UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

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

Commission File Number 1-1204

HESS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)

13-4921002
(I.R.S. Employer Identification Number)

1185 AVENUE OF THE AMERICAS, NEW YORK, N.Y.
(Address of Principal Executive Offices)
10036
(Zip Code)

(Registrant’s Telephone Number, Including Area Code is (212) 997-8500)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ		Accelerated Filer o		Non-Accelerated Filer o (Do not check if a smaller reporting company)		Smaller Reporting Company o

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 March 31, 2011, there were 339,747,215 shares of Common Stock outstanding.

 

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)
(Millions of dollars, except per share data)

		Three Months Ended
		March 31,
		2011				2010
REVENUES AND NON-OPERATING INCOME
Sales (excluding excise taxes) and other operating revenues		$	10,215			$	9,259
Income (loss) from equity investment in HOVENSA L.L.C.			(48	)			(85	)
Other, net			348				46
Total revenues and non-operating income			10,515				9,220
COSTS AND EXPENSES
Cost of products sold (excluding items shown separately below)			7,040				6,540
Production expenses			531				477
Marketing expenses			283				253
Exploration expenses, including dry holes and lease impairment			313				151
Other operating expenses			42				52
General and administrative expenses			164				155
Interest expense			99				84
Depreciation, depletion and amortization			558				542
Total costs and expenses			9,030				8,254
INCOME BEFORE INCOME TAXES			1,485				966
Provision for income taxes			511				398
NET INCOME			974				568
Less: Net income attributable to noncontrolling interests			45				30
NET INCOME ATTRIBUTABLE TO HESS CORPORATION		$	929			$	538
NET INCOME PER SHARE ATTRIBUTABLE TO HESS CORPORATION
BASIC		$	2.77			$	1.66
DILUTED			2.74				1.65
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)			339.2				327.0
COMMON STOCK DIVIDENDS PER SHARE		$	.10			$	.10

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Millions of dollars; thousands of shares)

		March 31,				December 31,
		2011				2010
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	1,968			$	1,608
Accounts receivable
Trade			4,917				4,478
Other			240				240
Inventories			1,552				1,452
Other current assets			759				1,002
Total current assets			9,436				8,780
INVESTMENTS IN AFFILIATES			446				443
PROPERTY, PLANT AND EQUIPMENT
Total — at cost			37,032				35,703
Less reserves for depreciation, depletion, amortization and lease impairment			15,273				14,576
Property, plant and equipment — net			21,759				21,127
GOODWILL			2,394				2,408
DEFERRED INCOME TAXES			2,123				2,167
OTHER ASSETS			479				471
TOTAL ASSETS		$	36,637			$	35,396
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable		$	4,304			$	4,274
Accrued liabilities			2,099				2,567
Taxes payable			913				726
Short-term debt and current maturities of long-term debt			35				46
Total current liabilities			7,351				7,613
LONG-TERM DEBT			5,517				5,537
DEFERRED INCOME TAXES			3,210				2,995
ASSET RETIREMENT OBLIGATIONS			1,228				1,203
OTHER LIABILITIES AND DEFERRED CREDITS			1,214				1,239
Total liabilities			18,520				18,587
EQUITY
Hess Corporation Stockholders’ Equity
Common stock, par value $1.00 Authorized — 600,000 shares Issued — 339,747 shares at March 31, 2011;
337,681 shares at December 31, 2010			340				338
Capital in excess of par value			3,331				3,256
Retained earnings			15,151				14,254
Accumulated other comprehensive income (loss)			(873	)			(1,159	)
Total Hess Corporation stockholders’ equity			17,949				16,689
Noncontrolling interests			168				120
Total equity			18,117				16,809
TOTAL LIABILITIES AND EQUITY		$	36,637			$	35,396

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(Millions of dollars)

		Three Months Ended
		March 31,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	974			$	568
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization			558				542
Exploratory dry hole costs and lease impairment			208				77
Provision (benefit) for deferred income taxes			(5	)			19
(Income) loss from equity investment in HOVENSA L.L.C.			48				85
Gains on asset sales			(343	)			(58	)
Stock compensation expense			20				24
Changes in operating assets and liabilities and other			(325	)			(432	)
Net cash provided by operating activities			1,135				825
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(1,082	)			(788	)
Proceeds from asset sales			359				183
Other, net			(11	)			(17	)
Net cash (used in) investing activities			(734	)			(622	)
CASH FLOWS FROM FINANCING ACTIVITIES
Debt with maturities of greater than 90 days
Borrowings			4				—
Repayments			(35	)			(142	)
Cash dividends paid			(68	)			(66	)
Other, net			58				13
Net cash (used in) financing activities			(41	)			(195	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			360				8
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			1,608				1,362
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	1,968			$	1,370

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

1. Basis of Presentation

     The financial statements included in this report reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of Hess Corporation’s (the Corporation) consolidated financial position at March 31, 2011 and December 31, 2010 and the consolidated results of operations and cash flows for the three month periods ended March 31, 2011 and 2010. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.

