

Income taxes on effect of hedge (gains) losses reclassified to income

    2       17       4       15  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net effect of hedge (gains) losses reclassified to income

    (3     (28     (6     (26
 

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value of cash flow hedges

    (40     147       (26     165  

Income taxes on change in fair value of cash flow hedges

    15       (56     10       (63
 

 

 

   

 

 

   

 

 

   

 

 

 

Net change in fair value of cash flow hedges

    (25     91       (16     102  
 

 

 

   

 

 

   

 

 

   

 

 

 

Change in derivatives designated as cash flow hedges, after taxes

    (28     63       (22     76  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pension and other postretirement plans

       

(Increase) reduction in unrecognized actuarial losses

    (4            (4     245  

Income taxes on actuarial changes in plan liabilities

    2              2       (89
 

 

 

   

 

 

   

 

 

   

 

 

 

(Increase) reduction in unrecognized actuarial losses, net

    (2            (2     156  
 

 

 

   

 

 

   

 

 

   

 

 

 

Amortization of net actuarial losses

    15       12       23       34  

Income taxes on amortization of net actuarial losses

    (5     (4     (8     (12
 

 

 

   

 

 

   

 

 

   

 

 

 

Net effect of amortization of net actuarial losses

    10       8       15       22  
 

 

 

   

 

 

   

 

 

   

 

 

 

Change in pension and other postretirement plans, after taxes

    8       8       13       178  
 

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustment

       

Foreign currency translation adjustment

    (88     (124     (37     (293

Reclassified to Gains on asset sales, net

           94              119  
 

 

 

   

 

 

   

 

 

   

 

 

 

Change in foreign currency translation adjustment

    (88     (30     (37     (174
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

    (108     41       (46     80  
 

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

    822       1,657       1,305       2,969  

Less: Comprehensive income (loss) attributable to noncontrolling interests

    (1     193       34       188  
 

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO
HESS CORPORATION

  $ 823     $ 1,464     $ 1,271     $ 2,781  
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)

 

                                               
    Six Months Ended
June 30,
 
    2014     2013  
    (In millions)  

CASH FLOWS FROM OPERATING ACTIVITIES

   

Net income

  $ 1,351     $ 2,889  

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

   

Depreciation, depletion and amortization

    1,512       1,293  

Exploratory dry hole costs

    286       68  

Exploration lease impairment

    161       128  

Gains on asset sales, net

    (789     (1,799

Loss from equity affiliates

    84         

Stock compensation expense

    41       34  

Provision (benefit) for deferred income taxes

    79       212  

(Income) loss from discontinued operations

    31       (127

Changes in operating assets and liabilities

    (648     (674
 

 

 

   

 

 

 

Cash provided by (used in) operating activities — continuing operations

    2,108       2,024  

Cash provided by (used in) operating activities — discontinued operations

    (39     42  
 

 

 

   

 

 

 

Net cash provided by (used in) operating activities

    2,069       2,066  
 

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

   

Capital expenditures

    (2,348     (2,982

Proceeds from asset sales

    2,847       3,799  

Other, net

    (125     (105
 

 

 

   

 

 

 

Cash provided by (used in) investing activities — continuing operations

    374       712  

Cash provided by (used in) investing activities — discontinued operations

    (404     (37
 

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    (30     675  
 

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

   

Net borrowings (repayments) of debt with maturities of 90 days or less

           (1,748

Debt with maturities of greater than 90 days

   

Borrowings

    598       185  

Repayments

    (500     (877

Common stock acquired and retired

    (1,735       

Cash dividends paid

    (156     (69

Employee stock options exercised, including income tax benefits

    148       42  

Noncontrolling interests, net

    (1     (189
 

 

 

   

 

 

 

Cash provided by (used in) financing activities — continuing operations

    (1,646     (2,656

Cash provided by (used in) financing activities — discontinued operations

    (2     (2
 

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    (1,648     (2,658
 

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    391       83  

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

    1,814       642  
 

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 2,205     $ 725  
 

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED EQUITY (UNAUDITED)

 

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

BALANCE AT JANUARY 1, 2014

  $ 325     $ 3,498     $ 21,235     $ (338   $ 24,720     $ 64     $ 24,784  

Net income

        1,317         1,317       34       1,351  

Other comprehensive income (loss)

          (46     (46            (46
         

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

            1,271       34       1,305  

Activity related to restricted common stock awards, net

    1       28                     29              29  

Employee stock options, including income tax benefits

    3       147                     150              150  

Performance share units

           8                     8              8  

Cash dividends declared

                  (156            (156            (156

Common stock acquired and retired

    (21     (227     (1,517            (1,765            (1,765

Noncontrolling interests, net

                                       (1     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JUNE 30, 2014

  $ 308     $ 3,454     $ 20,879     $ (384   $ 24,257     $ 97     $ 24,354  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JANUARY 1, 2013

  $ 342     $ 3,524     $ 17,717     $ (493   $ 21,090     $ 113     $ 21,203  

Net income

        2,707         2,707       182       2,889  

Other comprehensive income (loss)

          74       74       6       80  
         

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

            2,781       188       2,969  

Activity related to restricted common stock awards, net

    1       24                     25              25  

Employee stock options, including income tax benefits

           48                     48              48  

Performance share units

           8                     8              8  

Cash dividends declared

                  (69            (69            (69

Noncontrolling interests, net

                  14              14       (225     (211
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JUNE 30, 2013

  $ 343     $ 3,604     $ 20,369     $ (419   $ 23,897     $ 76     $ 23,973  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

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 or Hess) consolidated financial position at June 30, 2014 and December 31, 2013, and the consolidated results of operations and cash flows for the three and six month periods ended June 30, 2014 and 2013. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.

In the first quarter of 2013, the Corporation announced several initiatives to continue its transformation into a more focused pure play Exploration and Production (E&P) company. The transformation plan included fully exiting the Corporation’s Marketing and Refining (M&R) businesses, the sale of mature E&P assets and monetizing Bakken midstream assets by 2015. The M&R businesses to be divested included retail, energy marketing, terminal, energy trading and refining operations, as well as the Corporation’s interests in two power plant joint ventures. In February 2013, the Corporation permanently ceased its refining operations at the Port Reading facility, completing its exit from all refining operations. In the fourth quarter of 2013, the Corporation completed the sale of its energy marketing and terminal businesses. In the second quarter of 2014, the Corporation reached an agreement to sell its retail business and completed the sale of its interest in one of the power plant joint ventures. The results of the retail, energy marketing and terminal businesses as well as the Port Reading refining operations have been presented as discontinued operations for all periods in the Statement of Consolidated Income. The assets and liabilities of the retail business have been presented in the Consolidated Balance Sheet as held for sale at June 30, 2014 but have not been recast as held for sale as of December 31, 2013. See also Note 2, Discontinued Operations and Note 4, Dispositions in the Notes to the Consolidated Financial Statements for additional disclosures related to the divestitures.

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 Annual Report on Form 10-K for the year ended December 31, 2013. Certain information in the financial statements and notes has been reclassified to conform to the current period presentation.

New Accounting Pronouncements: In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The ASU amends the criteria for reporting discontinued operations to include only disposals representing a strategic shift in operations. The ASU also requires expanded disclosures regarding the assets, liabilities, income, and expenses of discontinued operations. This ASU is effective for the Corporation in the first quarter of 2015 and early adoption is permitted. The Corporation is currently assessing the impact of the ASU on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as a new Accounting Standards Codification (ASC) Topic, ASC 606. This ASU is effective for the Corporation beginning in the first quarter of 2017 and early adoption is not permitted. The Corporation is currently assessing the impact of the ASU on its consolidated financial statements.

2. Discontinued Operations

Downstream businesses reported as discontinued operations in the Statement of Consolidated Income include the retail, energy marketing and terminal businesses as well as the Port Reading refining operations. At June 30, 2014, the assets and liabilities of the retail business have been reported as assets held for sale in the Consolidated Balance Sheet.

 

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HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Sales and other operating revenues and Income from discontinued operations were as follows:

 

                                                                                               
    Three Months Ended      Six Months Ended  
    June 30,      June 30,  
    2014     2013      2014     2013  
    (In millions)  

Sales and other operating revenues

  $ 3,067     $ 5,594      $ 6,134     $ 13,005  
 

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from discontinued operations before income taxes

  $ (57   $ 23      $ (45   $ 196  

Current tax provision (benefit)

                        

Deferred tax provision (benefit)

    (20     7        (14     69  
 

 

 

   

 

 

    

 

 

   

 

 

 

Provision (benefit) for income taxes

    (20     7        (14     69  
 

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from discontinued operations, net of income taxes

  $ (37   $ 16      $ (31   $ 127  
 

 

 

   

 

 

    

 

 

   

 

 

 

The Corporation recognized pre-tax gains of $39 million ($24 million after income taxes) in the second quarter of 2014, $25 million ($16 million after income taxes) in the first quarter of 2014, and $218 million ($137 million after income taxes) in the first quarter of 2013, relating to the liquidation of last-in, first-out (LIFO) inventories. In the second quarter of 2014, the Corporation recognized a pre-tax charge of $115 million ($72 million after income taxes) related to the termination of lease contracts and the purchase of 180 retail gasoline stations. In the first quarter of 2013, the Corporation recorded additional depreciation related to the Port Reading refining facility of $80 million. The LIFO gains, additional depreciation and charge relating to the buyout of the leases were included in Income (loss) from discontinued operations.

