e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended September 30, 2009
or
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o |
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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)
(Registrants Telephone Number, Including Area Code is (212) 997-8500)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
At September 30, 2009, there were 327,071,438 shares of Common Stock outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements. |
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)
(In millions, except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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REVENUES AND NON-OPERATING INCOME |
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Sales (excluding excise taxes) and other operating revenues |
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$ |
7,270 |
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$ |
11,396 |
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$ |
20,936 |
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$ |
33,754 |
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Equity in
income (loss) of HOVENSA L.L.C. |
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(49 |
) |
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52 |
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(165 |
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23 |
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Other, net |
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163 |
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(62 |
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240 |
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38 |
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Total revenues and non-operating income |
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7,384 |
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11,386 |
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21,011 |
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33,815 |
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COSTS AND EXPENSES |
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Cost of products sold (excluding items shown separately below) |
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5,069 |
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8,164 |
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14,956 |
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24,206 |
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Production expenses |
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460 |
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503 |
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1,313 |
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1,421 |
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Marketing expenses |
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240 |
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266 |
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742 |
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766 |
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Exploration expenses, including dry holes and lease impairment |
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167 |
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157 |
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672 |
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467 |
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Other operating expenses |
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43 |
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62 |
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134 |
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154 |
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General and administrative expenses |
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148 |
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170 |
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444 |
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478 |
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Interest expense |
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97 |
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68 |
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269 |
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200 |
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Depreciation, depletion and amortization |
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626 |
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497 |
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1,670 |
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1,431 |
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Total costs and expenses |
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6,850 |
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9,887 |
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20,200 |
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29,123 |
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INCOME BEFORE INCOME TAXES |
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534 |
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1,499 |
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811 |
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4,692 |
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Provision for income taxes |
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182 |
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725 |
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374 |
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2,255 |
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NET INCOME |
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352 |
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774 |
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437 |
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2,437 |
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Less: Net income (loss) attributable to noncontrolling interests |
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11 |
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(1 |
) |
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55 |
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3 |
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NET INCOME ATTRIBUTABLE TO HESS CORPORATION |
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$ |
341 |
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$ |
775 |
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$ |
382 |
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$ |
2,434 |
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NET INCOME PER SHARE ATTRIBUTABLE TO HESS CORPORATION |
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BASIC |
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$ |
1.05 |
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$ |
2.40 |
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$ |
1.18 |
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$ |
7.60 |
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DILUTED |
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1.05 |
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2.37 |
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1.17 |
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7.47 |
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED) |
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326.0 |
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327.4 |
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325.8 |
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325.7 |
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COMMON STOCK DIVIDENDS PER SHARE |
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$ |
.10 |
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$ |
.10 |
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$ |
.30 |
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$ |
.30 |
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See accompanying notes to consolidated financial statements.
1
PART I FINANCIAL INFORMATION (CONTD.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In millions of dollars, thousands of shares)
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September 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
957 |
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$ |
908 |
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Accounts receivable |
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3,552 |
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4,297 |
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Inventories |
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1,424 |
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1,308 |
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Other current assets |
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993 |
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819 |
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Total current assets |
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6,926 |
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7,332 |
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INVESTMENTS IN AFFILIATES |
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HOVENSA
L.L.C. |
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755 |
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919 |
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Other |
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220 |
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208 |
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Total investments in affiliates |
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975 |
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1,127 |
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PROPERTY, PLANT AND EQUIPMENT |
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Total at cost |
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29,358 |
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27,437 |
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Less reserves for depreciation, depletion, amortization and lease impairment |
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12,712 |
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11,166 |
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Property, plant and equipment net |
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16,646 |
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16,271 |
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GOODWILL |
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1,225 |
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1,225 |
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DEFERRED INCOME TAXES |
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2,327 |
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2,292 |
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OTHER ASSETS |
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338 |
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342 |
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TOTAL ASSETS |
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$ |
28,437 |
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$ |
28,589 |
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LIABILITIES AND EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
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$ |
4,248 |
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$ |
5,045 |
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Accrued liabilities |
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1,681 |
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1,905 |
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Taxes payable |
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403 |
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637 |
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Current maturities of long-term debt |
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136 |
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143 |
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Total current liabilities |
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6,468 |
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7,730 |
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LONG-TERM DEBT |
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4,243 |
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3,812 |
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DEFERRED INCOME TAXES |
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2,259 |
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2,241 |
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ASSET RETIREMENT OBLIGATIONS |
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1,220 |
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1,164 |
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OTHER LIABILITIES |
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1,240 |
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1,251 |
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Total liabilities |
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15,430 |
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16,198 |
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EQUITY |
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Hess Corporation Stockholders Equity |
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Common stock, par value $1.00 |
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Authorized 600,000 shares
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Issued 327,071 shares at
September 30, 2009; 326,133 shares at December 31, 2008 |
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327 |
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326 |
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Capital in excess of par value |
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2,448 |
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2,347 |
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Retained earnings |
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11,926 |
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11,642 |
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Accumulated other comprehensive income (loss) |
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(1,827 |
) |
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(2,008 |
) |
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Total Hess Corporation stockholders equity |
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12,874 |
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12,307 |
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Noncontrolling interests |
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133 |
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84 |
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Total equity |
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13,007 |
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12,391 |
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TOTAL LIABILITIES AND EQUITY |
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$ |
28,437 |
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$ |
28,589 |
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See accompanying notes to consolidated financial statements.
2
PART I FINANCIAL INFORMATION (CONTD.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In millions of dollars)
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Nine Months Ended |
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September 30, |
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2009 |
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2008 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
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$ |
437 |
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$ |
2,437 |
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Adjustments to reconcile net income to net cash provided by operating activities |
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Depreciation, depletion and amortization |
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1,670 |
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1,431 |
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Exploratory dry hole costs and lease impairment |
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406 |
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171 |
|
(Benefit) provision for deferred income taxes |
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(324 |
) |
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18 |
|
Equity in (income) loss of HOVENSA L.L.C., net of distributions |
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165 |
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27 |
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Changes in operating assets and liabilities and other |
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(579 |
) |
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111 |
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Net cash provided by operating activities |
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|
1,775 |
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4,195 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures |
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(1,993 |
) |
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(3,282 |
) |
Other, net |
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26 |
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|
50 |
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Net cash used in investing activities |
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(1,967 |
) |
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(3,232 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Net borrowings (repayments) of debt with maturities of 90 days or less |
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(850 |
) |
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12 |
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Debt with maturities of greater than 90 days |
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Borrowings |
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1,247 |
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Repayments |
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(38 |
) |
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(60 |
) |
Cash dividends paid |
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(131 |
) |
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(130 |
) |
Payments to noncontrolling interests |
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(2 |
) |
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(123 |
) |
Employee stock options exercised, including income tax benefits |
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15 |
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111 |
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Net cash provided by (used in) financing activities |
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241 |
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(190 |
) |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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49 |
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|
773 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
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|
908 |
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|
607 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
957 |
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$ |
1,380 |
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|
See accompanying notes to consolidated financial statements.
3
PART I FINANCIAL INFORMATION (CONTD.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 Corporations (the Corporation) consolidated financial position at September 30,
2009 and December 31, 2008 and the consolidated results of operations for the three and
nine month periods ended September 30, 2009 and 2008 and the consolidated cash flows for
the nine month periods ended September 30, 2009 and 2008. The unaudited results of
operations for the interim periods reported are not necessarily indicative of results to
be expected for the full year.
The financial statements were prepared in accordance with the requirements of the
Securities and Exchange Commission (SEC) for interim reporting. As permitted under those
rules, certain notes or other financial information that are normally required by U.S.
generally accepted accounting principles (GAAP) have been condensed or omitted from these
interim financial statements. These statements, therefore, should be read in conjunction
with the consolidated financial statements and related notes included in the
Corporations Form 10-K for the year ended December 31, 2008.
The Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) became effective on July 1, 2009. The ASC combined multiple sources of authoritative
accounting literature into a single source of authoritative GAAP organized by accounting
topic. Since the ASC was not intended to change existing GAAP, the only impact on the
Corporations financial statements was that specific references to accounting principles
have been changed to refer to the ASC.
Effective January 1, 2009, the Corporation adopted the FASB accounting standard for
the accounting for and reporting of noncontrolling interests in a consolidated subsidiary
(ASC 810 Consolidation). As required, the Corporation retrospectively applied the
presentation and disclosure requirements of this standard. At September 30, 2009 and
December 31, 2008 noncontrolling interests of $133 million and $84 million, respectively,
have been classified as a component of equity. Previously the noncontrolling interests
had been classified in Other liabilities. Net income (loss) attributable to the
noncontrolling interests is also now separately reported in the Statement of Consolidated
Income. Certain other amounts in the consolidated financial statements and footnotes have
been reclassified to conform with the presentation requirements of this standard.
Effective January 1, 2009, the Corporation adopted the FASB accounting standard that
expanded the qualitative, quantitative and credit risk disclosure requirements related to
an entitys use of derivative instruments (ASC 815 Derivatives and Hedging). See Note
8, Derivative Instruments, Hedging, and Trading Activities, for these disclosures.