     The financial statements were prepared in accordance with the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain notes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) have been condensed or omitted from these interim financial statements. These statements, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Corporation’s Form 10-K for the year ended December 31, 2010. Certain information in the financial statements and notes has been reclassified to conform to the current period presentation.

2. Libyan Operations

     In response to civil unrest in Libya, a number of measures were taken by the international community, including the imposition of sanctions by the United States, the United Nations, the United Kingdom and the European Union. The sanctions blocked and froze the assets of, and any payments to, the Libyan government and any entities owned or controlled by the Libyan government, as well as designated entities and individuals. As a consequence of the civil unrest and the sanctions, the Corporation delivered force majeure notices to the Libyan government relating to the agreements covering its exploration and production interests in order to protect its rights while it is temporarily prevented from fulfilling its obligations and benefiting from the rights granted by those agreements. Because of the on-going events, including the sanctions, the Corporation is unable to determine when or if it will resume operations in Libya. Libyan production averaged 23,000 barrels of oil equivalent per day (boepd) for the full year of 2010 and 14,000 boepd for the first quarter of 2011. The Corporation had proved reserves of 167 million barrels of oil equivalent at December 31, 2010. At March 31, 2011, the net book value of the Corporation’s exploration and production assets in Libya was approximately $400 million.

3. Inventories

     Inventories consist of the following:

		March 31,				December 31,
		2011				2010
		(Millions of dollars)
Crude oil and other charge stocks		$	538			$	496
Refined products and natural gas			1,829				1,528
Less: LIFO adjustment			(1,244	)			(995	)
			1,123				1,029
Merchandise, materials and supplies			429				423
Total inventories		$	1,552			$	1,452

PART I — FINANCIAL INFORMATION (CONT’D.)

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

4. Refining Joint Venture

     The Corporation accounts for its investment in HOVENSA L.L.C. (HOVENSA), which is included in Investments in affiliates in the Consolidated Balance Sheet, using the equity method. Summarized financial information for HOVENSA follows:

		March 31,				December 31,
		2011				2010
		(Millions of dollars)
Summarized balance sheet
Cash and cash equivalents		$	52			$	45
Other current assets			528				668
Net fixed assets			1,969				1,987
Other assets			26				27
Current liabilities			(999	)			(1,001	)
Long-term debt			(655	)			(706	)
Deferred liabilities and credits			(136	)			(135	)
Members’ equity		$	785			$	885
Carrying value of Hess Corporation’s equity investment		$	111			$	158

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars)
Summarized income statement
Total revenues		$	2,862			$	2,766
Cost and expenses			(2,962	)			(2,934	)
Net income (loss)		$	(100	)		$	(168	)
Hess Corporation’s share, before income taxes (*)		$	(51	)		$	(85	)

5. Acquisitions and Divestitures

     In February 2011, the Corporation completed the sale of its interests in the Easington Catchment Area (Hess 30%), the Bacton Area (Hess 23%), the Everest Field (Hess 19%) and the Lomond Field (Hess 17%) in the United Kingdom North Sea for cash proceeds of $359 million, after closing adjustments. These disposals resulted in a pre-tax gain of $343 million ($310 million after income taxes), which has been included in Other, net in the Statement of Consolidated Income. The total combined net book value of the disposed assets prior to the sale was $16 million, including allocated goodwill of $14 million.

6. Capitalized Exploratory Well Costs

     The following table discloses the net changes in capitalized exploratory well costs pending determination of proved reserves for the three months ended March 31, 2011 (in millions):

Balance at January 1		$	1,783
Additions to capitalized exploratory well costs pending the determination of proved reserves			183
Reclassification to wells, facilities, and equipment based on the determination of proved reserves			(22	)
Capitalized exploratory well costs charged to expense			(69	)
Dispositions			(11	)
Balance at end of period		$	1,864

     Capitalized exploratory well costs charged to expense in the preceding table excludes $68 million of exploratory well costs which were incurred and subsequently expensed in 2011. Capitalized exploratory well costs greater than one year old after completion of drilling were $1,278 million at March 31, 2011. Approximately 48% of the capitalized well costs in excess of

PART I — FINANCIAL INFORMATION (CONT’D.)

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

one year relates to two separate projects in the deepwater Gulf of Mexico, Pony and Tubular Bells, where development planning is progressing, with sanction anticipated in 2011 for Tubular Bells and 2012 for Pony. Approximately 21% relates to Area 54 offshore Libya where force majeure has been declared following the imposition of sanctions against Libya. Approximately 18% relates to Block WA-390-P offshore Western Australia where further drilling, other appraisal activities and commercial analysis are ongoing. The remainder of the capitalized well costs in excess of one year relates to projects where further drilling is planned or development planning and other assessment activities are ongoing to determine the economic and operating viability of the projects.