The following table presents the assets and liabilities of the retail business that are classified as held for sale (in millions):

 

                       
    June 30,  
    2014  

Cash and cash equivalents

  $ 35  

Accounts receivable

    152  

Inventories

    162  

Property, plant and equipment — net

    1,589  

Goodwill

    115  

Other assets

    98  
 

 

 

 

Total assets

  $ 2,151  
 

 

 

 

Accounts payable and accrued liabilities

  $ 150  

Other liabilities and deferred credits

    113  
 

 

 

 

Total liabilities

  $ 263  
 

 

 

 

At June 30, 2014, the inventories held for sale consisted of $78 million of refined petroleum products, less a LIFO adjustment of $30 million, and $114 million of convenience store merchandise.

In January 2014, the Corporation’s retail business acquired its partners’ 56% interest in WilcoHess, a retail gasoline joint venture, for approximately $290 million and the settlement of liabilities. As a result of remeasuring the carrying value of the Corporation’s equity interest in WilcoHess to fair value in connection with this business combination, a pre-tax gain of $39 million ($24 million after income taxes) was recorded, which has been included in Income (loss) from discontinued operations in the Statement of Consolidated Income. Effective from the acquisition date, Hess has consolidated the results of WilcoHess’ operations, which have been included in the results of the discontinued operations reported above. The assets and liabilities related to WilcoHess are included in the amounts reported above as held for sale.

 

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HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

3. Exit and Disposal Costs

The following table provides the components of and changes in the Corporation’s restructuring accruals:

 

                                                                                               
    Exploration
and
Production
    Corporate
and Other
    Discontinued
Operations
    Total  
    (In millions)  

Employee Severance

       

Balance at January 1, 2014

  $ 32     $ 32     $ 107     $ 171  

Provision

    17       14       30       61  

Payments

    (27     (9     (47     (83
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

    22       37       90       149  
 

 

 

   

 

 

   

 

 

   

 

 

 

Facility and Other Exit Costs

       

Balance at January 1, 2014

    53       17       48       118  

Provision

    (17 )*      9       32       24  

Payments, settlements and other

    (16     (8     (42     (66
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

    20       18       38       76  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total accruals at June 30, 2014

  $ 42     $ 55     $ 128     $ 225  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Represents the release from certain leased office space obligations.

The following table provides the classification of costs and expense reversals associated with the Corporation’s restructuring program:

 

                                                                                               
    Three Months Ended      Six Months Ended  
    June 30,      June 30,  
    2014     2013      2014     2013  
    (In millions)  

Employee Severance

        

Operating costs and expenses

  $ 2     $ 10      $ 2     $ 44  

Marketing expenses

    1              1       5  

Exploration expenses, including dry holes and lease impairment

    1       1        4       15  

General and administrative expenses

    14       2        24       43  

Income (loss) from discontinued operations

    10       20        30       84  
 

 

 

   

 

 

    

 

 

   

 

 

 

Total employee severance

  $ 28     $ 33      $ 61     $ 191  
 

 

 

   

 

 

    

 

 

   

 

 

 

Facility and Other Exit Costs

        

General and administrative expenses

  $ (7   $ 9      $ (5   $ 9  

Depreciation, depletion and amortization

    (3            (3      

Income (loss) from discontinued operations

    14       14        32       35  
 

 

 

   

 

 

    

 

 

   

 

 

 

Total facility and other exit costs

  $ 4     $ 23      $ 24     $ 44  
 

 

 

   

 

 

    

 

 

   

 

 

 

The employee severance charges primarily resulted from the Corporation’s divestiture program announced in March 2013. The severance charges were based on probable amounts incurred under ongoing severance arrangements or other statutory requirements, plus amounts earned through June 30, 2014 under enhanced benefit arrangements. The expense associated with the enhanced benefits is recognized ratably over the estimated service period required for the employee to earn the benefit upon termination.

 

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HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The Corporation expects to incur additional enhanced severance benefit charges of approximately $15 million beyond the amounts accrued at June 30, 2014, of which approximately $3 million relates to E&P, $4 million to Corporate and $8 million to discontinued operations. The Corporation’s estimate of employee severance costs could change due to a number of factors, including the number of employees that work through the requisite service date and the timing of when each remaining divestiture occurs.

In the second quarter of 2014, the facility and other exit costs comprised professional fees and adjustments associated with the relief of certain exit obligations from leased office space. The facility and other exit costs in the second quarter of 2013 primarily related to the shutdown costs for Port Reading refining operations and contract termination and other costs.

For the accrued employee severance at June 30, 2014 totaling $149 million, the Corporation expects to pay approximately 65% in 2014, 30% in 2015 and the remainder in 2016. For the accrued facility and other exit costs totaling $76 million, the Corporation expects to pay approximately 75% in 2014 and the remainder in 2015 and beyond.

4. Dispositions

In April 2014, the Corporation completed the sale of its E&P interests in Thailand for cash proceeds of approximately $805 million. This transaction resulted in a pre-tax gain of $706 million ($706 million gain after income taxes) after deducting the net book value of assets, including allocated goodwill of $76 million. In June 2014, the Corporation completed the sale of its 50% interest in a joint venture constructing an electric generating facility in Newark, New Jersey for cash proceeds of $320 million, resulting in a pre-tax gain of approximately $13 million ($8 million gain after income taxes). Also in June 2014, the Corporation completed the sale of approximately 30,000 additional net acres of Utica dry gas acreage, including related wells and facilities, for cash proceeds of approximately $485 million and recorded a pre-tax gain of $62 million ($35 million gain after income taxes) after deducting the net book value of assets, including allocated goodwill of $11 million. The Corporation also sold approximately 47,000 acres of Utica dry gas acreage in March 2014 for proceeds of approximately $590 million. There was no gain or loss realized on the transaction as the carrying value of undeveloped leasehold costs was reduced by the sales proceeds. In the first quarter of 2014, the Corporation completed the sale of its interest in the Pangkah asset, offshore Indonesia for cash proceeds of approximately $650 million. This transaction resulted in a pre-tax gain of $31 million ($10 million loss after income taxes) after deducting the net book value of assets, including allocated goodwill of $56 million. In addition, the Corporation sold an exploration block in Indonesia for a pre-tax loss of $20 million ($11 million gain after income taxes).

In the second quarter of 2013, the Corporation sold its Russian subsidiary, Samara-Nafta, for cash proceeds of $2.1 billion after working capital and other adjustments. Net proceeds to Hess were approximately $1.9 billion. The transaction resulted in an after-tax gain of $1,119 million. After reduction of the noncontrolling interest holder’s share of $168 million, which is reflected in Net income (loss) attributable to noncontrolling interests, the net gain attributable to the Corporation was $951 million. In March 2013, the Corporation sold its interests in the Azeri-Chirag-Guneshli (ACG) fields (Hess 3%), offshore Azerbaijan in the Caspian Sea, and the associated Baku-Tbilisi-Ceyhan (BTC) oil transportation pipeline company (Hess 2%) for cash proceeds of $884 million. The transaction resulted in an after-tax gain of $360 million. In January 2013, the Corporation completed the sale of its interests in the Beryl fields and the Scottish Area Gas Evacuation System (SAGE) in the United Kingdom North Sea for cash proceeds of $442 million. The transaction resulted in an after-tax gain of $323 million.

 

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HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

5. Inventories

Inventories consisted of the following:

 

                                               
    June 30,     December 31,  
    2014     2013  
    (In millions)  

Crude oil

  $ 320     $ 291  

Refined petroleum products and natural gas

    480       618  

Less: LIFO adjustment

    (274     (339
 

 

 

   

 

 

 
    526       570  

Merchandise, materials and supplies

    316       384  
 

 

 

   

 

 

 

Total inventories

  $ 842     $ 954  
 

 

 

   

 

 

 

The inventories at the retail gasoline stations have been classified as Assets held for sale in the Consolidated Balance Sheet at June 30, 2014. Inventories related to the E&P segment were $631 million at June 30, 2014 and $599 million at December 31, 2013.

6. Property, Plant and Equipment

Assets Held for Sale

        Downstream Businesses: In May 2014, the Corporation reached an agreement to sell its retail business for proceeds of $2.874 billion comprising $2.6 billion in cash plus $274 million for retail gasoline station leases. As a result, the assets and liabilities of the retail business have been classified as held for sale at June 30, 2014. This transaction, which is subject to customary closing conditions, is expected to complete before year-end 2014. See also Note 2, Discontinued Operations, in the Notes to the Consolidated Financial Statements.