Effective January 1, 2009, the Corporation also adopted the FASB staff position that
requires the application of the fair value measurement and disclosure provisions to
nonfinancial assets and liabilities that are measured at fair value on a nonrecurring
basis (ASC 820 Fair Value Measurements). Such fair value measurements are determined
based on the same fair value hierarchy of inputs currently required to measure the fair
value of financial assets and liabilities. The impact of this accounting standard was
not material to the Corporations consolidated financial statements.
Effective June 30, 2009, the Corporation adopted the FASB accounting standard which
provides guidance on the accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued (ASC 855 Subsequent
Events). The adoption of this standard did not impact the Corporations existing practice
of evaluating subsequent events through the date the financial statements are filed with
the SEC. The Corporation evaluated subsequent events through
November 6, 2009.
4
PART I FINANCIAL INFORMATION (CONTD.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In June 2009, the FASB amended existing accounting standards to eliminate the
concept of a qualifying special-purpose entity (ASC 810 Consolidation) and limit the
circumstances in which
transferred financial assets should be derecognized (ASC 860 Transfers and Servicing).
The amended standards also require additional analysis of variable interest entities,
which are generally defined as entities in which equity investors do not have the
characteristics of a controlling interest or do not have sufficient equity at risk to
finance its activities without additional subordinated financial support. These
standards also change the criteria for determining the primary beneficiary of a variable
interest entity, which is the entity responsible for consolidation. As required, the
Corporation will adopt the provisions of these standards effective January 1, 2010. The
adoption of these standards is not expected to have a material impact on the
Corporations financial statements.
Inventories consist of the following (in millions):
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September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Crude oil and other charge stocks |
|
$ |
379 |
|
|
$ |
383 |
|
Refined products and natural gas |
|
|
1,299 |
|
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|
988 |
|
Less: LIFO adjustment |
|
|
(709 |
) |
|
|
(500 |
) |
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|
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|
969 |
|
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|
871 |
|
Merchandise, materials and supplies |
|
|
455 |
|
|
|
437 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
1,424 |
|
|
$ |
1,308 |
|
|
|
|
|
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|
3. |
|
Refining Joint Venture |
The Corporation accounts for its investment in HOVENSA L.L.C. (HOVENSA) using the
equity method. Summarized financial information for HOVENSA follows (in millions):
|
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|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Summarized balance sheet |
|
|
|
|
|
|
|
|
Cash and short-term investments |
|
$ |
145 |
|
|
$ |
75 |
|
Other current assets |
|
|
503 |
|
|
|
664 |
|
Net fixed assets |
|
|
2,077 |
|
|
|
2,136 |
|
Other assets |
|
|
59 |
|
|
|
58 |
|
Current liabilities |
|
|
(847 |
) |
|
|
(679 |
) |
Long-term debt |
|
|
(356 |
) |
|
|
(356 |
) |
Deferred liabilities and credits |
|
|
(111 |
) |
|
|
(104 |
) |
|
|
|
|
|
|
|
Members equity |
|
$ |
1,470 |
|
|
$ |
1,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Summarized income statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
2,644 |
|
|
$ |
5,413 |
|
|
$ |
7,307 |
|
|
$ |
15,170 |
|
Cost and expenses |
|
|
(2,741 |
) |
|
|
(5,308 |
) |
|
|
(7,632 |
) |
|
|
(15,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(97 |
) |
|
$ |
105 |
|
|
$ |
(325 |
) |
|
$ |
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hess Corporations
share, before income
taxes |
|
$ |
(49 |
) |
|
$ |
52 |
|
|
$ |
(165 |
) |
|
$ |
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
PART I FINANCIAL INFORMATION (CONTD.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. |
|
Capitalized Exploratory Well Costs |
The following table discloses the net changes in capitalized exploratory well costs
pending determination of proved reserves for the nine months ended September 30, 2009 (in
millions):
|
|
|
|
|
Balance at January 1 |
|
$ |
1,094 |
|
Additions to capitalized exploratory well costs pending the
determination of proved reserves |
|
|
227 |
|
Reclassifications to wells, facilities, and equipment based on the
determination of proved reserves |
|
|
(16 |
) |
Capitalized exploratory well costs charged to expense |
|
|
(74 |
) |
|
|
|
|
Balance at end of period |
|
$ |
1,231 |
|
|
|
|
|
The preceding table excludes costs related to exploratory dry holes of $158 million
which were incurred and subsequently expensed in 2009. Capitalized exploratory well
costs greater than one year old after completion of drilling were $919 million as of
September 30, 2009 and $381 million as of December 31, 2008. This increase is primarily
related to the Pony and Tubular Bells projects in the deepwater Gulf of Mexico and
offshore projects in Western Australia (WA-Block 390-P) and Libya (Area 54). Development
options for Pony and Tubular Bells are being evaluated. Further drilling is scheduled on
WA-Block 390 and in Area 54.
In February 2009, the Corporation issued $250 million of 5 year senior unsecured
notes with a coupon of 7% and $1 billion of 10 year senior unsecured notes with a coupon
of 8.125%. The majority of the proceeds were used to repay revolving credit debt and
outstanding borrowings on other credit facilities.
In July 2009, the Corporation amended its asset backed credit facility to increase
the capacity from $500 million to $1 billion, subject to the availability of sufficient
levels of eligible receivables from certain Marketing and Refining operations pledged as
collateral. In addition, the expiration date has been extended to July 2010.
During the third quarter of 2009, the Corporation assumed approximately $65 million
of private placement debt in conjunction with the acquisition of 37 previously leased
retail gasoline stations.
Foreign currency gains (losses) amounted to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Nine Months |
|
|
Ended September 30, |
|
Ended September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Pre-tax foreign currency gains (losses) |
|
$ |
|
1 |
|
$ |
|
(76 |
) |
$ |
|
32 |
|
$ |
|
(32 |
) |
After-tax foreign currency gains (losses) |
|
|
|
4 |
|
|
|
(10 |
) |
|
|
(1 |
) |
|
|
2 |
The
pre-tax amount of foreign currency gains (losses) is reported in Other, net within
the Statement of Consolidated Income.
6
PART I FINANCIAL INFORMATION (CONTD.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Components of net periodic pension cost consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
9 |
|
|
$ |
9 |
|
|
$ |
29 |
|
|
$ |
29 |
|
Interest cost |
|
|
19 |
|
|
|
15 |
|
|
|
59 |
|
|
|
55 |
|
Expected return on plan assets |
|
|
(12 |
) |
|
|
(15 |
) |
|
|
(42 |
) |
|
|
(55 |
) |
Amortization of net loss |
|
|
17 |
|
|
|
6 |
|
|
|
45 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension expense |
|
$ |
33 |
|
|
$ |
15 |
|
|
$ |
91 |
|
|
$ |
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2009, the Corporation expects to contribute approximately $135 million to its
pension plans and had contributed $111 million through September 30, 2009.
8. |
|
Derivative Instruments, Hedging, and Trading Activities |
The Corporation utilizes derivative instruments for both non-trading and trading
activities. In non-trading activities, the Corporation uses futures, forwards, options
and swaps individually or in combination, to mitigate its exposure to fluctuations in
prices of crude oil, natural gas, refined products and electricity, and changes in
foreign currency exchange rates. In trading activities, the Corporation, principally
through a consolidated partnership (in which the Corporation has a 50% voting interest),
trades energy commodities and energy derivatives, including futures, forwards, options
and swaps, based on expectations of future market conditions. The following information
includes 100% of the trading partnerships accounts.
The Corporation maintains a control environment under the direction of its chief
risk officer and through its corporate risk policy, which the Corporations senior
management has approved. Controls include volumetric, term and value-at-risk limits.
Risk limits are monitored daily and exceptions are reported to business units and to
senior management. The Corporations risk management department also performs independent
verifications of sources of fair values and validations of valuation models. These
controls apply to all of the Corporations non-trading and trading activities, including
the consolidated trading partnership.
The table below shows the gross volume of the Corporations trading and non-trading
derivative instruments outstanding at September 30, 2009:
|
|
|
|
|
|
|
Volume* |
Commodity Contracts |
|
|
|
|
Crude oil, refined products, and natural gas liquids (millions of barrels) |
|
|
|
2,159 |
Natural gas (millions of mcf) |
|
|
|
9,281 |
Electricity (millions of megawatt hours) |
|
|
|
166 |
Other Contracts |
|
|
|
|
Foreign exchange (millions of U.S. dollars) |
|
|
|
1,150 |
|
|
|
* |
|
Volume represents all gross notional amounts of both long and short positions,
including long and short positions that offset in a closed position
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. |
7
PART I FINANCIAL INFORMATION (CONTD.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Corporation records all derivative instruments on the balance sheet at fair
value (see Note 9, Fair Value Measurements). The table below reflects the gross and net
fair values of the Corporations derivative instruments as of September 30, 2009 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Accounts |
|
|
Accounts |
|
|
|
Receivable |
|
|
Payable |
|
Derivative contracts designated as hedging instruments |
|
|
|
|
|
|
|
|
Commodity |
|
$ |
894 |
|
|
$ |
(1,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts not designated as hedging instruments* |
|
|
|
|
|
|
|
|
Commodity |
|
|
9,910 |
|
|
|
(11,213 |
) |
Foreign exchange |
|
|
4 |
|
|
|
(44 |
) |
Other |
|
|
13 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
Total derivative contracts not designated as hedging instruments |
|
|
9,927 |
|
|
|
(11,272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross fair value of derivative contracts |
|
|
10,821 |
|
|
|
(12,698 |
) |
Master netting arrangements |
|
|
(9,342 |
) |
|
|
9,342 |
|
Cash collateral (received) posted |
|
|
(227 |
) |
|
|
332 |
|
|
|
|
|
|
|
|
Net fair value of derivative contracts |
|
$ |
1,252 |
|
|
$ |
(3,024 |
) |
|
|
|
|
|
|
|
|
|
|
* |
|
Includes trading derivatives and derivatives used for risk management. |
The Corporation generally enters into master netting arrangements to mitigate
counterparty credit risk. Master netting arrangements are standardized contracts that
govern all specified transactions with the same counterparty and allow the Corporation to
terminate all contracts upon occurrence of certain events, such as a counterpartys
default or bankruptcy. Where these arrangements provide the right of offset and the
Corporations intent and practice is to offset amounts in the case of contract
terminations, the Corporation records fair value on a net basis.