7. Foreign Currency

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

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars)
Pre-tax foreign currency gains (losses)		$	(1	)		$	(6	)

8. Retirement Plans

     Components of net periodic pension cost consisted of the following:

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars)
Service cost		$	14			$	12
Interest cost			22				22
Expected return on plan assets			(27	)			(21	)
Amortization of net loss			11				12
Pension expense		$	20			$	25

     In 2011, the Corporation expects to contribute approximately $190 million to its pension plans. Through March 31, 2011, the Corporation had contributed approximately $65 million to its pension plans.

9. Risk Management and Trading Activities

     In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the prices of crude oil, natural gas, refined products and electricity, as well as to changes in interest rates and foreign currency values. In the disclosures that follow risk management activities are referred to as energy marketing and corporate risk management activities. The Corporation also has trading operations, principally through a 50% voting interest in a consolidated partnership, that trades energy-related commodities, securities and derivatives. These activities are also exposed to commodity price risks primarily related to the prices of crude oil, natural gas, electricity and refined products.

     Following is a description of the Corporation’s activities that use derivatives as part of their operations and strategies. Derivatives include both financial instruments and forward purchase and sale contracts. Gross notional amounts of both long and short positions are presented in the volume tables below. These amounts include long and short positions that offset in closed positions and have not reached contractual maturity. Gross notional amounts do not quantify risk or represent assets or liabilities of the Corporation, but are used in the calculation of cash settlements under the contracts.

     Energy Marketing Activities: In its energy marketing activities the Corporation sells refined petroleum products, natural gas and electricity principally to commercial and industrial businesses at fixed and floating prices for varying periods of time. Commodity contracts such as futures, forwards, swaps and options, together with physical assets such as storage and pipeline capacity, are used to obtain supply and reduce margin volatility or lower costs related to sales contracts with customers.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

     The table below shows the gross volume of the Corporation’s energy marketing commodity contracts outstanding:

		March 31,				December 31,
		2011				2010
Commodity Contracts
Crude oil and refined products (millions of barrels)			41				30
Natural gas (millions of mcf)			2,150				2,210
Electricity (millions of megawatt hours)			291				301

     The changes in fair value of certain energy marketing commodity contracts that are not designated as hedges are recognized currently in earnings. Revenues from the sales contracts are recognized in Sales and other operating revenues, while supply contract purchases and net settlements from financial derivatives related to these energy marketing activities are recognized in Cost of products sold. Net realized and unrealized pre-tax gains (losses) on derivative contracts not designated as hedges amounted to $(3) million and $74 million for the three months ended March 31, 2011 and 2010, respectively.

     At March 31, 2011, a portion of energy marketing commodity contracts are designated as cash flow hedges to hedge variability of expected future cash flows of forecasted supply transactions. The length of time over which the Corporation hedges exposure to variability in future cash flows is predominantly 2 years or less. For contracts outstanding at March 31, 2011, the maximum duration was approximately 3 years. The Corporation records the effective portion of changes in the fair value of cash flow hedges as a component of Other comprehensive income. Amounts recorded in Accumulated other comprehensive income are reclassified into Cost of products sold in the same period that the hedged item is recognized in earnings. The ineffective portion of changes in fair value of cash flow hedges is recognized immediately in Cost of products sold.

     At March 31, 2011, the after-tax deferred losses relating to energy marketing activities recorded in Accumulated other comprehensive income were $124 million ($147 million at December 31, 2010). The Corporation estimates that approximately $84 million of this amount will be reclassified into earnings over the next twelve months. During the three months ended March 31, 2011 and 2010, the Corporation reclassified after-tax losses from Accumulated other comprehensive income of $20 million and $91 million, respectively. The after-tax amount of loss from hedge ineffectiveness reflected in earnings was $2 million and $1 million for the three months ended March 31, 2011 and 2010, respectively. The fair value of energy marketing cash flow hedge positions increased by $2 million and decreased by $226 million for the three months ended March 31, 2011 and 2010, respectively.

     Corporate Risk Management: Corporate risk management activities include transactions designed to reduce risk in the selling prices of crude oil, refined products or natural gas produced by the Corporation or to reduce exposure to foreign currency or interest rate movements. Generally, futures, swaps or option strategies may be used to fix the forward selling price of a portion of the Corporation’s crude oil, refined products or natural gas production. Forward contracts may also be used to purchase certain currencies in which the Corporation does business with the intent of reducing exposure to foreign currency fluctuations. These forward contracts comprise various currencies including the British Pound and Thai Baht. Interest rate swaps may be used to convert interest payments on certain long-term debt from fixed to floating rates.