        Exploration and Production: At December 31, 2013, assets totaling $1,097 million, primarily consisting of the net property, plant and equipment balances as well as allocated goodwill of $76 million, for Thailand and the Pangkah Field, offshore Indonesia (Hess 75%) were reported as Assets held for sale. In addition, liabilities related to these properties totaling $286 million, primarily consisting of asset retirement obligations and deferred income taxes, were reported in Liabilities associated with assets held for sale. In 2014, the Corporation completed the sale of its interests in Thailand and Pangkah. See Note 4, Dispositions, in the Notes to the Consolidated Financial Statements.

Capitalized Exploratory Well Costs: The following table discloses the net changes in capitalized exploratory well costs pending determination of proved reserves for the six months ended June 30, 2014 (in millions):

 

                       

Balance at January 1

  $ 2,045  

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

    102  

Capitalized exploratory well costs charged to expense

    (227
 

 

 

 

Balance at June 30, 2014

  $ 1,920  
 

 

 

 

The preceding table excludes exploratory dry hole costs of $59 million which were incurred and subsequently expensed in 2014. Capitalized exploratory well costs charged to expense in the second quarter of 2014 included $169 million to write-off a previously capitalized exploration well in the western half of Green Canyon Block 469 in the Gulf of Mexico, as explained below. Capitalized exploratory well costs greater than one year old after completion of drilling were $1,794 million at June 30, 2014. Approximately 47% of the capitalized well costs in excess of one year relates to Block WA-390-P, offshore Western Australia, where development planning and commercial activities, including negotiations with potential liquefaction partners, are ongoing. Successful negotiation with a third party liquefaction partner is necessary before the Corporation can negotiate a gas sales agreement and sanction development of the project. Approximately 28% relates to the Stampede Project in the Gulf of Mexico where Hess is operator and owns a 25% working interest. An application to unitize Blocks 468, 512, the western half of 469 and the eastern half of 511 was filed with the Bureau of Safety and Environmental Enforcement in the

 

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HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

first quarter of 2014. During the second quarter, the Corporation received approval to unitize Blocks 468, 512 and the eastern half of 511. As Block 469 was not accepted in the unitized development area, the Corporation expensed the capitalized well on this block. The Stampede development project continues to progress and project sanction is expected later in the year. Approximately 21% relates to offshore Ghana where the Corporation has drilled seven successful exploration wells. Appraisal plans for the seven wells on the block were submitted to the Ghanaian government for approval in June 2013. Four plans have been approved and discussions continue with the government on the three remaining appraisal plans. The Corporation commenced a three well appraisal drilling program in the second quarter of 2014 and completed drilling the first well in June. The second well was also drilled and is currently undergoing production testing. 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. Goodwill

The changes in the carrying amount of goodwill are as follows (in millions):

 

                       

Balance at January 1, 2014

  $ 1,869  

Acquisitions (a)

    115  

Dispositions (b)

    (126
 

 

 

 

Balance at June 30, 2014

  $ 1,858  
 

 

 

 

 

(a)

Represents the goodwill resulting from the Corporation’s WilcoHess acquisition. See Note 2, Discontinued Operations, in the Notes to the Consolidated Financial Statements.

(b)

Includes $115 million reclassified to Assets held for sale in the first half of 2014.

8. Debt

In June 2014, the Corporation issued $600 million of unsecured, fixed-rate notes ($598 million net of discount) comprising $300 million with a coupon of 1.3% scheduled to mature in June 2017 and $300 million with a coupon of 3.5% scheduled to mature in July 2024. In the first half of 2014, the Corporation repaid $500 million of debt, including $250 million of unsecured, fixed-rate notes, $74 million assumed in the acquisition of WilcoHess, and $152 million for the retirement of various lease obligations in connection with the Corporation’s purchase of retail gasoline stations. See also Note 2, Discontinued Operations, in the Notes to the Consolidated Financial Statements.

9. Other Non-operating Income

In the first quarter of 2014, the Corporation recorded a charge of $84 million ($52 million after income taxes) to reduce to fair value its investment in the Bayonne Energy Center (BEC) joint venture (Hess 50%) based on a Level 3 fair value measurement. This charge was included in Other, net in the Statement of Consolidated Income.

Pre-tax foreign currency gains (losses) included in Other, net in the Statement of Consolidated Income amounted to the following:

 

                                                                                               
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2014     2013     2014     2013  
    (In millions)  

Pre-tax foreign currency gains (losses)

  $ (19   $ (19   $ (25   $ (51
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

10. Retirement Plans

Components of net periodic pension cost consisted of the following:

 

                                                                                               
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2014     2013     2014     2013  
    (In millions)  

Service cost

  $ 13     $ 17     $ 25     $ 37  

Interest cost

    24       22       49       44  

Expected return on plan assets

    (40     (36     (80     (69

Amortization of net loss

    7       13       15       34  

Settlement loss*

    8              8         
 

 

 

   

 

 

   

 

 

   

 

 

 

Pension expense

  $ 12     $ 16     $ 17     $ 46  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

*

In 2014, the Corporation recorded charges related to plan settlements of $8 million ($5 million after income taxes) due to employee retirements.

In 2014, the Corporation expects to contribute approximately $80 million to its funded pension plans. Through June 30, 2014, the Corporation contributed approximately $40 million of this amount.

11. Weighted Average Common Shares and Share Repurchase Plan

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

 

                                                                                               
    Three Months Ended
June  30,
     Six Months Ended
June  30,
 
    2014     2013      2014     2013  
    (In millions, except per share amounts)  

Income from continuing operations, net of income taxes

  $ 967     $ 1,600      $ 1,382     $ 2,762  

Less: Net income (loss) attributable to noncontrolling interests

    (1     185        34       182  
 

 

 

   

 

 

    

 

 

   

 

 

 

Net income from continuing operations attributable to Hess Corporation

    968       1,415        1,348       2,580  

Income (loss) from discontinued operations, net of income taxes

    (37     16        (31     127  
 

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to Hess Corporation

  $ 931     $ 1,431      $ 1,317     $ 2,707  
 

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

    309.7       340.1        314.2       339.6  

Effect of dilutive securities:

        

Restricted common stock

    1.4       1.1        1.5       1.3  

Stock options

    1.7       1.9        1.7       1.6  

Performance share units

    1.3       0.9        1.3       0.9  
 

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

    314.1       344.0        318.7       343.4  
 

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) attributable to Hess Corporation per share:

        

Basic:

        

Continuing operations

  $ 3.13     $ 4.16      $ 4.29     $ 7.60  

Discontinued operations

    (0.12     0.05        (0.10     0.37  
 

 

 

   

 

 

    

 

 

   

 

 

 

Net income per share

  $ 3.01     $ 4.21      $ 4.19     $ 7.97  
 

 

 

   

 

 

    

 

 

   

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

                                                                                               
    Three Months Ended
June  30,
     Six Months Ended
June  30,
 
    2014     2013      2014     2013  
    (In millions, except per share amounts)  

Diluted:

        

Continuing operations

  $ 3.08     $ 4.11      $ 4.23     $ 7.51  

Discontinued operations

    (0.12     0.05        (0.10     0.37  
 

 

 

   

 

 

    

 

 

   

 

 

 

Net income per share

  $ 2.96     $ 4.16      $ 4.13     $ 7.88  
 

 

 

   

 

 

    

 

 

   

 

 

 

The Corporation granted 1,028,883 shares of restricted stock, 298,222 performance share units (PSUs) and 162,911 stock options during the six month period ended June 30, 2014 and 1,205,569 shares of restricted stock and 279,093 PSUs for the same period in 2013. The weighted average common shares used in the diluted earnings per share calculations exclude the effect of 1,978,777 and 2,577,984 out-of-the-money stock options for the three and six months ended June 30, 2014, respectively, as well as 3,793,948 and 5,091,024 out-of-the-money stock options for the three and six months ended June 30, 2013, respectively.

In March 2013, the Corporation announced a board authorized plan to repurchase up to $4 billion of outstanding common stock using proceeds from its announced asset divestiture program. In May 2014, the Corporation increased its board authorized share repurchase program to $6.5 billion. The share repurchase program commenced in August 2013. In the first half of 2014, the Corporation purchased approximately 20.9 million shares for a total cost of approximately $1,765 million, at an average cost of $84.33 per share including transaction fees. As of June 30, 2014, the Corporation has approximately $3.2 billion available under its board authorized plan for purchasing additional common shares.

12. Guarantees and Contingencies

The Corporation is subject to loss contingencies with respect to various claims, lawsuits and other proceedings. The Corporation cannot predict with certainty if, how or when such claims, lawsuits and proceedings will be resolved or what the eventual relief, if any, may be. Numerous issues may need to be resolved, including through lengthy discovery, conciliation and/or arbitration proceedings, or litigation before a loss or range of loss can be reasonably estimated. Subject to the foregoing, in management’s opinion, based upon currently known facts and circumstances, the outcome of such lawsuits, claims and proceedings is not expected to have a material adverse effect on the financial condition of the Corporation. However, the Corporation could incur judgments, enter into settlements or revise its opinion regarding the outcome of certain matters, and such developments could have a material adverse effect on its results of operations in the period in which the amounts are accrued and its cash flows in the period in which the amounts are paid.