Non-trading activities
Cash Flow Hedges: The Corporation uses commodity contracts to hedge variability of
expected future cash flows and forecasted transactions (cash flow hedges). At September
30, 2009, the Corporation used cash flow hedges principally to fix the cost of supply in
its energy marketing business. The Corporation records the effective portion of changes
in the fair value of cash flow hedges as a component of other comprehensive income.
Amounts recorded in Accumulated other comprehensive income are reclassified into Cost of
products sold in the same period that the hedged item is recognized in earnings. The
ineffective portion of changes in the fair value of cash flow hedges is recognized
immediately in Cost of products sold. The length of time over which the Corporation
hedges exposure to variability in future cash flows is predominantly two years or less.
The maximum duration was five years for the contracts outstanding at September 30, 2009.
The Corporation may use futures and swaps to hedge crude oil and natural gas
production in its Exploration and Production business. In October 2008, the Corporation
closed its Brent crude oil cash flow hedges, covering 24,000 barrels per day from 2009
through 2012, by entering into offsetting contracts with the same counterparty. As a
result, the Corporation no longer accounts for these contracts as cash flow hedges.
Because the underlying cash flows from the originally hedged production are still
probable, the deferred losses within Accumulated other comprehensive income as of the
date the contracts were closed will be recorded in Sales and other operating revenues as
the contracts mature. There were no open hedges of crude oil or natural gas production
at September 30, 2009.
8
PART I FINANCIAL INFORMATION (CONTD.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
At
September 30, 2009, the after-tax deferred losses reported in Accumulated other
comprehensive income relating to cash flow hedges were $1,433 million. The Corporation
estimates that approximately $606 million of this amount will be reclassified into
earnings over the next twelve months.
Other Risk Management Derivatives: The
Corporation mitigates certain risks in its
energy marketing business using commodity contracts that it does not designate as hedges.
Changes in the fair value of the commodity contracts, which include forward purchases and
sales of energy marketing products, are recognized currently in earnings. Revenues from
the sales contracts are reported within Sales and other operating revenues and supply
contract purchases are reported within Cost of products sold. The Corporation also uses
foreign exchange contracts that it does not designate as hedges with the intent to reduce
its exposure to fluctuations in foreign exchange rates. Net
pre-tax gains on these derivative contracts amounted to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2009 |
|
Commodity |
|
$ |
5 |
|
|
$ |
94 |
|
Foreign exchange |
|
|
(24 |
) |
|
|
83 |
|
|
|
|
|
|
|
|
Total |
|
$ |
(19 |
) |
|
$ |
177 |
|
|
|
|
|
|
|
|
Trading Activities
In trading activities, the Corporation is primarily exposed to changes in crude oil,
natural gas, and refined product prices. Pre-tax gains
(losses) from trading activities, reported in Sales and
other operating revenues, amounted to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2009 |
|
Commodity |
|
$ |
49 |
|
|
$ |
149 |
|
Foreign exchange |
|
|
(11 |
) |
|
|
19 |
|
Other |
|
|
(3 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
Total |
|
$ |
35 |
|
|
$ |
180 |
|
|
|
|
|
|
|
|
Credit Risk
The Corporation is exposed to credit risks that may at times be concentrated with
certain counterparties or groups of counterparties. Accounts receivable are generated
from a diverse domestic and international customer base. The Corporation reduces its risk
related to certain counterparties by using master netting arrangements and, in certain
circumstances, requiring collateral, generally cash or letters of credit. The Corporation
records the cash collateral received or posted as an offset of the fair value of
derivatives executed with the same counterparty.
9
PART
I FINANCIAL INFORMATION (CONTD.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
At September 30, 2009, the Corporation had a total of $3,676 million of outstanding
letters of credit, primarily issued to satisfy margin and collateral requirements.
Certain of the Corporations agreements also contain contingent collateral provisions
that could require the Corporation to post additional collateral if the Corporations
credit rating declines. As of September 30, 2009, the net liability related to
derivatives with contingent collateral provisions was approximately $2,642 million before
cash collateral posted of approximately $323 million. At September 30, 2009, all three
major credit rating agencies that rate the Corporations debt had assigned an investment
grade rating. If two of the three agencies were to downgrade the Corporations rating to
below investment grade as of September 30, 2009, the Corporation would be required to
post additional collateral of approximately $265 million.
9. |
|
Fair Value Measurements |
The Corporation determines fair value in accordance with the FASB fair value
measurements accounting standard (ASC 820 Fair Value Measurements), 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). Multiple inputs may be used to measure
fair value, however, the level of fair value for each financial asset or liability
presented below is based on the lowest significant input level within this fair value
hierarchy. The following table provides the fair value of the Corporations financial
assets and (liabilities) based on this hierarchy (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral and |
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
counterparty |
|
|
September 30, |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
netting |
|
|
2009 |
|
Supplemental pension
plan investments |
|
$ |
66 |
|
|
$ |
|
|
|
$ |
5 |
|
|
$ |
|
|
|
$ |
71 |
|
Derivative contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
181 |
|
|
|
988 |
|
|
|
390 |
|
|
|
(307 |
) |
|
|
1,252 |
|
Liabilities |
|
|
(159 |
) |
|
|
(2,627 |
) |
|
|
(649 |
) |
|
|
411 |
|
|
|
(3,024 |
) |
|
The following table provides changes in financial assets and liabilities that are
measured at fair value based on Level 3 inputs (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2009 |
|
Balance at beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(215 |
) |
|
$ |
149 |
|
Unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61 |
) |
|
|
93 |
|
Included in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
(187 |
) |
Purchases, sales or other settlements during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
(226 |
) |
Net transfers in to (out of) Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(254 |
) |
|
$ |
(254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying amount of the Corporations financial instruments generally approximate
their fair values at September 30, 2009 except fixed rate long term debt, which had a
carrying value of $4,379 million and a fair value of $4,999 million.
10
PART I FINANCIAL INFORMATION (CONTD.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10. |
|
Weighted Average Common Shares |
The weighted average numbers of common shares used in the basic and diluted earnings
per share computations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Common shares basic |
|
|
324,066 |
|
|
|
322,365 |
|
|
|
323,796 |
|
|
|
320,159 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common stock |
|
|
1,213 |
|
|
|
1,670 |
|
|
|
1,163 |
|
|
|
1,866 |
|
Stock options |
|
|
759 |
|
|
|
2,985 |
|
|
|
846 |
|
|
|
3,228 |
|
Convertible preferred stock |
|
|
|
|
|
|
366 |
|
|
|
|
|
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares diluted |
|
|
326,038 |
|
|
|
327,386 |
|
|
|
325,805 |
|
|
|
325,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation issued 3,091,080 stock options and 1,041,530 shares of restricted
stock in the first nine months of 2009. The calculation of weighted average common shares
excludes the effect of 3,533,000 and 3,893,000 out-of-the money options for the quarter
and nine months ended September 30, 2009, respectively.