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

		March 31,				December 31,
		2011				2010
Commodity contracts, primarily crude oil (millions of barrels)			31				35
Foreign exchange contracts (millions of U.S. Dollars)			861				1,025
Interest rate swap contracts (millions of U.S. Dollars)			310				310

     During 2008, the Corporation closed Brent crude oil cash flow hedges covering 24,000 barrels per day through 2012, by entering into offsetting contracts with the same counterparty. As a result, the valuation of those contracts is no longer subject to change due to price fluctuations. There were no other open hedges of crude oil or natural gas production at March 31, 2011. Hedging activities decreased Exploration and Production Sales and other operating revenues by $128 million and $131 million ($81 million and $83 million after-tax, respectively) for the three months ended March 31, 2011 and 2010, respectively. Hedging activities decreased Sales and other operating revenues by $533 million for the year ended December 31, 2010 ($338 million after-taxes).

PART I — FINANCIAL INFORMATION (CONT’D.)

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

     At March 31, 2011, the after-tax deferred losses in Accumulated other comprehensive income relating to the closed Brent crude oil hedges were $562 million ($638 million at December 31, 2010). The Corporation estimates that approximately $325 million of this amount will be reclassified into earnings over the next twelve months.

     At March 31, 2011, the Corporation had interest rate swaps with a gross notional amount of $310 million, which were designated as fair value hedges. Changes in fair value of interest rate swaps and the hedged fixed-rate debt are recorded in Interest expense. During the three months ended March 31, 2011 and 2010, the Corporation recorded a decrease of $2 million and an increase of $1 million (excluding accrued interest), respectively, in the fair value of interest rate swaps and a corresponding adjustment in the carrying value of the hedged fixed-rate debt.

     Foreign exchange contracts are not designated as hedges. Gains or losses on foreign exchange contracts are recognized immediately in Other, net in Revenues and non-operating income.

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

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars)
Commodity		$	1			$	1
Foreign exchange			19				(37	)
Total		$	20			$	(36	)

     Trading Activities: Trading activities are conducted principally through a trading partnership in which the Corporation has a 50% voting interest. This consolidated entity intends to generate earnings through various strategies primarily using energy-related commodities, securities and derivatives. The Corporation also takes trading positions for its own account. The information that follows represents 100% of the trading partnership and the Corporation’s proprietary trading accounts.

     The table below shows the gross volume of derivative instruments outstanding relating to trading activities:

		March 31,				December 31,
		2011				2010
Commodity Contracts
Crude oil and refined products (millions of barrels)			3,784				3,328
Natural gas (millions of mcf)			4,730				4,699
Electricity (millions of megawatt hours)			167				79
Other Contracts (millions of U.S. Dollars)
Foreign exchange			582				506
Interest rate			153				205

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

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars)
Commodity		$	122			$	105
Foreign exchange			(5	)			(2	)
Interest rate and other			13				(8	)
Total		$	130			$	95

PART I — FINANCIAL INFORMATION (CONT’D.)

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

     Fair Value Measurements: The Corporation determines fair value in accordance with the fair value measurements accounting standard (ASC 820 — Fair Value Measurements and Disclosures), which established a hierarchy that categorizes the sources of inputs, which generally range from quoted prices for identical instruments in a principal trading market (Level 1) to estimates determined using related market data (Level 3).

     When Level 1 inputs are available within a particular market, those inputs are selected for determination of fair value over Level 2 or 3 inputs in the same market. To value Level 2 and 3 derivatives the Corporation uses observable inputs for similar instruments that are available from exchanges, pricing services or broker quotes. These observable inputs may be supplemented with other methods, including internal extrapolation, that result in the most representative prices for instruments with similar characteristics. Multiple inputs may be used to measure fair value, however, the level of fair value for each financial asset or liability presented below is based on the lowest significant input level within this fair value hierarchy.

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

														Collateral
														and
														counterparty
		Level 1				Level 2				Level 3				netting				Balance
		(Millions of dollars)
March 31, 2011
Assets
Derivative contracts
Commodity		$	376			$	1,088			$	1,503			$	(509	)		$	2,458
Foreign exchange			—				2				—				—				2
Other			—				18				—				—				18
Collateral and counterparty netting			(120	)			(117	)			(22	)			(280	)			(539	)
Total derivative contracts			256				991				1,481				(789	)			1,939
Other assets measured at fair value on a recurring basis			20				55				—				—				75
Total assets		$	276			$	1,046			$	1,481			$	(789	)		$	2,014
Liabilities
Derivative contracts
Commodity		$	(453	)		$	(2,856	)		$	(716	)		$	509			$	(3,516	)
Foreign exchange			—				(12	)			—				—				(12	)
Other			—				(13	)			—				—				(13	)
Collateral and counterparty netting			120				117				22				68				327
Total derivative contracts			(333	)			(2,764	)			(694	)			577				(3,214	)
Other liabilities measured at fair value on a recurring basis			—				—				—				—				—
Total liabilities		$	(333	)		$	(2,764	)		$	(694	)		$	577			$	(3,214	)

PART I — FINANCIAL INFORMATION (CONT’D.)