The Corporation, along with many companies engaged in refining and marketing of gasoline, has been a party to lawsuits and claims related to the use of methyl tertiary butyl ether (MTBE) in gasoline. A series of similar lawsuits, many involving water utilities or governmental entities, were filed in jurisdictions across the U.S. against producers of MTBE and petroleum refiners who produced gasoline containing MTBE, including the Corporation. The principal allegation in all cases was that gasoline containing MTBE is a defective product and that these parties are strictly liable in proportion to their share of the gasoline market for damage to groundwater resources and are required to take remedial action to ameliorate the alleged effects on the environment of releases of MTBE. The majority of the cases asserted against the Corporation have been settled. In March 2014, the Corporation agreed to settle claims against it arising out of an action brought by the State of New Jersey for approximately $35 million. The settlement is subject to entry of the settlement by the trial judge. The Corporation has reserves to fully cover this settlement amount. An action brought by the Commonwealth of Puerto Rico remained unresolved at June 30, 2014, for which the Corporation has recorded a reserve. In June 2014, the Commonwealth of Pennsylvania filed a lawsuit in state court in Pennsylvania alleging that Hess Corporation and all major oil companies with operations in Pennsylvania have damaged the ground waters in Pennsylvania by introducing gasoline with MTBE into the Commonwealth. This action has been removed to the Federal court and will likely be forwarded to the existing MTBE multidistrict litigation pending in the Southern District of New York. It is reasonably possible that the Corporation has incurred a loss relating to this matter, but at this early stage it is unable to estimate a range of potential liability.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

13. Segment Information

The Corporation has substantially completed its transition to a pure play E&P company. The results of operations for its retail, energy marketing, terminal and refining businesses have been classified as discontinued operations. See also Note 1, Basis of Presentation and Note 2, Discontinued Operations, in the Notes to the Consolidated Financial Statements for additional disclosures related to these divestures. The Corporation currently has one operating segment, Exploration and Production, and a Corporate, Interest and Other segment which includes the energy trading operations and an interest in a power plant joint venture that is being divested.

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

 

                                                                                               
    Three Months Ended
June  30,
    Six Months Ended
June 30,
 
    2014     2013     2014     2013  
    (In millions)  

Sales and other operating revenues:

       

Exploration and Production

  $ 2,829     $ 3,011     $ 5,502     $ 6,477  

Corporate, Interest and Other

    17       58       116       60  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,846     $ 3,069     $ 5,618     $ 6,537  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Hess Corporation:

       

Exploration and Production

  $ 1,057     $ 1,533     $ 1,565     $ 2,819  

Corporate, Interest and Other

    (89     (118     (217     (239
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    968       1,415       1,348       2,580  

Discontinued operations

    (37     16       (31     127  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 931     $ 1,431     $ 1,317     $ 2,707  
 

 

 

   

 

 

   

 

 

   

 

 

 

Identifiable assets by operating segment were as follows:

 

                                               
    June 30,
2014
     December 31,
2013
 
    (In millions)  

Exploration and Production

  $ 36,183      $ 37,863  

Corporate, Interest and Other

    2,608        2,144  
 

 

 

    

 

 

 

Continuing operations

    38,791        40,007  

Discontinued operations

    2,280        2,747  
 

 

 

    

 

 

 

Total

  $ 41,071      $ 42,754  
 

 

 

    

 

 

 

14. Financial 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 and natural gas as well as changes in interest rates and foreign currency values. In the disclosures that follow, risk management activities refer to the mitigation of these risks through hedging activities. The Corporation is also exposed to refined petroleum product margins related to its retail business and commodity price risks primarily related to crude oil, natural gas, refined petroleum products and electricity, as well as foreign currency values from a 50% voting interest in a consolidated trading partnership. Hess has announced that it is divesting both of these businesses.

In conjunction with the sale of the energy marketing business in the fourth quarter of 2013, certain derivative contracts, including new transactions following the closing date, (the “delayed transfer derivative contracts”) were not transferred to Direct Energy, a North American subsidiary of Centrica plc (Centrica), as required customer or regulatory consents had not been obtained. However, the agreement entered into between Hess and Direct Energy on the closing date transferred all

 

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HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

economic risks and rewards of the energy marketing business, including the ownership of the delayed transfer derivative contracts, to Direct Energy. The transfer of these remaining contracts was substantially complete by the end of the second quarter of 2014.

The Corporation maintains a control environment for all of its risk management and trading activities 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 and 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 (IPVs) of sources of fair values and validations of valuation models. 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 beginning 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.

Corporate Financial Risk Management Activities: Corporate financial risk management activities include transactions designed to reduce risk in the selling prices of crude oil 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 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, primarily the British Pound and Danish Krone. Interest rate swaps may be used to convert interest payments on certain long-term debt from fixed to floating rates.

The gross volumes of the Corporate risk management derivative contracts outstanding were as follows:

 

                                               
    June 30,
2014
     December 31,
2013
 

Commodity, primarily crude oil (millions of barrels)

    27        9  

Foreign exchange (millions of USD*)

  $ 1,245      $ 220  

Interest rate swaps (millions of USD)

  $ 1,000      $ 865  

 

*

Denominated in U.S. dollars (USD).

In the fourth quarter of 2013, the Corporation entered into Brent crude oil fixed-price swap contracts to hedge 25,000 barrels of oil per day (bopd) for calendar year 2014. This 2014 hedging program was extended by 5,000 bopd in the first quarter of 2014 and an additional 10,000 bopd in the second quarter of 2014. These Brent crude oil hedges are at an overall average price of $109.17 per barrel. In addition, during the second quarter of 2014 the Corporation entered into West Texas Intermediate (WTI) crude oil fixed-price swap contracts to hedge 20,000 bopd for the remainder of 2014 at an average price of $100.41 per barrel. In 2013, the Corporation had Brent crude oil fixed-price swap contracts to hedge 90,000 bopd of crude oil sales volumes at an average price of approximately $109.70 per barrel.

Realized losses from E&P crude oil hedging activities decreased E&P Sales and other operating revenues by $6 million and $3 million for the three and six months ended June 30, 2014, respectively ($4 million and $2 million after income taxes, respectively). Realized gains from E&P hedging activities increased Sales and other operating revenues by $52 million and $34 million for the three and six months ended June 30, 2013, respectively ($33 million and $22 million after income taxes, respectively). At June 30, 2014, the after-tax deferred losses in Accumulated other comprehensive income (loss) related to

 

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HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

crude oil hedges were $16 million, which will be reclassified into Sales and other operating revenues in the Statement of Consolidated Income during the remainder of 2014 as the hedged crude oil sales are recognized in earnings. Losses from ineffectiveness of crude oil hedges, that were recognized immediately in Sales and other operating revenues, were approximately $3 million and $4 million for the three and six months ended June 30, 2014, respectively, and a gain of $3 million and $18 million for the three and six months ended June 30, 2013, respectively.

At June 30, 2014 and December 31, 2013, the Corporation had interest rate swaps with gross notional amounts of $1,000 million and $865 million, respectively, 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. For the three months ended June 30, 2014 and 2013, the Corporation recorded an increase of approximately $4 million and a decrease of $23 million (excluding accrued interest), respectively, in the fair value of interest rate swaps and a corresponding adjustment in the carrying value of the hedged fixed-rate debt. For the six months ended June 30, 2014 and 2013, the Corporation recorded an increase of $5 million and a decrease of $28 million (excluding accrued interest), respectively, in the fair value of interest rate swaps and a corresponding adjustment in the carrying value of the hedged fixed-rate debt.

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 in Corporate Financial Risk Management activities and not designated as hedges amounted to the following:

 

                                                                                               
    Three Months Ended
June  30,
    Six Months Ended
June  30,
 
    2014     2013     2014     2013  
    (In millions)  

Foreign exchange

  $ (13   $ (7   $ (13   $ (40

Commodity

    3              3         
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (10   $ (7   $ (10   $ (40
 

 

 

   

 

 

   

 

 

   

 

 

 

Trading Activities: Trading activities are conducted through a trading partnership in which the Corporation has a 50% voting interest that is currently for sale. This partnership intends to generate earnings through various strategies primarily using energy-related commodities, securities and derivatives. The information that follows represents 100% of the trading partnership as well as the Corporation’s proprietary trading accounts for 2013.