11. |
|
Equity and Comprehensive Income |
The table below summarizes changes in equity (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hess |
|
|
Non |
|
|
|
|
|
|
Stockholders |
|
|
controlling |
|
|
|
|
|
|
Equity |
|
|
Interests |
|
|
Total Equity |
|
Balance January 1, 2009 |
|
$ |
12,307 |
|
|
$ |
84 |
|
|
$ |
12,391 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
382 |
|
|
|
55 |
|
|
|
437 |
|
Deferred gains (losses) on cash flow hedges, after tax |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of hedge losses recognized in income |
|
|
701 |
|
|
|
|
|
|
|
701 |
|
Net change in fair value of cash flow hedges |
|
|
(656 |
) |
|
|
|
|
|
|
(656 |
) |
Change in foreign currency translation adjustment
and other, after tax |
|
|
109 |
|
|
|
(4 |
) |
|
|
105 |
|
Change in post retirement plan liabilities, after tax |
|
|
27 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
563 |
|
|
|
51 |
|
|
|
614 |
|
|
|
|
|
|
|
|
|
|
|
Activity related to restricted common stock awards, net |
|
|
46 |
|
|
|
|
|
|
|
46 |
|
Employee stock options, including income tax benefits |
|
|
56 |
|
|
|
|
|
|
|
56 |
|
Cash dividends declared |
|
|
(98 |
) |
|
|
|
|
|
|
(98 |
) |
Payments to noncontrolling interests and other |
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2009 |
|
$ |
12,874 |
|
|
$ |
133 |
|
|
$ |
13,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2008 |
|
$ |
9,774 |
|
|
$ |
226 |
|
|
$ |
10,000 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
2,434 |
|
|
|
3 |
|
|
|
2,437 |
|
Deferred gains (losses) on cash flow hedges, after tax |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of hedge losses recognized in income |
|
|
270 |
|
|
|
|
|
|
|
270 |
|
Net change in fair value of cash flow hedges |
|
|
(328 |
) |
|
|
|
|
|
|
(328 |
) |
Change in foreign currency translation adjustment
and other, after tax |
|
|
(28 |
) |
|
|
(3 |
) |
|
|
(31 |
) |
Change in post retirement plan liabilities, after tax |
|
|
8 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
2,356 |
|
|
|
|
|
|
|
2,356 |
|
|
|
|
|
|
|
|
|
|
|
Activity related to restricted common stock awards, net |
|
|
49 |
|
|
|
|
|
|
|
49 |
|
Employee stock options, including income tax benefits |
|
|
149 |
|
|
|
|
|
|
|
149 |
|
Cash dividends declared |
|
|
(97 |
) |
|
|
|
|
|
|
(97 |
) |
Payments to noncontrolling interests and other |
|
|
|
|
|
|
(124 |
) |
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2008 |
|
$ |
12,231 |
|
|
$ |
102 |
|
|
$ |
12,333 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income was $629 million ($614 million attributable to Hess
Corporation) for the three months ended September 30, 2009 and $1,121 million ($1,129
million attributable to Hess Corporation) for the three months ended September 30, 2008.
11
PART I FINANCIAL INFORMATION (CONTD.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Corporations results by operating segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration and Production |
|
$ |
1,858 |
|
|
$ |
2,773 |
|
|
$ |
4,885 |
|
|
$ |
8,659 |
|
Marketing and Refining |
|
|
5,435 |
|
|
|
8,681 |
|
|
|
16,128 |
|
|
|
25,302 |
|
Less: Transfers between affiliates |
|
|
(23 |
) |
|
|
(58 |
) |
|
|
(77 |
) |
|
|
(207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,270 |
|
|
$ |
11,396 |
|
|
$ |
20,936 |
|
|
$ |
33,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Hess
Corporation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration and Production |
|
$ |
397 |
|
|
$ |
699 |
|
|
$ |
548 |
|
|
$ |
2,548 |
|
Marketing and Refining |
|
|
38 |
|
|
|
161 |
|
|
|
110 |
|
|
|
125 |
|
Corporate, including interest |
|
|
(94 |
) |
|
|
(85 |
) |
|
|
(276 |
) |
|
|
(239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
341 |
|
|
$ |
775 |
|
|
$ |
382 |
|
|
$ |
2,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues exclude excise and similar taxes of approximately $525 million
and $550 million in the third quarter of 2009 and 2008, respectively, and $1,525 million
and $1,650 million during the first nine months of 2009 and 2008, respectively.
Identifiable assets by operating segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Exploration and Production |
|
$ |
21,275 |
|
|
$ |
19,506 |
|
Marketing and Refining |
|
|
5,869 |
|
|
|
6,680 |
|
Corporate |
|
|
1,293 |
|
|
|
2,403 |
|
|
|
|
|
|
|
|
Total |
|
$ |
28,437 |
|
|
$ |
28,589 |
|
|
|
|
|
|
|
|
The United States Deep Water Royalty Relief Act of 1995 (the Act) implemented a
royalty relief program that relieves eligible leases issued between November 28, 1995
and November 28, 2000 from paying royalties on deepwater production in Federal Outer
Continental Shelf lands. The Act does not impose any price thresholds in order to
qualify for the royalty relief. The U.S. Minerals Management Service (MMS) created
regulations that included pricing requirements to qualify for the royalty relief
provided in the Act. During the period from 2003 to 2009, the Corporation accrued the
royalties imposed by the MMS regulations. The legality of the thresholds imposed by the
MMS was challenged in the federal courts and, in early October 2009, the U.S. Supreme
Court decided not to review the appellate courts decision against the MMS. As a result,
the Corporation recognized a pre-tax gain of $143 million ($89 million after income
taxes) in the third quarter of 2009 to reverse all previously recorded royalties. The
pre-tax gain is reported in Other, net within the Statement of
Consolidated Income.
12
PART I FINANCIAL INFORMATION (CONTD.)
Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition.
Overview
Hess Corporation (the Corporation) is a global integrated energy company that
operates in two segments, Exploration and Production (E&P) and Marketing and Refining
(M&R). The E&P segment explores for, develops, produces, purchases, transports and
sells crude oil and natural gas. The M&R segment manufactures refined petroleum products
and purchases, trades and markets refined petroleum products, natural gas and
electricity. The Corporation reported net income of $341 million in the third quarter of
2009, compared with $775 million in the third quarter of 2008.
Exploration and Production: E&P reported income of $397 million for the third
quarter of 2009, compared with income of $699 million in the third quarter of 2008. The
decrease in earnings mainly reflects significantly lower average oil and gas selling
prices. Reported E&P earnings for the third quarter of 2009 included after-tax income of
$89 million related to the resolution of a U.S. royalty dispute.
In the third quarter of 2009, the Corporations average worldwide crude oil selling
price, including the effect of hedging, was $56.07 per barrel compared with $93.36 per
barrel in the third quarter of 2008. The Corporations average worldwide natural gas
selling price was $4.60 per thousand cubic feet (mcf) in the third quarter of 2009
compared with $7.60 per mcf in the third quarter of 2008.
Worldwide crude oil and natural gas production was 420,000 barrels of oil
equivalent per day (boepd) in the third quarter of 2009 compared with 361,000 boepd in
the same period of 2008. This increase was largely due to production from the Shenzi
Field together with Phase 2 production from Block A-18 of the Joint Development Area of
Malaysia and Thailand (JDA). The Shenzi Field commenced production at the end of the
first quarter of 2009 and net production averaged 38,000 boepd for
the third quarter. For the full year of 2009, worldwide crude oil and natural gas production is expected to average between approximately 400,000
and 410,000 boepd.
Drilling continued in the Carnarvon Basin offshore Western Australia (WA-Block
390-P, Hess 100%) during the third quarter. The Corporation has now completed 9 wells
and expects to drill the remaining 7 wells of the program by mid-2010.
Marketing and Refining: M&R results generated income of $38 million for the third
quarter of 2009, compared with income of $161 million in the third quarter of 2008,
primarily reflecting lower margins. M&R results included a benefit of $12 million due to an income tax adjustment relating to refining operations.
Results of Operations
The after-tax results by major operating activity were as follows (in millions,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Exploration and Production |
|
$ |
397 |
|
|
$ |
699 |
|
|
$ |
548 |
|
|
$ |
2,548 |
|
Marketing and Refining |
|
|
38 |
|
|
|
161 |
|
|
|
110 |
|
|
|
125 |
|
Corporate |
|
|
(33 |
) |
|
|
(42 |
) |
|
|
(108 |
) |
|
|
(114 |
) |
Interest expense |
|
|
(61 |
) |
|
|
(43 |
) |
|
|
(168 |
) |
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
Hess Corporation |
|
$ |
341 |
|
|
$ |
775 |
|
|
$ |
382 |
|
|
$ |
2,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (diluted) |
|
$ |
1.05 |
|
|
$ |
2.37 |
|
|
$ |
1.17 |
|
|
$ |
7.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
PART I FINANCIAL INFORMATION (CONTD.)
Results of Operations (continued)
Items Affecting Comparability Between Periods
The following table summarizes, on an after-tax basis, items of income (expense)
that are included in net income and affect comparability between periods (amounts in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Exploration and Production |
|
$ |
89 |
|
|
$ |
|
|
|
$ |
45 |
|
|
$ |
|
|
Marketing and Refining |
|
|
12 |
|
|
|
|
|
|
|
12 |
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
101 |
|
|
$ |
|
|
|
$ |
41 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The items in the table above are explained on
pages 17 through 19.
In the discussion that follows, the financial effects of certain transactions are
disclosed on an after-tax basis. Management reviews segment earnings on an after-tax
basis and uses after-tax amounts in its review of variances in segment earnings.
Management believes that after-tax amounts are preferable to pre-tax amounts for
explaining variances in earnings, since they show the entire effect of a transaction.
After-tax amounts are determined by applying the appropriate income tax rate in each tax
jurisdiction to pre-tax amounts.