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

														Collateral
														and
														counterparty
		Level 1				Level 2				Level 3				netting				Balance
		(Millions of dollars)
December 31, 2010
Assets
Derivative contracts
Commodity		$	65			$	1,308			$	883			$	(304	)		$	1,952
Foreign exchange			—				1				—				—				1
Other			—				17				—				—				17
Collateral and counterparty netting			(1	)			(274	)			(19	)			(213	)			(507	)
Total derivative contracts			64				1,052				864				(517	)			1,463
Other assets measured at fair value on a recurring basis			20				49				3				—				72
Total assets		$	84			$	1,101			$	867			$	(517	)		$	1,535
Liabilities
Derivative contracts
Commodity		$	(324	)		$	(2,519	)		$	(474	)		$	304			$	(3,013	)
Foreign exchange			—				(12	)			—				—				(12	)
Other			—				(10	)			—				—				(10	)
Collateral and counterparty netting			1				274				19				34				328
Total derivative contracts			(323	)			(2,267	)			(455	)			338				(2,707	)
Other liabilities measured at fair value on a recurring basis			—				—				—				—				—
Total liabilities		$	(323	)		$	(2,267	)		$	(455	)		$	338			$	(2,707	)

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

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars)
Balance at beginning of period		$	412			$	84
Unrealized gains (losses)
Included in earnings			312				103
Included in other comprehensive income			10				(14	)
Purchases			(819	)			(103	)
Sales			815				92
Settlements			20				(31	)
Transfers into Level 3			83				(159	)
Transfers out of Level 3			(46	)			(18	)
Balance at end of period		$	787			$	(46	)

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

PART I — FINANCIAL INFORMATION (CONT’D.)

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

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

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars)
Transfers into Level 1		$	(26	)		$	25
Transfers out of Level 1			214				15
		$	188			$	40
Transfers into Level 2		$	8			$	—
Transfers out of Level 2			(233	)			137
		$	(225	)		$	137
Transfers into Level 3		$	83			$	(159	)
Transfers out of Level 3			(46	)			(18	)
		$	37			$	(177	)

     The Corporation’s policy is to recognize transfers in and transfers out as of the end of the reporting period. Transfers between levels result from the passage of time as contracts move closer to their maturities, fluctuations in the market liquidity for certain contracts and/or changes in the level of significance of fair value measurement inputs.

     In addition to the financial assets and liabilities disclosed in the tables above, the Corporation had other short-term financial instruments, primarily cash equivalents and accounts receivable and payable, for which the carrying value approximated their fair value at March 31, 2011 and December 31, 2010. Fixed-rate long-term debt had a carrying value of $5,550 million compared with a fair value of $6,189 million at March 31, 2011, and a carrying value of $5,569 million, compared with a fair value of $6,353 million at December 31, 2010.

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

		Accounts				Accounts
		Receivable				Payable
		(Millions of dollars)
March 31, 2011
Derivative contracts designated as hedging instruments
Commodity		$	128			$	(376	)
Other			7				(4	)
Total derivative contracts designated as hedging instruments			135				(380	)
Derivative contracts not designated as hedging instruments (*)
Commodity			19,656				(20,465	)
Foreign exchange			6				(17	)
Other			33				(31	)
Total derivative contracts not designated as hedging instruments			19,695				(20,513	)
Gross fair value of derivative contracts			19,830				(20,893	)
Master netting arrangements			(17,611	)			17,611
Cash collateral (received) posted			(280	)			68
Net fair value of derivative contracts		$	1,939			$	(3,214	)

PART I — FINANCIAL INFORMATION (CONT’D.)

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

		Accounts				Accounts
		Receivable				Payable
		(Millions of dollars)
December 31, 2010
Derivative contracts designated as hedging instruments
Commodity		$	225			$	(483	)
Other			10				(2	)
Total derivative contracts designated as hedging instruments			235				(485	)
Derivative contracts not designated as hedging instruments (*)
Commodity			11,581				(12,383	)
Foreign exchange			7				(19	)
Other			31				(32	)
Total derivative contracts not designated as hedging instruments			11,619				(12,434	)
Gross fair value of derivative contracts			11,854				(12,919	)
Master netting arrangements			(10,178	)			10,178
Cash collateral (received) posted			(213	)			34
Net fair value of derivative contracts		$	1,463			$	(2,707	)

     Credit Risk: The Corporation is exposed to credit risks that may at times be concentrated with certain counterparties, groups of counterparties or customers. Accounts receivable are generated from a diverse domestic and international customer base. The Corporation’s net receivables at March 31, 2011 are concentrated with the following counterparty and customer industry segments: Integrated Oil Companies — 26%, Real Estate — 10%, Manufacturing — 9%, Government Entities — 9% and Services — 8%. The Corporation reduces its risk related to certain counterparties by using master netting arrangements and requiring collateral, generally cash or letters of credit. The Corporation records the cash collateral received or posted as an offset to the fair value of derivatives executed with the same counterparty. At March 31, 2011 and December 31, 2010, the Corporation held cash from counterparties of $280 million and $213 million, respectively. The Corporation posted cash to counterparties at March 31, 2011 and December 31, 2010 of $68 million and $34 million, respectively.