The gross volumes of derivative contracts outstanding related to trading activities were as follows:

 

                                               
    June 30,
2014
     December 31,
2013
 

Commodity

    

Crude oil and refined petroleum products (millions of barrels)

    1,311        1,815  

Natural gas (millions of mcf)

    2,705        2,735  

Electricity (millions of megawatt hours)

    1        1  

Foreign exchange (millions of USD)

  $ 91      $ 52  

Equity securities (millions of shares)

    14        11  

 

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HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

                                                                                               
    Three Months Ended
June 30,
     Six Months Ended
June 30,
 
    2014     2013      2014     2013  
    (In millions)  

Commodity

  $ 10      $ 54      $ 95     $ 47  

Foreign exchange

    (1     1        (1     1  

Equity and other

    5       2        20       8  
 

 

 

   

 

 

    

 

 

   

 

 

 

Total*

  $ 14     $ 57      $ 114     $ 56  
 

 

 

   

 

 

    

 

 

   

 

 

 

 

*

The unrealized pre-tax gains and losses included in earnings were primarily reflected in Sales and other operating revenues.

Fair Value Measurements: The Corporation generally enters into master netting arrangements to mitigate legal and counterparty credit risk. Master netting arrangements are generally accepted overarching master contracts that govern all individual transactions with the same counterparty entity as a single legally enforceable agreement. The U.S. Bankruptcy Code provides for the enforcement of certain termination and netting rights under certain types of contracts upon the bankruptcy filing of a counterparty, commonly known as the safe harbor provisions. If a master netting arrangement provides for termination and netting upon the counterparty’s bankruptcy, these rights are generally enforceable with respect to safe harbor transactions. If these arrangements provide the right of offset and the Corporation’s intent and practice is to offset amounts in the case of such a termination, the Corporation’s policy is to record the fair value of derivative assets and liabilities on a net basis.

In the normal course of business, the Corporation relies on legal and credit risk mitigation clauses providing for adequate credit assurance as well as close-out netting, including two-party netting and single counterparty multilateral netting. As applied to the Corporation, two-party netting is the right to net amounts owing under safe harbor transactions between a single defaulting counterparty entity and a single Hess entity, and single counterparty multilateral netting is the right to net amounts owing under safe harbor transactions among a single defaulting counterparty entity and multiple Hess entities. The Corporation is reasonably assured that these netting rights would be upheld in a bankruptcy proceeding in the U.S. in which the defaulting counterparty is a debtor under the U.S. Bankruptcy Code.

 

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HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following table provides information about the effect of netting arrangements on the presentation of the Corporation’s physical and financial derivative assets and (liabilities) that are measured at fair value, with the effect of “single counterparty multilateral netting” being included in column (v):

 

                                                                                                                                               
    Gross
Amounts
    Gross Amounts Offset
in the Consolidated
Balance Sheet
    Net Amounts
Presented in
the
Consolidated
Balance Sheet
    Gross Amounts
Not  Offset in
the
Consolidated
Balance Sheet
    Net
Amounts
 
      Physical
Derivative  and
Financial
Instruments
    Cash
Collateral (a)
       
    (i)     (ii)     (iii)     (iv)=(i)+(ii)+(iii)     (v)     (vi)=(iv)+(v)  
    (In millions)  

June 30, 2014

           

Assets

           

Derivative contracts

           

Commodity

  $ 2,149     $ (1,859   $ (68   $ 222     $ (1   $ 221  

Interest rate and other

    77        (15     (7     55        (1     54  

Counterparty netting

           (12            (12            (12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative contracts

  $ 2,226     $ (1,886   $ (75   $ 265     $ (2   $ 263  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Derivative contracts

           

Commodity

  $ (2,263   $ 1,859     $ 39     $ (365   $ 1     $ (364

Other

    (30     15             (15     1       (14

Counterparty netting

          12             12             12  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative contracts

  $ (2,293   $ 1,886     $ 39     $ (368   $ 2     $ (366
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2013 (b)

           

Assets

           

Derivative contracts

           

Commodity

  $ 3,086     $ (1,867   $ (79   $ 1,140     $ (41   $ 1,099  

Interest rate and other

    51       (10           41       (3     38  

Counterparty netting

          (206           (206           (206
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative contracts

  $ 3,137     $ (2,083   $ (79   $ 975     $ (44   $ 931  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Derivative contracts

           

Commodity

  $ (3,212   $ 1,867     $ 168     $ (1,177   $ 41     $ (1,136

Other

    (12     10             (2     3       1  

Counterparty netting

          206             206             206  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative contracts

  $ (3,224   $ 2,083     $ 168     $ (973   $ 44     $ (929
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

All cash collateral was offset in the Consolidated Balance Sheet.

(b)

Assets and liabilities in 2013 include amounts relating to the divested energy marketing business.

The net assets and liabilities that were offset in the Consolidated Balance Sheet as reflected in column (iv) of the table above were primarily included in Accounts receivable — Trade and Accounts payable, respectively. Included in these net amounts were the assets and liabilities related to the Corporation’s discontinued operations of approximately $1 million and $4 million, respectively, as of June 30, 2014, and $612 million and $620 million, respectively, as of December 31, 2013. The assets and liabilities relating to the discontinued operations at June 30, 2014 were classified as Assets held for sale and Liabilities associated with assets held for sale.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The table below reflects the gross and net fair values of the corporate and trading derivative instruments and, at December 31, 2013 also includes energy marketing risk management derivative instruments:

 

                                 
    Accounts
Receivable
    Accounts
Payable
 
    (In millions)  

June 30, 2014

   

Derivative contracts designated as hedging instruments

   

Commodity

  $      $ (25

Interest rate and other

    42       (2
 

 

 

   

 

 

 

Total derivative contracts designated as hedging instruments

    42       (27
 

 

 

   

 

 

 

Derivative contracts not designated as hedging instruments (a)

   

Commodity

    2,149       (2,238

Foreign exchange

    3       (15

Equity and other

    32       (13
 

 

 

   

 

 

 

Total derivative contracts not designated as hedging instruments

    2,184       (2,266
 

 

 

   

 

 

 

Gross fair value of derivative contracts

    2,226       (2,293

Master netting arrangements

    (1,886     1,886  

Cash collateral (received) posted

    (75     39  
 

 

 

   

 

 

 

Net fair value of derivative contracts

  $ 265     $ (368
 

 

 

   

 

 

 

December 31, 2013 (b)

   

Derivative contracts designated as hedging instruments

   

Commodity

  $ 11     $ (3

Interest rate and other

    36       (1
 

 

 

   

 

 

 

Total derivative contracts designated as hedging instruments

    47       (4
 

 

 

   

 

 

 

Derivative contracts not designated as hedging instruments (a)

   

Commodity

    3,075       (3,209

Foreign exchange

    2       (3

Other

    13       (8
 

 

 

   

 

 

 

Total derivative contracts not designated as hedging instruments

    3,090       (3,220
 

 

 

   

 

 

 

Gross fair value of derivative contracts

    3,137       (3,224

Master netting arrangements

    (2,083     2,083  

Cash collateral (received) posted

    (79     168  
 

 

 

   

 

 

 

Net fair value of derivative contracts

  $ 975     $ (973
 

 

 

   

 

 

 

 

(a)

Includes trading derivatives and derivatives used for risk management.

(b)

Assets and liabilities in 2013 include amounts relating to the divested energy marketing business.

The Corporation determines fair value in accordance with the fair value measurements accounting standard (Accounting Standards Codification 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

                                                                                                     
    Level 1     Level 2     Level 3     Counterparty
netting
    Collateral     Balance  
    (In millions)  

June 30, 2014

           

Assets

           

Derivative contracts

           

Commodity

  $ 124     $ 182     $ 54     $ (70   $ (68   $ 222  

Interest rate and other

    18       42       3       (1     (7     55  

Collateral and counterparty netting

    (5     (7                       (12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative contracts

    137       217       57       (71     (75     265  

Other assets measured at fair value
on a recurring basis

    66                               66  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value
on a recurring basis

  $ 203     $ 217     $ 57     $ (71   $ (75   $ 331 (a) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Derivative contracts

           

Commodity

  $ (84   $ (375   $ (15   $ 70     $ 39     $ (365

Other

    (2     (12     (2     1             (15

Collateral and counterparty netting

    5       7                         12  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative contracts

    (81     (380     (17     71       39       (368

Other liabilities measured at fair value
on a recurring basis

    (114                             (114
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured at fair value
on a recurring basis

  $ (195   $ (380   $ (17   $ 71     $ 39     $ (482 )(b) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other fair value measurement disclosures

           

Long-term debt (c)

  $     $ (7,254   $     $     $     $ (7,254
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2013 (d)

           

Assets

           

Derivative contracts

           

Commodity

  $ 254     $ 579     $ 494     $ (108   $ (79   $ 1,140  

Interest rate and other

    2       37       3       (1           41  

Collateral and counterparty netting

    (15     (191                       (206
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative contracts

    241       425       497       (109     (79     975  

Other assets measured at fair value
on a recurring basis

                                   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value
on a recurring basis

  $ 241     $ 425     $ 497     $ (109   $ (79   $ 975  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

                                                                                                                                               
    Level 1     Level 2     Level 3     Counterparty
netting
     Collateral      Balance  
    (In millions)  

December 31, 2013 (d)

             

Liabilities

             

Derivative contracts

             

Commodity

  $ (97   $ (1,071   $ (285   $ 108      $ 168      $ (1,177

Other

          (3           1               (2

Collateral and counterparty netting

    15       191                           206  
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total derivative contracts

    (82     (883     (285     109        168        (973

Other liabilities measured at fair value
on a recurring basis

    (31                               (31
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value
on a recurring basis

  $ (113   $ (883   $ (285   $ 109      $ 168      $ (1,004
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Other fair value measurement disclosures

             

Long-term debt (c)

  $     $ (6,641   $     $      $      $ (6,641
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(a)

Includes a total of $137 million of Level 1, $217 million of Level 2 and $56 million of Level 3 assets that relate to the Corporation’s continuing operations.