Comparison of Results
Exploration and Production
Following is a summarized income statement of the Corporations E&P operations (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Sales and other operating revenues* |
|
$ |
1,792 |
|
|
$ |
2,661 |
|
|
$ |
4,622 |
|
|
$ |
8,343 |
|
Other, net |
|
|
145 |
|
|
|
(71 |
) |
|
|
210 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues and non-operating income |
|
|
1,937 |
|
|
|
2,590 |
|
|
|
4,832 |
|
|
|
8,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production expenses, including related taxes |
|
|
460 |
|
|
|
503 |
|
|
|
1,313 |
|
|
|
1,421 |
|
Exploration expenses, including dry holes
and lease impairment |
|
|
167 |
|
|
|
157 |
|
|
|
672 |
|
|
|
467 |
|
General, administrative and other expenses |
|
|
65 |
|
|
|
84 |
|
|
|
182 |
|
|
|
220 |
|
Depreciation, depletion and amortization |
|
|
602 |
|
|
|
479 |
|
|
|
1,605 |
|
|
|
1,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
1,294 |
|
|
|
1,223 |
|
|
|
3,772 |
|
|
|
3,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of operations before income taxes |
|
|
643 |
|
|
|
1,367 |
|
|
|
1,060 |
|
|
|
4,858 |
|
Provision for income taxes |
|
|
246 |
|
|
|
668 |
|
|
|
512 |
|
|
|
2,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of operations attributable
to Hess Corporation |
|
$ |
397 |
|
|
$ |
699 |
|
|
$ |
548 |
|
|
$ |
2,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amounts differ from E&P operating revenues in Note 12, Segment
Information, primarily due to the exclusion of sales of hydrocarbons purchased
from unrelated third parties. |
14
PART I FINANCIAL INFORMATION (CONTD.)
Results of Operations (continued)
After considering the items affecting comparability between periods in the table on
page 17, the remaining changes in E&P earnings are primarily attributable to changes in
selling prices, sales volumes, operating costs, depreciation, depletion and
amortization, and exploration expenses as discussed below.
Selling prices: Lower average realized selling prices of crude oil and natural gas
decreased E&P revenues by approximately $1,205 million and $4,250 million in the third
quarter and first nine months of 2009, respectively, compared with the corresponding
periods of 2008. The Corporations average selling prices were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Average selling prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil per barrel (including hedging) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
63.79 |
|
|
$ |
116.14 |
|
|
$ |
56.02 |
|
|
$ |
109.39 |
|
Europe |
|
|
47.34 |
|
|
|
83.23 |
|
|
|
42.80 |
|
|
|
90.69 |
|
Africa |
|
|
54.97 |
|
|
|
91.72 |
|
|
|
44.98 |
|
|
|
89.66 |
|
Asia and other |
|
|
67.49 |
|
|
|
105.58 |
|
|
|
56.63 |
|
|
|
106.09 |
|
Worldwide |
|
|
56.07 |
|
|
|
93.36 |
|
|
|
47.09 |
|
|
|
93.62 |
|
|
Crude oil per barrel (excluding hedging) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
63.79 |
|
|
$ |
116.14 |
|
|
$ |
56.02 |
|
|
$ |
109.39 |
|
Europe |
|
|
47.34 |
|
|
|
83.23 |
|
|
|
42.80 |
|
|
|
90.69 |
|
Africa |
|
|
67.27 |
|
|
|
108.49 |
|
|
|
56.59 |
|
|
|
106.91 |
|
Asia and other |
|
|
67.49 |
|
|
|
105.58 |
|
|
|
56.63 |
|
|
|
106.09 |
|
Worldwide |
|
|
61.42 |
|
|
|
102.80 |
|
|
|
52.35 |
|
|
|
102.03 |
|
|
Natural gas liquids per barrel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
36.05 |
|
|
$ |
77.50 |
|
|
$ |
32.38 |
|
|
$ |
72.79 |
|
Europe |
|
|
43.53 |
|
|
|
81.84 |
|
|
|
37.86 |
|
|
|
84.77 |
|
Asia and other |
|
|
44.74 |
|
|
|
|
|
|
|
38.49 |
|
|
|
|
|
Worldwide |
|
|
37.27 |
|
|
|
78.50 |
|
|
|
33.90 |
|
|
|
75.96 |
|
|
Natural gas per mcf (including hedging) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
2.65 |
|
|
$ |
8.57 |
|
|
$ |
3.19 |
|
|
$ |
9.35 |
|
Europe |
|
|
4.38 |
|
|
|
10.12 |
|
|
|
5.25 |
|
|
|
9.75 |
|
Asia and other |
|
|
5.12 |
|
|
|
5.77 |
|
|
|
4.88 |
|
|
|
5.33 |
|
Worldwide |
|
|
4.60 |
|
|
|
7.60 |
|
|
|
4.74 |
|
|
|
7.48 |
|
|
Natural gas per mcf (excluding hedging) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
2.65 |
|
|
$ |
8.57 |
|
|
$ |
3.19 |
|
|
$ |
9.35 |
|
Europe |
|
|
4.38 |
|
|
|
10.84 |
|
|
|
5.25 |
|
|
|
10.16 |
|
Asia and other |
|
|
5.12 |
|
|
|
5.77 |
|
|
|
4.88 |
|
|
|
5.33 |
|
Worldwide |
|
|
4.60 |
|
|
|
7.85 |
|
|
|
4.74 |
|
|
|
7.64 |
|
In October 2008, the Corporation closed its Brent crude oil cash flow hedges,
covering 24,000 barrels per day from 2009 through 2012, by entering into offsetting
contracts with the same counterparty. The deferred after tax loss as of the date the
hedge positions were closed will be recorded in earnings as the contracts mature. The
estimated annual after-tax loss from the closed positions will be approximately $335
million from 2009 through 2012. Crude oil hedges reduced E&P earnings by $84 million and
$249 million in the third quarter and first nine months of 2009 ($134 million and $398
million before income taxes). Crude oil and natural gas hedges reduced Exploration and
Production earnings by $138 million and $377 million in the third quarter and first nine
months of 2008, respectively ($224 million and $610 million before income taxes).
15
PART I FINANCIAL INFORMATION (CONTD.)
Results of Operations (continued)
Sales and production volumes: The
Corporations crude oil and natural gas production was
420,000 boepd in the third quarter of 2009 compared with 361,000 boepd in the same
period of 2008. Production in the first nine months of 2009 was 406,000 boepd compared
with 382,000 boepd in the first nine months of 2008. The Corporation anticipates that
its production for the full year of 2009 will average between approximately 400,000 and 410,000
boepd.
The Corporations net daily worldwide production by region was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Crude oil (barrels per day) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
73 |
|
|
|
31 |
|
|
|
54 |
|
|
|
34 |
|
Europe |
|
|
83 |
|
|
|
80 |
|
|
|
82 |
|
|
|
82 |
|
Africa |
|
|
124 |
|
|
|
121 |
|
|
|
125 |
|
|
|
123 |
|
Asia and other |
|
|
17 |
|
|
|
12 |
|
|
|
16 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
| |
|
| |
Total |
|
|
297 |
|
|
|
244 |
|
|
|
277 |
|
|
|
253 |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas liquids (barrels per day) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
12 |
|
|
|
9 |
|
|
|
10 |
|
|
|
10 |
|
Europe |
|
|
2 |
|
|
|
4 |
|
|
|
3 |
|
|
|
4 |
|
Asia and other |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
Total |
|
|
14 |
|
|
|
13 |
|
|
|
14 |
|
|
|
14 |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (mcf per day) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
105 |
|
|
|
76 |
|
|
|
92 |
|
|
|
84 |
|
Europe |
|
|
120 |
|
|
|
216 |
|
|
|
153 |
|
|
|
260 |
|
Asia and other |
|
|
429 |
|
|
|
333 |
|
|
|
442 |
|
|
|
346 |
|
|
|
| |
|
| |
|
| |
|
| |
Total |
|
|
654 |
|
|
|
625 |
|
|
|
687 |
|
|
|
690 |
|
|
|
| |
|
| |
|
| |
|
| |
Barrels of oil equivalent per day* |
|
|
420 |
|
|
|
361 |
|
|
|
406 |
|
|
|
382 |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
* |
|
Natural gas production is converted assuming six Mcf equals one barrel. |
United States: Crude oil production in the United States was higher in the third
quarter and first nine months of 2009 compared to the corresponding periods in 2008,
primarily due to the Shenzi Field which commenced production at the end of the first
quarter of 2009. Crude oil and natural gas production in the Gulf of Mexico totaling
approximately 10,000 boepd was shut-in during the third quarter of 2008 due to the impact of
hurricanes.
Europe: Crude oil production in Europe in the third quarter and first nine months
of 2009 was comparable to the same periods in 2008, as higher production in Russia was
offset by lower production in the U.K. North Sea. Natural gas production was lower in
the third quarter and first nine months of 2009 compared to the same periods in 2008,
primarily due to decline at the Atlantic and Cromarty fields, which are nearing the end
of their productive lives.
Asia and other: The increase in natural gas production in the third quarter and
first nine months of 2009 compared to the corresponding periods in 2008 was principally
due to Phase 2 gas sales from the JDA, which commenced production in November 2008.
Sales volumes: Higher crude oil sales volumes increased revenue by approximately
$335 million in the third quarter and $530 million in the first nine months of 2009,
compared with the corresponding periods of 2008. During the third quarter of 2009, the
Corporations sales volumes were under lifted compared to production while year-to-date
sales volumes approximated total production volumes.
16
PART I FINANCIAL INFORMATION (CONTD.)
Results of Operations (continued)
Operating costs and depreciation, depletion and amortization: Cash operating costs,
consisting of production expenses and general and administrative expenses, decreased by
$62 million and $165 million in the third quarter and first nine months of 2009 compared
with the corresponding periods of 2008, excluding the impact of items affecting
comparability discussed below. These decreases were principally due to lower price
related production taxes.