     At March 31, 2011, the Corporation had a total of $2,453 million of outstanding letters of credit, primarily issued to satisfy margin requirements. Certain of the Corporation’s agreements also contain contingent collateral provisions that could require the Corporation to post additional collateral if the Corporation’s credit rating declines. As of March 31, 2011, the net liability related to derivatives with contingent collateral provisions was approximately $1,400 million before cash collateral posted of approximately $35 million. At March 31, 2011, all three major credit rating agencies that rate the Corporation’s debt had assigned an investment grade rating. If two of the three agencies were to downgrade the Corporation’s rating to below investment grade, as of March 31, 2011, the Corporation would be required to post additional collateral of approximately $305 million.

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:

		Three Months
		Ended March 31,
		2011				2010
		(In thousands)
Common shares — basic			335,818				324,768
Effect of dilutive securities
Restricted common stock			1,563				1,379
Stock options			1,778				809
Common shares — diluted			339,159				326,956

PART I — FINANCIAL INFORMATION (CONT’D.)

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

     The Corporation issued 2,111,295 stock options and 702,955 shares of restricted stock for the three months ended March 31, 2011 (2,675,700 and 891,900 shares, respectively, for the same period in 2010). The table above excludes the effect of 2,857,000 shares related to out-of-the money options for the three months ended March 31, 2011 (4,236,000 shares for the same period in 2010).

11. Equity and Comprehensive Income

     The table below summarizes changes in equity:

		Hess				Non-
		Stockholders’				controlling
		Equity				Interests				Total Equity
		(Millions of dollars)
Balance at January 1, 2011		$	16,689			$	120			$	16,809
Net income (loss)			929				45				974
Deferred gains (losses) on cash flow hedges, after-tax
Effect of hedge losses recognized in income			101				—				101
Net change in fair value of cash flow hedges			(3	)			—				(3	)
Change in post retirement plan liabilities, after-tax			7				—				7
Change in foreign currency translation adjustment and other			181				5				186
Comprehensive income (loss)			1,215				50				1,265
Activity related to restricted common stock awards, net			11				—				11
Employee stock options, including income tax benefits			66				—				66
Cash dividends declared			(34	)			—				(34	)
Noncontrolling interests, net			2				(2	)			—
Balance at March 31, 2011		$	17,949			$	168			$	18,117
Balance at January 1, 2010		$	13,384			$	144			$	13,528
Net income (loss)			538				30				568
Deferred gains (losses) on cash flow hedges, after-tax
Effect of hedge losses recognized in income			174				—				174
Net change in fair value of cash flow hedges			(242	)			—				(242	)
Change in post retirement plan liabilities, after-tax			8				—				8
Change in foreign currency translation adjustment and other			(14	)			1				(13	)
Comprehensive income (loss)			464				31				495
Activity related to restricted common stock awards, net			13				—				13
Employee stock options, including income tax benefits			22				—				22
Cash dividends declared			(33	)			—				(33	)
Noncontrolling interests, net			5				(3	)			2
Balance at March 31, 2010		$	13,855			$	172			$	14,027

12. Segment Information

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

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars)
Operating revenues
Exploration and Production		$	2,687			$	2,141
Marketing and Refining			7,563				7,157
Less: Transfers between affiliates			(35	)			(39	)
Total (*)		$	10,215			$	9,259

PART I — FINANCIAL INFORMATION (CONT’D.)

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

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars)
Net income (loss) attributable to Hess Corporation
Exploration and Production		$	979			$	551
Marketing and Refining			39				87
Corporate, including interest			(89	)			(100	)
Total		$	929			$	538

     Identifiable assets by operating segment were as follows:

		March 31,				December 31,
		2011				2010
		(Millions of dollars)
Exploration and Production		$	28,816			$	28,242
Marketing and Refining			6,809				6,377
Corporate			1,012				777
Total		$	36,637			$	35,396

13. Subsequent Event

     In April 2011, the Corporation entered into a new $4 billion syndicated revolving credit facility that matures in April 2016, which replaces a $3 billion facility that was scheduled to mature in May 2012. The new facility can be used for borrowings and letters of credit. The interest rate and facility fee are subject to adjustment if the Corporation’s credit rating changes. The restrictions on the amount of total borrowings and cash dividends remain unchanged.

PART I — FINANCIAL INFORMATION (CONT’D.)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     Overview

     Hess Corporation (the Corporation) is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. The M&R segment manufactures refined petroleum products and purchases, markets and trades refined petroleum products, natural gas and electricity.