(b)

Includes a total of $82 million of Level 1, $378 million of Level 2 and $14 million of Level 3 liabilities that relate to the Corporation’s continuing operations.

(c)

Long-term debt, including current maturities, had a carrying value of $6,077 million and $5,798 million at June 30, 2014 and December 31, 2013, respectively.

(d)

Assets and liabilities in 2013 include amounts relating to the divested energy marketing business.

In addition to the financial assets and liabilities disclosed in the tables above, the Corporation had other short-term financial instruments, primarily cash equivalents and accounts receivable and payable, for which the carrying value approximated their fair value at June 30, 2014 and December 31, 2013.

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

 

                                                                                               
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2014     2013     2014     2013  
    (In millions)  

Transfers into Level 1

  $      $ (18   $ (10   $ (19

Transfers out of Level 1

    (1     62       (1     62  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ (1   $ 44     $ (11   $ 43  
 

 

 

   

 

 

   

 

 

   

 

 

 

Transfers into Level 2

  $ 2     $ (92   $ (16   $ (92

Transfers out of Level 2

    (1     19       4       18  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1     $ (73   $ (12   $ (74
 

 

 

   

 

 

   

 

 

   

 

 

 

Transfers into Level 3

  $ 1     $      $ 7     $ 2  

Transfers out of Level 3

    (1     29       16       29  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $      $ 29     $ 23     $ 31  
 

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

                                                                   
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
        2014             2013             2014             2013      
    (In millions)  

Balance at beginning of period

  $ 59     $ 70     $ 212     $ 141  

Unrealized pre-tax gains (losses) included in earnings (a)

    4       2       (300     (61

Purchases (b)

    6       12       11       40  

Sales (b)

    (6     (8     (10     (31

Settlements (c)

    (23     2       104       (13

Transfers into Level 3

    1              7       2  

Transfers out of Level 3

    (1     29       16       29  
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 40     $ 107     $ 40     $ 107  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

The unrealized pre-tax gains and losses included in earnings were reflected in Sales and other operating revenues and Income (loss) from discontinued operations in the Statement of Consolidated Income.

(b)

Purchases and sales primarily represent option premiums paid or received, respectively, during the reporting period and were reflected in Sales and other operating revenues and Income (loss) from discontinued operations in the Statement of Consolidated Income.

(c)

Settlements represent realized gains and losses on derivatives settled during the reporting period and were reflected in Sales and other operating revenues and Income (loss) from discontinued operations in the Statement of Consolidated Income.

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 in the table below represent full contract prices. Significant changes in any of the inputs, independently or correlated, may result in a different fair value.

 

                                 
    Unit of     Measurement          Range /
    Weighted Average    

June 30, 2014

      

Assets

      

Commodity contracts with a fair value of $54 million
Contract prices

      

Crude oil and refined petroleum products

  $ / bbl (a)      $94.62 - 198.79 / 146.04
 

 

Basis prices

      

Natural gas

  $ / MMBTU (c)      $(1.37) - 3.76 / 1.59
 

 

Contract volatilities

      

Crude oil and refined petroleum products

  %      7.00 - 16.00 / 13.00

Natural gas

  %      18.00 -31.00 /23.00
 

 

Liabilities

      

Commodity contracts with a fair value of $15 million
Contract prices

      

Crude oil and refined petroleum products

  $ / bbl (a)      $104.93 - 198.79 / 146.92
 

 

Contract volatilities

      

Crude oil and refined petroleum products

  %      7.00 - 16.00 / 11.00
 

 

 

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

                                 
    Unit of
Measurement
   Range /
Weighted Average
 

December 31, 2013 (d)

    

Assets

    

Commodity contracts with a fair value of $494 million
Contract prices

    

Crude oil and refined petroleum products

  $ / bbl (a)      $78.45 - 228.86 / 118.68   

Electricity

  $ / MWH (b)      $19.52 - 165.75 / 45.76     
 

 

 

Basis prices

    

Natural gas

  $ / MMBTU (c)      $(4.99) - 18.10 / 0.23        
 

 

 

Contract volatilities

    

Crude oil and refined petroleum products

  %      16.00 - 18.00 / 17.00        

Natural gas

  %      17.00 - 35.00 / 22.00        

Electricity

  %      16.00 - 36.00 / 23.00        
 

 

 

Liabilities

    

Commodity contracts with a fair value of $285 million
Contract prices

    

Crude oil and refined petroleum products

  $ / bbl (a)      $57.45 - 183.89 / 122.54   

Electricity

  $ / MWH (b)      $26.48 - 155.33 / 43.12     
 

 

 

Basis prices

    

Natural gas

  $ / MMBTU (c)      $(1.90) - 18.00 /(0.62)      
 

 

 

Contract volatilities

    

Crude oil and refined petroleum products

  %      16.00 - 17.00 / 17.00        

Natural gas

  %      34.00 - 35.00 / 35.00        

Electricity

  %      16.00 - 36.00 / 22.00        
 

 

 

 

(a)

Price per barrel.

(b)

Price per megawatt hour.

(c)

Price per million British thermal unit.

(d)

Assets and liabilities in 2013 include amounts relating to the divested energy marketing business.

Note:

Fair value measurement for all recurring inputs was performed using a combination of income and market approach techniques.

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. As of June 30, 2014, the Corporation’s net Accounts receivable — Trade related to continuing operations were concentrated with the following counterparty industry segments: Integrated Oil Companies — 43%, Refiners — 21%, Financial Institutions — 12%, Government Entities — 10% and Trading Companies — 8%. As of December 31, 2013, the Corporation’s net Accounts receivable — Trade were concentrated as follows: Integrated Oil Companies — 45%, Refiners — 18%, Financial Institutions — 14%, Government Entities — 8% and Trading Companies — 7%. The Corporation reduces its risk related to certain counterparties by using master netting arrangements and requiring collateral, generally cash or letters of credit. The Corporation records the cash collateral received or posted as an offset to the fair value of derivatives executed with the same counterparty. At June 30, 2014 and December 31, 2013, the Corporation held cash from counterparties of $75 million and $79 million, respectively. The Corporation posted cash to counterparties at June 30, 2014 and December 31, 2013, of $39 million and $168 million, respectively.

 

24


Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The Corporation had outstanding letters of credit totaling $223 million and $410 million at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014, the $223 million in outstanding letters of credit were primarily issued to satisfy international E&P collateral requirements. There were outstanding letters of credit related to discontinued operations totaling $12 million at June 30, 2014 and $198 million at December 31, 2013. Certain of the Corporation’s agreements also contain contingent collateral provisions that could require the Corporation to post additional collateral if the Corporation’s credit rating declines. As of June 30, 2014, the net liability related to both realized and unrealized derivative contracts with contingent collateral provisions was approximately $59 million ($281 million at December 31, 2013). There was no cash collateral posted on those derivatives at June 30, 2014 ($31 million at December 31, 2013). At June 30, 2014 and at December 31, 2013, all three major credit rating agencies that rate the Corporation’s debt had assigned an investment grade rating. If one of the three agencies were to downgrade the Corporation’s rating to below investment grade, the Corporation would be required to post additional collateral of approximately $54 million at June 30, 2014 and $134 million at December 31, 2013.

 

25


Table of Contents

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 or Hess) is a global Exploration and Production (E&P) company that develops, produces, purchases, transports and sells crude oil and natural gas. In March 2013, the Corporation announced an asset sales program that included divesting its downstream businesses and oil and gas properties in Indonesia and Thailand to continue its transformation into a more focused pure play E&P company. Other actions announced by the Corporation included the pursuit of monetizing Bakken midstream assets by 2015 and returning capital to shareholders. In the third quarter of 2013, the Corporation increased its quarterly dividend 150% to $0.25 per common share and commenced share repurchases under an authorized $4 billion share repurchase program. In May 2014, the Corporation increased this share repurchase program to $6.5 billion from $4 billion. Through June 30, 2014, Hess purchased a total of 40.2 million common shares at a cost of approximately $3.3 billion under its share repurchase program.