Depreciation, depletion and amortization expenses increased by $123 million and
$179 million in the third quarter and first nine months of 2009 compared with the
corresponding periods of 2008, excluding the impact of items affecting comparability
discussed below. These increases were primarily due to the commencement of production in
the Shenzi Field at the end of the first quarter 2009 and the ramp up of production at
the JDA with Phase 2 gas. Rates per barrel also increased due to the mix of production
from assets with varying per barrel rates, including the Shenzi Field.
Excluding the impact of items affecting comparability discussed below, E&P total
production unit costs (cash operating costs plus depreciation, depletion, and
amortization) are anticipated to be in the range of $27 to $29 per barrel of oil
equivalent (boe).
Exploration expenses: Exploration expenses were higher in the third quarter and
the first nine months of 2009 compared with the same periods in 2008 principally
reflecting higher dry hole expense and lease impairment partially offset by lower
seismic costs.
Income taxes: The effective income tax rate for E&P operations in the first nine months
of 2009 was 49% compared with 48% in the first nine months of 2008. The effective
income tax rate for E&P operations for the full year of 2009 is expected to be in the
range of 47% to 49%.
Foreign exchange: The after-tax foreign currency gains related to E&P activities were
$4 million in the third quarter of 2009 compared with losses of $8 million in the third
quarter of 2008. The after-tax foreign currency loss in the nine months ended September
30, 2009 was $1 million compared with a gain of $3 million for the nine months ended
September 30, 2008.
Reported E&P earnings include the following items affecting
comparability of earnings between periods, after-tax (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Royalty dispute resolution |
|
$ |
89 |
|
|
$ |
|
|
|
$ |
89 |
|
|
$ |
|
|
Reductions in carrying values of assets |
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
89 |
|
|
$ |
|
|
|
$ |
45 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In early October 2009, the U.S. Supreme Court decided it would not review the
decision of the 5th Circuit Court of Appeals against the U.S. Minerals Management
Service relating to royalty relief under the Deep Water Royalty Relief Act of 1995. As a
result, the Corporation recognized an after-tax gain of $89 million in the third quarter
of 2009 to reverse all previously recorded royalties covering the periods from 2003 to
2009. The pre-tax gain of $143 million is reported in Other, net
within the Statement of Consolidated Income.
Approximately $7 million of the after-tax gain related to 2009.
17
PART I FINANCIAL INFORMATION (CONTD.)
Results of Operations (continued)
In the second quarter of 2009, after-tax charges of $31 million ($51 million before
income taxes) were recorded to reduce the carrying values of production equipment in the
U.K. North Sea and materials inventory in Equatorial Guinea and the United States. In
the first quarter of 2009, the Corporation recorded an after-tax charge of $13 million
($26 million before income taxes) to reduce the carrying values of two short-lived
fields in the U.K. North Sea. The pre-tax amount of the reductions in carrying value of
production equipment and the short-lived fields was reported in Depreciation, depletion
and amortization and the majority of the reduction in carrying values of inventory of
$25 million was reported in Production expenses in the Statement of Consolidated
Income.
The Corporations future E&P earnings may be impacted by external factors, such as
political risk, volatility in the selling prices of crude oil and natural gas, reserve
and production changes, industry cost inflation, exploration expenses, the effects of
weather and changes in foreign exchange and income tax rates.
Marketing and Refining
M&R activities generated income of $38 million and $110 million in the third
quarter and first nine months of 2009 compared with $161 million and $125 million for
the corresponding periods of 2008. The Corporations downstream operations include
HOVENSA L.L.C. (HOVENSA), a 50% owned refining joint venture with a subsidiary of
Petroleos de Venezuela S.A. (PDVSA), which is accounted for using the equity method.
Additional Marketing and Refining activities include a fluid catalytic cracking facility
in Port Reading, New Jersey, as well as retail gasoline stations, energy marketing and
trading operations.
Refining: Refining operations generated a loss of $15 million and $59 million in the
third quarter and first nine months of 2009 compared with income of $46 million in both
the third quarter and first nine months of 2008, excluding the impact of the item
affecting comparability discussed below. The Corporations share of HOVENSAs losses,
after income taxes, was $30 million in the third quarter of 2009 and $101 million in the
first nine months of 2009 compared with income of $32 million and $14 million in the
corresponding periods of 2008, principally reflecting lower refining margins. Port
Readings after tax earnings were $16 million and $43 million in the third quarter and
first nine months of 2009, compared with $14 million and $30 million in
the corresponding periods of 2008.
The following table summarizes refinery capacity and utilization rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery utilization |
|
|
Refinery |
|
Three Months Ended |
|
Nine Months Ended |
|
|
capacity |
|
September 30, |
|
September 30, |
|
|
(thousands of |
|
|
|
|
|
|
|
|
|
|
barrels per day) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
HOVENSA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude |
|
|
|
500 |
|
|
76.9 |
% |
|
|
91.3 |
% |
|
|
82.4 |
% |
|
|
91.5 |
% |
Fluid catalytic cracker |
|
|
|
150 |
|
|
82.9 |
% |
|
|
72.8 |
% |
|
|
75.2 |
% |
|
|
73.4 |
% |
Coker |
|
|
|
58 |
|
|
78.9 |
% |
|
|
105.4 |
% |
|
|
83.6 |
% |
|
|
98.8 |
% |
Port Reading |
|
|
|
70 |
|
|
92.2 |
% |
|
|
92.4 |
% |
|
|
91.1 |
% |
|
|
90.3 |
% |
In the third quarter of 2009, M&R results included a benefit of $12 million due to
an income tax adjustment. This amount is included in the table of items affecting
comparability between periods on page 14.
18
PART I FINANCIAL INFORMATION (CONTD.)
Results of Operations (continued)
Marketing: Marketing operations, which consist principally of energy marketing and
retail gasoline operations, generated earnings of $35 million in the third quarter of
2009 compared with $110 million in the third quarter of 2008. The decrease was
primarily due to lower margins and lower refined product volumes. Marketing operations
had earnings of $123 million in the first nine months of 2009 compared with earnings of
$102 million in the first nine months of 2008.
The following table summarizes marketing sales volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Refined products (thousands of barrels
per day) |
|
|
443 |
|
|
|
460 |
|
|
|
466 |
|
|
|
470 |
|
Natural gas (thousands of mcf per day) |
|
|
1,800 |
|
|
|
1,600 |
|
|
|
2,100 |
|
|
|
1,900 |
|
Electricity (megawatts round the clock) |
|
|
5,200 |
|
|
|
3,400 |
|
|
|
4,400 |
|
|
|
3,200 |
|
The Corporation has a 50% voting interest in a consolidated partnership that trades
energy commodities and energy derivatives. The Corporation also takes trading positions
for its own account. The Corporations after-tax results from trading activities,
including its share of the results from the trading partnership, amounted to income of
$6 million in the third quarter and $34 million in the first nine months of 2009
compared with income of $5 million in the third quarter and a loss of $23 million in the
first nine months of 2008.
Marketing expenses decreased in the third quarter and first nine months of 2009
compared with the corresponding periods of 2008, principally
reflecting lower retail
credit card fees.
The Corporations future M&R earnings may be impacted by
external factors, such as volatility in margins,
competitive industry conditions, government regulatory changes, credit risk and supply
and demand factors, including the effects of weather.
Corporate
The following table summarizes corporate expenses (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Corporate expenses |
|
$ |
(52 |
) |
|
$ |
(61 |
) |
|
$ |
(169 |
) |
|
$ |
(167 |
) |
Income tax benefits |
|
|
19 |
|
|
|
19 |
|
|
|
61 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33 |
) |
|
|
(42 |
) |
|
|
(108 |
) |
|
|
(114 |
) |
|
Items affecting
comparability between
periods,
after-tax |
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net corporate expenses |
|
$ |
(33 |
) |
|
$ |
(42 |
) |
|
$ |
(92 |
) |
|
$ |
(114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax corporate expenses were lower in the third quarter and first nine months
of 2009 compared with the same periods of 2008, mainly due to higher income from pension
related investments and lower costs as a result of cost saving initiatives, partly
offset by higher bank facility fees. In the first nine months of 2009, a charge of $25
million before income taxes ($16 million after-tax) relating to retirement benefits and
employee severance costs, was recorded in General and administrative expenses. In the
fourth quarter of 2009, the Corporation will record a pre-tax charge of approximately
$15 million ($10 million after-tax) for pension plan settlements relating to the
retirements referred to above.
19
PART I FINANCIAL INFORMATION (CONTD.)
Results of Operations (continued)
After-tax corporate expenses in 2009 are estimated to be in the range of $145
to $150 million, excluding items affecting comparability between periods.
Interest
Interest expense was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Total interest incurred |
|
$ |
(98 |
) |
|
$ |
(70 |
) |
|
$ |
(273 |
) |
|
$ |
(204 |
) |
Less: capitalized interest |
|
|
1 |
|
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense before income taxes |
|
|
(97 |
) |
|
|
(68 |
) |
|
|
(269 |
) |
|
|
(200 |
) |
Income tax benefits |
|
|
36 |
|
|
|
25 |
|
|
|
101 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax interest expense |
|
$ |
(61 |
) |
|
$ |
(43 |
) |
|
$ |
(168 |
) |
|
$ |
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest incurred in 2009 reflects higher average debt principally
resulting from the Corporations $1.25 billion debt offering in February 2009 (see Note
5, Long-Term Debt), higher average interest rates and higher fees relating to letters of
credit.