     The Corporation reported net income of $929 million in the first quarter of 2011 compared to $538 million in the first quarter of 2010. Net income for the first quarter of 2011 included an after-tax gain of $310 million relating to the completion of the sale of a package of natural gas producing assets in the United Kingdom North Sea. First quarter of 2010 results included income of $58 million related to the sale of the Corporation’s interest in the Jambi Merang natural gas development project in Indonesia.

     Exploration and Production

     E&P reported net income of $979 million in the first quarter of 2011 compared to $551 million in the first quarter of 2010, including the after-tax gains on asset sales referred to above. In the first quarter of 2011, the Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $87.22 per barrel compared with $63.62 per barrel in the first quarter of 2010. The Corporation’s average worldwide natural gas selling price was $5.84 per thousand cubic feet (mcf) in the first quarter of 2011 compared with $5.92 per mcf in the first quarter of 2010. Worldwide crude oil and natural gas production was 399,000 barrels of oil equivalent per day (boepd) in the first quarter of 2011 down from 423,000 boepd in the same period of 2010, primarily reflecting the suspension of production in Libya due to civil unrest and the sale of certain natural gas producing assets in the United Kingdom. Due to the U.S. and international sanctions against Libya, the Corporation has assumed that production from Libya will remain suspended for the balance of the year, resulting in a 20,000 boepd reduction in forecasted production. In addition, a shut in well at the outside operated Llano Field in the deepwater Gulf of Mexico and production sharing contract effects related to higher oil prices combine to further reduce the forecast by an additional 10,000 boepd for the year. As a result, the Corporation now estimates that production will average between 385,000 and 395,000 boepd for the full year of 2011, down from the previous guidance of 415,000 to 425,000 boepd.

     The following is an update of E&P activities during 2011:

	•		In North Dakota, net production from the Bakken oil shale play was 25,000 boepd during the quarter. The Corporation currently has 18 rigs dedicated to drilling Bakken wells.
	•		In February 2011, the Corporation completed the sale of its interests in certain natural gas producing assets located in the United Kingdom North Sea for cash proceeds of $359 million, after closing adjustments, resulting in a pre-tax gain of $343 million ($310 million after income taxes).
	•		The Corporation signed a letter of award to process production from the Tubular Bells Field (Hess 40%) in the deepwater Gulf of Mexico at a third party owned spar facility. The Corporation is targeting sanction for this project later this year.
	•		The Corporation spud the Paradise exploration well on its Deepwater Tano Cape Three Points block in Ghana. The Corporation is carrying 100% of the well costs and has a 90% working interest. While results are preliminary, intermediate wire line logs indicate the well encountered 370 feet of net hydrocarbon pay in two separate intervals. In the second quarter, further drilling of this well will continue toward a third interval.
	•		In Egypt, drilling of the Cherry exploration well in the North Red Sea (Hess 80%) encountered noncommercial quantities of hydrocarbons. The well was completed in the second quarter of 2011.

     Status of Libyan Operations: In response to civil unrest in Libya, a number of measures were taken by the international community, including the imposition of sanctions by the United States, the United Nations, the United Kingdom and the European Union. The sanctions blocked and froze the assets of, and any payments to, the Libyan government and any entities owned or controlled by the Libyan government, as well as designated entities and individuals. As a consequence of the civil unrest and the sanctions, the Corporation delivered force majeure notices to the Libyan government relating to the agreements covering its exploration and production interests in order to protect its rights while it is temporarily prevented from fulfilling its obligations and benefiting from the rights granted by those agreements. Because of the on-going events, including the

PART I — FINANCIAL INFORMATION (CONT’D.)

     Overview (continued)

sanctions, the Corporation is unable to determine when or if it will resume operations in Libya. The loss of Libyan production will increase unit costs and lower the effective tax rate but it is not expected to have a material adverse impact on operating income or cash flows. Libyan production averaged 23,000 boepd for the full year of 2010 and 14,000 boepd for the first quarter of 2011. The Corporation had proved reserves of 167 million barrels of oil equivalent at December 31, 2010. At March 31, 2011, the net book value of the Corporation’s exploration and production assets in Libya was approximately $400 million.

     Gulf of Mexico Update: The Corporation became a member of the Marine Well Containment Company LLC (MWCC) in March 2011. The MWCC was formed to provide a rapid response system to contain a potential well control incident in the deepwater Gulf of Mexico. The MWCC system has been accepted by the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) as a viable well containment system for permit approvals. Member companies have an equal share of MWCC ownership and are obligated to fund a proportionate share of all capital and operating expenses. Both member and non-member companies will pay a fee to gain access to the MWCC system on a well-by-well basis. The Corporation has also joined the Helix Well Containment Group, another oil spill response organization. In addition, the Corporation is in the process of responding to the BOEMRE’s requested revisions to its previously submitted oil spill response plan for its Gulf of Mexico operations.