Second Quarter Results

The Corporation reported net income of $931 million in the second quarter of 2014, compared with $1,431 million in the second quarter of 2013. Excluding items affecting comparability of earnings between periods on page 28, net income was $432 million in the second quarter of 2014 as compared to $520 million in the second quarter of 2013, primarily due to the impact on operating earnings related to divesting E&P assets and downstream businesses. E&P crude oil and natural gas production was 319,000 barrels of oil equivalent per day (boepd) in the second quarter of 2014 and 341,000 boepd in the same period in 2013. E&P asset sales reduced second quarter 2014 production by 43,000 boepd and continued shut-in of Libyan production due to civil unrest reduced production by 24,000 boepd, compared to the second quarter of 2013.

Exploration and Production

E&P earnings were $1,057 million in the second quarter of 2014 compared with $1,533 million in the second quarter of 2013. Excluding items affecting comparability of earnings between periods, E&P net income was $483 million and $600 million in the second quarter of 2014 and 2013, respectively. In the second quarter of 2014, the Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $101.70 per barrel, up from $97.89 per barrel in the second quarter of 2013. The Corporation’s average worldwide natural gas selling price was $6.35 per thousand cubic feet (mcf) in the second quarter of 2014, compared with $6.44 per mcf in the second quarter of 2013. Pro forma production, which excludes production from assets sold as well as any production from Libya, was 310,000 boepd and 265,000 boepd in the second quarter of 2014 and 2013, respectively. The Corporation expects pro forma production to average between 300,000 boepd and 305,000 boepd for the third quarter of 2014, reflecting planned seasonal maintenance shutdowns in the Gulf of Mexico and North Sea, which are expected to reduce third quarter production by approximately 20,000 boepd. The Corporation continues to expect full year 2014 pro forma production to be between 305,000 boepd and 315,000 boepd.

The following is an update of E&P activities:

 

   

In North Dakota, net production from the Bakken oil shale play averaged 80,000 boepd for the second quarter of 2014, an increase of 25% from 64,000 boepd in the second quarter of 2013. Production increased primarily due to ongoing field development and the expanded Tioga Gas Plant commencing operations in late March 2014. The Corporation brought 53 gross operated wells on production in the quarter, bringing the year-to-date total to 83 wells. Drilling and completion costs per operated well averaged $7.4 million in the second quarter of 2014, a reduction of 12% from the second quarter of 2013. The Corporation expects Bakken production to average between 85,000 boepd and 90,000 boepd for the third quarter of 2014 and continues to expect full year 2014 Bakken production to be between 80,000 boepd and 90,000 boepd.

 

   

At the Valhall Field in Norway, net production averaged 31,000 boepd in the second quarter of 2014 compared with 13,000 boepd in the year-ago quarter, which reflected start-up operations following completion of a redevelopment project in 2013, ongoing drilling and higher uptimes. The Crestal Gas Lift Project (Phase 1) commenced in June with commissioning expected in the second quarter of 2015. Full year 2014 net production from Valhall is forecast to be in the range of 30,000 boepd to 35,000 boepd.

 

   

In the North Malay Basin, the Corporation signed a gas sales agreement with the Malaysian government and awarded an installation and commissioning contract for a central processing platform, a bridge-linked wellhead platform and three remote wellhead platforms. Production from the Early Production System averaged 7,000 boepd in the second quarter of 2014.

 

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

 

Overview (continued)

 

   

In Libya, production from the Waha fields was shut-in beginning in the third quarter of 2013 and remains shut-in due to continued civil unrest in the country.

 

   

In April 2014, the Corporation completed the sale of its assets in Thailand, for cash proceeds of approximately $805 million. The Thailand assets were producing at a rate of 19,000 boepd at the time of sale.

 

   

In the Utica shale, the Corporation completed the sale of a further 30,000 net acres, including related wells and facilities in the Corporation’s 100% owned acreage in the dry gas area of the play, for cash proceeds of approximately $485 million. In addition, ten wells were drilled on the Corporation’s joint venture acreage during the second quarter of 2014.

 

   

At the Tubular Bells development in the deepwater Gulf of Mexico, the offshore hook-up and final commissioning activities continued in the second quarter with first oil from the field planned for September 2014. The drilling of a fourth production well also commenced in the second quarter.

 

   

During the second quarter, the Corporation received U.S. governmental approval to unitize Blocks 468, 512 and the eastern half of 511, collectively referred to as the Stampede area. The development project continues to progress, and project sanction is expected later this year. In addition, during the quarter, the Corporation wrote-off a previously capitalized exploration well in the western half of Block 469 in the Gulf of Mexico which resulted in a pre-tax charge of $169 million ($105 million after income taxes) since the block will not be part of a unitized Stampede development project.

 

   

The Corporation recorded pre-tax charges of $135 million ($68 million after-tax) to write-off leasehold acreage in the Paris Basin of France, the Shakrok Block in Kurdistan and its interest in a natural gas exploration project, offshore Sabah, Malaysia.

 

   

In the Deepwater Tano Cape Three Points Block, offshore Ghana, the Corporation commenced drilling of a three well appraisal program in the second quarter of 2014. The first well in the program, Pecan #2A, was completed in June. The second well, Pecan #3A, was also drilled and is currently undergoing production testing as planned with results expected in the third quarter. The final well of the appraisal program is expected to be drilled in the third quarter.

Downstream Businesses

The Corporation’s downstream businesses consisted of its retail, energy marketing, terminal, energy trading and refining operations, together with its interests in two power plant joint ventures. By year-end 2013, the energy marketing and terminal businesses had been divested and the remaining refining operation had been shut down. In May 2014, the Corporation announced the sale of its retail business for a total of $2.874 billion, comprising $2.6 billion in cash plus $274 million for retail gasoline station leases. The transaction, which is subject to customary closing conditions, is expected to be completed before year-end 2014. In January 2014, the Corporation acquired its partners’ 56% interest in WilcoHess, a retail gasoline joint venture, for approximately $290 million and the settlement of liabilities. In June 2014, the Corporation acquired 180 previously leased retail gasoline stations resulting in a pre-tax charge of $115 million ($72 million after-tax). Both of these transactions occurred in anticipation of the divestiture of the retail business. Also in June, the Corporation completed the sale of its 50% interest in a joint venture constructing an electric generating facility in Newark, New Jersey for cash proceeds of $320 million.

 

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

 

Results of Operations

The after-tax income (loss) by major operating activity is summarized below:

 

                                                                   
    Three Months Ended
June  30,
    Six Months Ended
June 30,
 
    2014     2013     2014     2013  
    (In millions, except per share amounts)  

Exploration and Production

  $ 1,057     $ 1,533     $ 1,565     $ 2,819  

Corporate and Interest

    (91     (128     (180     (237

Downstream businesses

    (35     26       (68     125  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Hess Corporation

  $ 931     $ 1,431     $ 1,317     $ 2,707  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Hess Corporation per share — Diluted

  $ 2.96     $ 4.16     $ 4.13     $ 7.88  
 

 

 

   

 

 

   

 

 

   

 

 

 

Items Affecting Comparability of Earnings Between Periods

The following table summarizes, on an after-tax basis, items of income (expense) that are included in net income and affect comparability of earnings between periods. The items in the table below are explained and the pre-tax amounts are discussed on pages 33 to 36.

 

                                                                   
    Three Months Ended
June  30,
    Six Months Ended
June 30,
 
    2014     2013     2014     2013  
    (In millions)  

Exploration and Production

  $ 574     $ 933     $ 568     $ 1,521  

Corporate and Interest

    (9     (1     (17     (12

Downstream businesses

    (66     (21     (112     9  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total items affecting comparability of earnings between periods

  $ 499     $ 911     $ 439     $ 1,518  
 

 

 

   

 

 

   

 

 

   

 

 

 

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 a preferable method of explaining variances in earnings, since they show the entire effect of a transaction rather than only the pre-tax amount. After-tax amounts are determined by applying the income tax rate in each tax jurisdiction to pre-tax amounts.

 

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

 

Results of Operations (continued)

 

Comparison of Results

Exploration and Production

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

 

                                                                   
    Three Months Ended
June  30,
    Six Months Ended
June 30,
 
    2014     2013     2014     2013  
    (In millions)  

Revenues and Non-operating Income

       

Sales and other operating revenues

  $ 2,829     $ 3,011     $ 5,502     $ 6,477  

Gains on asset sales, net

    766       1,111       776       1,799  

Other, net

    (28     (18     (34     (53
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and non-operating income

    3,567       4,104       6,244       8,223  
 

 

 

   

 

 

   

 

 

   

 

 

 

Costs and Expenses

       

Cost of products sold (excluding items shown separately below)

    444       421       837       1,017  

Operating costs and expenses

    522       510       988       1,095  

Production and severance taxes

    78       97       140       227  

Exploration expenses, including dry holes and lease impairment

    460       200       579       419  

General and administrative expenses

    79       87       159       172  

Depreciation, depletion and amortization

    782       609       1,503       1,285  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    2,365       1,924       4,206       4,215  
 

 

 

   

 

 

   

 

 

   

 

 

 

Results of operations before income taxes

    1,202       2,180       2,038       4,008  

Provision for income taxes

    145       478       473       1,013  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    1,057       1,702       1,565       2,995  

Less: Net income attributable to noncontrolling interests

          169             176  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Hess Corporation

  $ 1,057     $ 1,533     $ 1,565     $ 2,819  
 

 

 

   

 

 

   

 

 

   

 

 

 

Excluding the E&P items affecting comparability of earnings between periods in the table on page 34, the changes in E&P earnings were primarily attributable to the asset sales. Other items affecting the comparability of earnings are changes in selling prices, production and sales volumes, cost of products sold, cash operating costs, depreciation, depletion and amortization, exploration expenses and income taxes, as described below.