Sales and Other Operating Revenues
Sales and other operating revenues decreased by 36% in the third quarter and 38% in
the first nine months of 2009 compared with the corresponding periods of 2008, primarily
due to lower crude oil, natural gas and refined product selling prices. The decrease in
cost of products sold principally reflects lower costs of refined products and purchased
natural gas.
Liquidity and Capital Resources
The following table sets forth certain relevant measures of the Corporations
liquidity and capital resources (in millions, except ratios):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Cash and cash equivalents |
|
$ |
957 |
|
|
|
$ |
908 |
|
|
Current portion of long-term debt |
|
|
136 |
|
|
|
|
143 |
|
|
Total debt |
|
|
4,379 |
|
|
|
|
3,955 |
|
|
Total equity |
|
|
13,007 |
|
|
|
|
12,391 |
|
|
Debt to capitalization ratio* |
|
|
25.2 |
% |
|
|
|
24.2 |
% |
|
|
|
|
* |
|
Total debt as a percentage of the sum of total debt plus total equity. |
Cash Flows
The following table sets forth a summary of the Corporations cash flows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
1,775 |
|
|
$ |
4,195 |
|
Investing activities |
|
|
(1,967 |
) |
|
|
(3,232 |
) |
Financing activities |
|
|
241 |
|
|
|
(190 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
49 |
|
|
$ |
773 |
|
|
|
|
|
|
|
|
20
PART I FINANCIAL INFORMATION (CONTD.)
Liquidity and Capital Resources (continued)
Operating Activities: Net cash provided by operating activities, including changes in
operating assets and liabilities, amounted to $1,775 million in the first nine months of
2009 compared with $4,195 million in 2008, reflecting decreased earnings.
Investing Activities: The following table summarizes the Corporations capital
expenditures (in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Exploration and Production |
|
$ |
1,910 |
|
|
$ |
3,185 |
|
Marketing, Refining and Corporate |
|
|
83 |
|
|
|
97 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,993 |
|
|
$ |
3,282 |
|
|
|
|
|
|
|
|
Financing Activities: In the first nine months of 2009, net borrowings were $359
million. In February 2009, the Corporation issued $250 million of 5 year senior
unsecured notes with a coupon of 7% and $1 billion of 10 year senior unsecured notes
with a coupon of 8.125%. The majority of the proceeds were used to repay outstanding
borrowings. Dividends paid were $131 million in the first nine months of 2009 ($130
million in the first nine months of 2008).
Future Capital Requirements and Resources
The Corporation anticipates investing a total of approximately $3.2 billion in
capital and exploratory expenditures during 2009, of which $3.1 billion relates to E&P
operations. The Corporation expects to fund its 2009 operations, including
capital expenditures, dividends, pension contributions and required debt repayments,
with existing cash on-hand, cash flow from operations and its available credit
facilities. Crude oil prices, natural gas prices, and refining margins are volatile and difficult to predict.
In addition, unplanned increases in the Corporations
capital expenditure program could occur.
Refining margins are currently weak, which may lead HOVENSA to seek
additional financial support. The Corporation intends to provide its
share of the financial support. The Corporation will take steps as necessary to
protect its financial flexibility and may pursue other sources of liquidity, including
the issuance of debt securities, the issuance of equity securities, and/or asset sales.
The table below summarizes the capacity, usage, and available capacity of the
Corporations borrowing and letter of credit facilities at September 30, 2009 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration |
|
|
|
|
|
|
|
|
|
|
Letters of |
|
|
|
|
|
|
Available |
|
|
|
Date |
|
|
Capacity |
|
|
Borrowings |
|
|
Credit Issued |
|
|
Total Used |
|
|
Capacity |
|
Revolving credit facility |
|
May 2012(a) |
|
$ |
3,000 |
|
|
$ |
|
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
2,997 |
|
Asset backed credit facility |
|
July 2010 |
|
|
630 |
(b) |
|
|
|
|
|
|
500 |
|
|
|
500 |
|
|
|
130 |
|
Committed lines |
|
Various(c) |
|
|
1,965 |
|
|
|
|
|
|
|
1,390 |
|
|
|
1,390 |
|
|
|
575 |
|
Uncommitted lines |
|
Various(c) |
|
|
1,783 |
|
|
|
|
|
|
|
1,783 |
|
|
|
1,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
7,378 |
|
|
$ |
|
|
|
$ |
3,676 |
|
|
$ |
3,676 |
|
|
$ |
3,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
$75 million expires in May 2011. |
|
(b) |
|
Total capacity of $1.0 billion subject to the amount of eligible receivables posted. |
|
(c) |
|
Committed and uncommitted lines have expiration dates primarily through 2010. |
21
PART I FINANCIAL INFORMATION (CONTD.)
Liquidity and Capital Resources (continued)
The Corporation maintains a $3.0 billion syndicated revolving credit facility, of
which $2,925 million is committed through May 2012. This facility can be used for
borrowings and letters of credit. At September 30, 2009, available capacity under the
facility was $2,997 million. The Corporation has a 364 day asset-backed credit facility
securitized by certain accounts receivable from its M&R operations. At September 30,
2009, under the terms of this financing arrangement, the Corporation has the ability to
borrow or issue letters of credit of up to $1.0 billion, subject to the availability of
sufficient levels of eligible receivables. At September 30, 2009, outstanding letters of
credit under this facility were collateralized by a total of $1,029 million of accounts
receivable, which are held by a wholly owned subsidiary. These receivables are only
available to pay the general obligations of the Corporation after satisfaction of the
outstanding obligations under the asset backed facility.
The Corporation also has a shelf registration under which it may issue additional
debt securities, warrants, common stock or preferred stock.
At September 30, 2009, a loan agreement covenant based on the Corporations debt to
capitalization ratio permitted the Corporation to borrow up to an additional $17.3
billion for the construction or acquisition of assets. Under a separate loan agreement
covenant, the Corporation has the ability to borrow up to $3.5 billion of additional
secured debt at September 30, 2009. The Corporations $3,676 million of letters of
credit outstanding at September 30, 2009 were primarily issued to satisfy margin and
collateral requirements. See also Note 8, Derivative Instruments, Hedging, and Trading
Activities.
Off-Balance Sheet Arrangements
The Corporation has leveraged leases not included in its balance sheet, primarily
related to retail gasoline stations that the Corporation operates. The net present
value of these leases is $412 million at September 30, 2009. The Corporations
September 30, 2009 debt to capitalization ratio would increase from 25.2% to 26.9% if
the leases were included as debt.
The Corporation guarantees the payment of up to 50% of HOVENSAs crude oil
purchases from suppliers other than PDVSA. At September 30, 2009, the guarantee
amounted to $202 million. This amount fluctuates based on the volume of crude oil
purchased and related prices. In addition, the Corporation has agreed to provide funding
up to a maximum of $15 million to the extent HOVENSA does not have funds to meet its
senior debt obligations.
Change in Accounting Policies
The Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) became effective on July 1, 2009. The ASC combined multiple sources of authoritative
accounting literature into a single source of authoritative GAAP organized by accounting
topic. Since the ASC was not intended to change existing GAAP, the only impact on the
Corporations financial statements was that specific references to accounting principles
have been changed to refer to the ASC.
22
PART I FINANCIAL INFORMATION (CONTD.)
Change in Accounting Policies (continued)
Effective January 1, 2009, the Corporation adopted the FASB accounting standard for
the accounting for and reporting of noncontrolling interests in a consolidated
subsidiary (ASC 810 Consolidation). As required, the Corporation retrospectively
applied the presentation and disclosure requirements of this standard. At September 30,
2009 and December 31, 2008 noncontrolling interests of $133 million and $84 million,
respectively, have been classified as a component of equity. Previously the
noncontrolling interests had been classified in Other liabilities. Net income (loss)
attributable to the noncontrolling interests is also now separately reported in the
Statement of Consolidated Income. Certain other amounts in the consolidated financial
statements and footnotes have been reclassified to conform with the presentation
requirements of this standard.
Effective January 1, 2009, the Corporation adopted the FASB accounting standard
that expanded the qualitative, quantitative and credit risk disclosure requirements
related to an entitys use of derivative instruments (ASC 815 Derivatives and
Hedging). See Note 8, Derivative Instruments, Hedging, and Trading Activities, for these
disclosures.
Effective January 1, 2009, the Corporation also adopted the FASB staff position
that requires the application of the fair value measurement and disclosure provisions to
nonfinancial assets and liabilities that are measured at fair value on a nonrecurring
basis (ASC 820 Fair Value Measurements). Such fair value measurements are determined
based on the same fair value hierarchy of inputs required to measure the fair value of
financial assets and liabilities. The impact of this accounting standard was not
material to the Corporations consolidated financial statements.
Effective June 30, 2009, the Corporation adopted the FASB accounting standard which
provides guidance on the accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued (ASC 855 Subsequent
Events). The adoption of this standard did not impact the Corporations existing
practice of evaluating subsequent events through the date the financial statements are
filed with the SEC. The Corporation evaluated subsequent events through November
6, 2009.