Selling Prices: Average realized crude oil selling prices, including the effect of hedging, were 4% and 5% higher in the second quarter and first six months of 2014, respectively, compared to the same periods in 2013 mainly due to the sale of the Corporation’s subsidiary in Russia in the second quarter of 2013, which realized significantly lower crude oil prices.

The Corporation’s average selling prices were as follows:

 

                                                                   
    Three Months Ended
June 30,
     Six Months Ended
June 30,
 
    2014      2013      2014      2013  

Crude oil — per barrel (including hedging)

          

United States

          

Onshore

  $ 92.44      $ 89.97      $ 90.35      $ 89.71  

Offshore

    100.42        106.71        99.89        107.11  

Total United States

    95.82        97.20        94.44        97.12  

Europe

    111.03        77.14        110.10        68.37  

Africa

    108.83        106.15        108.65        107.94  

Asia

    106.33        105.27        104.66        109.30  

Worldwide

    101.70        97.89        100.52        96.08  

 

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

 

Results of Operations (continued)

 

                                                                   
    Three Months Ended
June 30,
     Six Months Ended
June 30,
 
    2014      2013      2014      2013  

Crude oil — per barrel (excluding hedging)

          

United States

          

Onshore

  $ 92.44      $ 88.91      $ 90.35      $ 89.37  

Offshore

    101.09        103.43        100.24        106.03  

Total United States

    96.10        95.18        94.58        96.46  

Europe

    111.39        75.22        110.06        67.80  

Africa

    109.10        102.78        108.62        106.88  

Asia

    106.33        105.27        104.66        109.30  

Worldwide

    101.99        95.45        100.59        95.34  

Natural gas liquids — per barrel

          

United States

          

Onshore

  $ 36.99      $ 38.84      $ 40.91      $ 41.21  

Offshore

    32.21        27.81        33.14        27.80  

Total United States

    35.39        34.57        37.54        35.97  

Europe

    55.77        53.16        60.16        52.58  

Asia

            66.90                72.68  

Worldwide

    36.59        36.28        39.41        37.49  

Natural gas — per mcf

          

United States

          

Onshore

  $ 4.36      $ 3.19      $ 4.87      $ 3.03  

Offshore

    4.01        3.17        4.18        2.86  

Total United States

    4.22        3.18        4.52        2.94  

Europe

    10.51        9.99        11.01        9.08  

Asia and other

    7.24        7.39        7.23        7.57  

Worldwide

    6.35        6.44        6.72        6.53  

Through June 30, 2014, the Corporation had entered into Brent crude oil fixed-price swap contracts to hedge a total of 40,000 barrels of oil per day (bopd) for the remainder of 2014 at an average price of $109.17 per barrel. In addition, the Corporation entered into West Texas Intermediate (WTI) crude oil fixed-price swap contracts to hedge 20,000 bopd for the remainder of 2014 at an average price of $100.41 per barrel. In 2013, the Corporation had Brent crude oil fixed-price swap contracts to hedge 90,000 bopd of crude oil sales volumes at an average price of approximately $109.70 per barrel.

Realized losses from E&P crude oil hedging activities decreased E&P Sales and other operating revenues by $6 million and $3 million for the three and six months ended June 30, 2014, respectively ($4 million and $2 million after income taxes, respectively). Realized gains from E&P hedging activities increased E&P Sales and other operating revenues by $52 million and $34 million for the three and six months ended June 30, 2013, respectively ($33 million and $22 million after income taxes, respectively).

Production volumes: The Corporation’s crude oil and natural gas production was 319,000 boepd in both the second quarter and first six months of 2014 and 341,000 boepd and 365,000 boepd for the same periods in 2013, respectively. Pro forma production, which excludes assets sold as well as any production from Libya, was 310,000 boepd and 302,000 boepd in the second quarter and first six months of 2014, respectively, and 265,000 boepd and 267,000 boepd in the same periods of 2013, respectively.

 

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

 

Results of Operations (continued)

 

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

 

                                                                   
    Three Months Ended
June  30,
     Six Months Ended
June  30,
 
    2014      2013      2014      2013  
    (In thousands)  

Crude oil — barrels per day

          

United States

          

Bakken

    64        52        61        52  

Other Onshore

    9        11        9        12  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total Onshore

    73        63        70        64  

Offshore

    54        48        53        48  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total United States

    127        111        123        112  
 

 

 

    

 

 

    

 

 

    

 

 

 

Europe

    36        33        37        49  

Africa

    51        73        49        75  

Asia

    2        9        4        13  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total

    216        226        213        249  
 

 

 

    

 

 

    

 

 

    

 

 

 

Natural gas liquids — barrels per day

          

United States

          

Bakken

    8        6        5        6  

Other Onshore

    5        4        4        4  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total Onshore

    13        10        9        10  

Offshore

    7        6        7        7  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total United States

    20        16        16        17  
 

 

 

    

 

 

    

 

 

    

 

 

 

Europe

    1        1        1         

Asia

           1               1  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total

    21        18        17        18  
 

 

 

    

 

 

    

 

 

    

 

 

 

Natural gas — mcf per day

          

United States

          

Bakken

    48        39        31        37  

Other Onshore

    50        27        38        27  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total Onshore

    98        66        69        64  

Offshore

    83        75        81        73  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total United States

    181        141        150        137  
 

 

 

    

 

 

    

 

 

    

 

 

 

Europe

    35        15        36        14  

Asia and other

    275        427        345        437  
 

 

 

    

 

 

    

 

 

    

 

 

 

Total

    491        583        531        588  
 

 

 

    

 

 

    

 

 

    

 

 

 

Barrels of oil equivalent per day*

    319        341        319        365  
 

 

 

    

 

 

    

 

 

    

 

 

 

 

*

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. In addition, natural gas liquids do not sell at prices equivalent to crude oil. See the average selling prices in the table beginning on page 29.

United States: Crude oil production was higher in the second quarter and first six months of 2014, compared to the corresponding periods in 2013, as a result of higher production from the Bakken oil shale play due to new wells and lower downtime at the Llano Field. Natural gas liquids production in the United States was higher in the second quarter of 2014, compared to the corresponding period in 2013, mainly due to higher production from the Bakken following the completion of the Tioga Gas Plant expansion project. Natural gas production was higher in the second quarter of 2014 compared to the second quarter of 2013 primarily due to higher production from the Utica Shale together with higher Bakken production.

 

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)

 

Result of Operations (continued)

 

Natural gas production was also higher in the first six months of 2014 compared to the same period in 2013, largely due to the active drilling program in the Utica, partially offset by lower production from the Bakken caused by a shutdown at the Tioga Gas Plant to complete an expansion project in the first quarter of 2014.

Europe: Crude oil production was comparable in the second quarter of 2014 and 2013, as lower production due to the April 2013 sale of the Corporation’s Russian subsidiary, which was producing at an aggregate rate of approximately 50,000 bopd at the time of sale, was offset by higher production from the Valhall Field following completion of a redevelopment project in 2013. Crude oil production was lower in the first six months of 2014 compared to the same period in 2013 due to the sale of the Corporation’s Russian subsidiary referred to above, partially offset by an increase in production at Valhall in 2014. Natural gas production was higher in the second quarter and the first six months of 2014 following the ramp up in production at Valhall following the redevelopment project.

Africa: Crude oil production in Africa was lower in the second quarter and first six months of 2014, compared to the corresponding periods in 2013, primarily due to the ongoing shutdown of Libyan production, which began in the third quarter of 2013, due to civil unrest in the country. Libyan production was 24,000 bopd in both the second quarter and first six months of 2013.

Asia and other: Crude oil and natural gas production was lower in the second quarter and first six months of 2014 compared to the same periods in 2013, mainly due to asset sales. In January 2014, the Corporation sold its interest in the Pangkah asset, offshore Indonesia, which was producing at the rate of 10,000 boepd at the time of sale. This sale was followed by the divestiture of the Corporation’s Thailand assets in April 2014, which were producing at the rate of 19,000 boepd at the time of sale. In March 2013, the Corporation sold its interests in the Azeri-Chirag-Guneshli (ACG) fields in Azerbaijan, which were producing at the rate of 6,000 boepd at the time of sale, fol