Recently Issued Accounting Standards
In June 2009, the FASB amended existing accounting standards to eliminate the
concept of a qualifying special-purpose entity (ASC 810 Consolidation) and limit the
circumstances in which transferred financial assets should be derecognized (ASC 860
Transfers and Servicing). The amended standards also require additional analysis of
variable interest entities, which are generally defined as entities in which equity
investors do not have the characteristics of a controlling interest or do not have
sufficient equity at risk to finance its activities without additional subordinated
financial support. These standards also change the criteria for determining the primary
beneficiary of a variable interest entity, which is the entity responsible for
consolidation. As required, the Corporation will adopt the provisions of these standards
effective January 1, 2010. The adoption of these standards is not expected to have a
material impact on the Corporations financial statements.
23
PART I FINANCIAL INFORMATION (CONTD.)
Market Risk Disclosures
In the normal course of its business, the Corporation is exposed to commodity risks
related to changes in the prices of crude oil, natural gas, refined products and
electricity, as well as to changes in interest rates and foreign currency values. In
the disclosures that follow, these operations are referred to as non-trading activities.
The Corporation also has trading operations, principally through a 50% voting interest
in a trading partnership. These trading operations are also exposed to commodity risks
primarily related to the prices of crude oil, natural gas and refined products.
Instruments: The Corporation primarily uses forward commodity contracts, foreign
exchange forward contracts, futures, swaps, options and energy securities in its
non-trading and trading activities.
Value-at-Risk: The Corporation uses value-at-risk to monitor and control commodity risk
within its trading and non-trading activities. The value-at-risk model uses historical
simulation and the results represent the potential loss in fair value over one day at a
95% confidence level. The model captures both first and second order sensitivities for
options. The potential change in fair value based on commodity price risk is presented
in the non-trading and trading sections below.
Non-Trading: The Corporations non-trading activities may include hedging of crude oil
and natural gas production. Futures and swaps are used to fix the selling prices of a
portion of the Corporations future production and the related gains or losses are an
integral part of the Corporations selling prices. In October 2008, the Corporation
closed its Brent crude oil hedges, covering 24,000 barrels per day from 2009 through
2012, by entering into offsetting positions with the same counterparty. The estimated
annual after-tax loss that will be reflected in earnings related to the closed crude oil
positions will be $335 million from 2009 to 2012. There were no open hedges of crude oil
or natural gas production at September 30, 2009.
The Corporation also markets energy commodities including refined petroleum
products, natural gas, and electricity. The Corporation uses futures, swaps, and options
to manage the risk in its marketing activities. The Corporation estimates that the
value-at-risk for commodity related derivatives that are settled in cash and used in
non-trading activities was $13 million at September 30, 2009 and December 31, 2008. The
results may vary from time to time as hedge levels change.
The Corporation uses foreign exchange contracts to reduce its exposure to
fluctuating foreign exchange rates by entering into forward contracts for various
currencies, including the British pound, the Euro, and the
Thai baht.
Trading: In trading activities, the Corporation is exposed to changes in crude oil,
natural gas and refined product prices. The trading partnership, in which the
Corporation has a 50% voting interest, trades energy commodities and derivatives. The
accounts of the partnership are consolidated with those of the Corporation. The
Corporation also takes trading positions for its own account. The information that
follows represents 100% of the trading partnership and the Corporations proprietary
trading accounts.
24
PART I FINANCIAL INFORMATION (CONTD.)
Market Risk Disclosures (continued)
Total net realized gains for the first nine months of 2009 amounted to $335 million
($97 million of realized gains for the first nine months of 2008). The following table
provides an assessment of the factors affecting the changes in fair value of trading
activities (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Fair value of contracts outstanding at January 1 |
|
$ |
864 |
|
|
$ |
154 |
|
Change in fair value of contracts outstanding
at the beginning of the year and still
outstanding at September 30 |
|
|
48 |
|
|
|
141 |
|
Reversal of fair value for contracts closed
during the period |
|
|
(386 |
) |
|
|
49 |
|
Fair value of contracts entered into
during the period and still outstanding |
|
|
(241 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
Fair value of contracts outstanding at September 30 |
|
$ |
285 |
|
|
$ |
284 |
|
|
|
|
|
|
|
|
The Corporation determines fair value in accordance with the Fair Value
Measurements Accounting Standard (ASC 820 Fair Value Measurements). The following
table summarizes the sources of fair values of derivatives used in the Corporations
trading activities at September 30, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments Maturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
Source of Fair Value |
|
Total |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
beyond |
|
Level 1 |
|
$ |
(27 |
) |
|
$ |
267 |
|
|
$ |
(333 |
) |
|
$ |
57 |
|
|
$ |
(18 |
) |
Level 2 |
|
|
340 |
|
|
|
47 |
|
|
|
233 |
|
|
|
4 |
|
|
|
56 |
|
Level 3 |
|
|
(28 |
) |
|
|
(2 |
) |
|
|
15 |
|
|
|
12 |
|
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
285 |
|
|
$ |
312 |
|
|
$ |
(85 |
) |
|
$ |
73 |
|
|
$ |
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation estimates that at September 30, 2009, the value-at-risk for trading
activities, including commodities, was $15 million compared with $17 million at December
31, 2008. The value-at-risk for trading activities may vary from time to time as
strategies change to capture potential market rate movements.
The following table summarizes the fair values of net receivables relating to the
Corporations trading activities and the credit ratings of counterparties at
September 30, 2009 (in millions):
|
|
|
|
|
Investment grade determined by outside sources |
|
$ |
145 |
|
Investment grade determined internally* |
|
|
46 |
|
Less than investment grade |
|
|
62 |
|
|
|
|
|
Fair value of net receivables outstanding at end of period |
|
$ |
253 |
|
|
|
|
|
|
|
|
* |
|
Based on information provided by counterparties and other available
sources. |
Forward-Looking Information
Certain sections of Managements Discussion and Analysis of Results of Operations
and Financial Condition, including references to the Corporations future results of
operations and financial position, liquidity and capital resources, capital
expenditures, oil and gas production, tax rates, debt repayment, hedging, derivative and
market risk disclosures and off-balance sheet arrangements include forward-looking
information. Forward-looking disclosures are based on the Corporations current
understanding and assessment of these activities and reasonable assumptions about the
future. Actual results may differ from these disclosures because of changes in market
conditions, government actions and other factors.
25
PART I FINANCIAL INFORMATION (CONTD.)
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is presented under Item 2, Managements Discussion
and Analysis of Results of Operations and Financial Condition Market Risk Disclosure.
Item 4. Controls and Procedures
Based upon their evaluation of the Corporations disclosure controls and procedures (as
defined in Exchange Act Rules 13a 15(e) and 15d 15(e)) as of September 30, 2009, John B.
Hess, Chief Executive Officer, and John P. Rielly, Chief Financial Officer, concluded that
these disclosure controls and procedures were effective as of September 30, 2009.
There was no change in internal control over financial reporting identified in connection
with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 in the quarter ended
September 30, 2009 that has materially affected, or is reasonably likely to materially
affect, internal control over financial reporting.
26
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
|
|
|
31(1) Certification required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule
15d-14(a) (17 CFR 240.15d-14(a)) |
|
|
|
|
31(2) Certification required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule
15d-14(a) (17 CFR 240.15d-14(a)) |
|
|
|
|
32(1) Certification required by Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule
15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. 1350) |
|
|
|
|
32(2) Certification required by Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule
15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. 1350) |
|
|
|
|
101(INS) XBRL Instance Document. |
|
|
|
|
101(SCH) XBRL Schema Document |
|
|
|
|
101(CAL) XBRL Calculation Linkbase Document |
|
|
|
|
101(LAB) XBRL Label Linkbase Document |
|
|
|
|
101(PRE) XBRL Presentation Linkbase Document |
|
|
|
|
101(DEF) XBRL Definition Linkbase Document |
|
b. |
|
Reports on Form 8-K |
|
|
|
|
During the quarter ended September 30, 2009, Registrant filed one report on Form 8-K: |
|
(i) |
|
Filing dated July 29, 2009 reporting under Items 2.02 and 9.01 a news
release dated July 29, 2009 reporting results for the second quarter of 2009 and
furnishing under Item 9.01 the prepared remarks of John B. Hess, Chairman of the
Board and Chief Executive Officer of Hess Corporation, at a public conference call
held on July 29, 2009. |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
HESS CORPORATION |
|
|
(REGISTRANT) |
|
|
|
|
|
|
|
|
|
By |
|
/s/ John B. Hess |
|
|
|
|
|
|
JOHN B. HESS
|
|
|
|
|
|
|
CHAIRMAN OF THE BOARD AND |
|
|
|
|
|
|
CHIEF EXECUTIVE OFFICER |
|
|
|
|
|
|
|
|
|
|
|
By |
|
/s/ John P. Rielly |
|
|
|
|
|
|
JOHN P. RIELLY
|
|
|
|
|
|
|
SENIOR VICE PRESIDENT AND |
|
|
|
|
|
|
CHIEF FINANCIAL OFFICER |
|
|
Date:
November 6, 2009
28