     Marketing and Refining

     M&R generated income of $39 million for the first quarter of 2011 compared to $87 million in the first quarter of 2010, primarily reflecting lower earnings from marketing operations. During the first quarter of 2011, HOVENSA L.L.C. (HOVENSA) shut down certain processing units, which reduced its crude oil refining capacity to 350,000 from 500,000 barrels per day.

     Results of Operations

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

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars,
		except per share data)
Exploration and Production		$	979			$	551
Marketing and Refining			39				87
Corporate			(28	)			(48	)
Interest expense			(61	)			(52	)
Net income attributable to Hess Corporation		$	929			$	538
Net income per share (diluted)		$	2.74			$	1.65

     Items Affecting the Comparability Between Periods

     The following table summarizes, on an after-tax basis, items of income (expense) that are included in net income and affect the comparability between periods. The items in the table below are explained and the pre-tax amounts are shown on pages 20 and 21.

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars)
Exploration and Production		$	310			$	58
Corporate			—				(7	)
Total		$	310			$	51

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

PART I — FINANCIAL INFORMATION (CONT’D.)

     Results of Operations (continued)

     Comparison of Results

     Exploration and Production

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

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars)
Sales and other operating revenues (*)		$	2,613			$	2,114
Other, net			344				54
Total revenues and non-operating income			2,957				2,168
Cost and expenses
Production expenses, including related taxes			531				477
Exploration expenses, including dry holes and lease impairment			313				151
General, administrative and other expenses			84				67
Depreciation, depletion and amortization			537				519
Total costs and expenses			1,465				1,214
Results of operations before income taxes			1,492				954
Provision for income taxes			513				403
Results of operations attributable to Hess Corporation		$	979			$	551

     The changes in E&P earnings are primarily attributable to changes in selling prices, sales volumes, costs and expenses and asset sales as described below.

     Selling prices: Higher average realized selling prices of crude oil increased E&P revenues by approximately $600 million in the first quarter of 2011, compared with the corresponding period of 2010.

     The Corporation’s average selling prices were as follows:

		Three Months
		Ended March 31,
		2011				2010
Crude oil — per barrel (including hedging)
United States		$	91.56			$	74.40
Europe			84.17				55.25
Africa			82.32				62.38
Asia			110.80				71.67
Worldwide			87.22				63.62
Crude oil — per barrel (excluding hedging)
United States		$	91.56			$	74.40
Europe			84.17				55.25
Africa			102.58				75.96
Asia			110.80				71.67
Worldwide			92.35				69.06
Natural gas liquids — per barrel
United States		$	57.31			$	51.11
Europe			80.29				59.38
Asia			73.35				63.92
Worldwide			63.45				52.93

PART I — FINANCIAL INFORMATION (CONT’D.)

     Results of Operations (continued)

		Three Months
		Ended March 31,
		2011				2010
Natural gas — per mcf
United States		$	3.82			$	4.63
Europe			8.25				5.41
Asia and other			5.75				6.37
Worldwide			5.84				5.92

     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 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 $325 million in 2011 and 2012. Crude oil hedges reduced E&P earnings by $81 million in the first quarter of 2011 ($128 million before income taxes) and $83 million in the first quarter of 2010 ($131 million before income taxes).

     Production and sales volumes: The Corporation’s crude oil and natural gas production was 399,000 boepd in the first quarter of 2011 down from 423,000 boepd in the same period of 2010, primarily reflecting the suspension of production in Libya due to civil unrest and the sale of certain natural gas producing assets in the United Kingdom. Due to the U.S. and international sanctions against Libya, the Corporation has assumed that production from Libya will remain suspended for the balance of the year, resulting in a 20,000 boepd reduction in forecasted production. In addition, a shut in well at the outside operated Llano Field in the deepwater Gulf of Mexico and production sharing contract effects related to higher oil prices combine to further reduce the forecast by an additional 10,000 boepd for the year. As a result, the Corporation now estimates that production will average between 385,000 and 395,000 boepd for the full year of 2011, down from the previous guidance of 415,000 to 425,000 boepd.

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

		Three Months
		Ended March 31,
		2011				2010
		(In thousands)
Crude oil (barrels per day)
United States			77				71
Europe			99				86
Africa			84				118
Asia			14				14
Total			274				289
Natural gas liquids (barrels per day)
United States			13				13
Europe			4				3
Asia			1				1
Total			18				17
Natural gas (mcf per day)
United States			106				97
Europe			107				156
Asia and other			430				452
Total			643				705
Barrels of oil equivalent per day (*)			399				423

PART I — FINANCIAL INFORMATION (CONT’D.)

     Results of Operations (continued)

          United States: Crude oil and natural gas production in the United States was higher in the first quarter of 2011 compared to the corresponding period in 2010, primarily due to new wells in the Bakken oil shale play, partly offset by lower production at the Shenzi Field.

          Europe: Crude oil production in the first quarter of 2011 was higher than the same period in 2010, primarily due to increased interests in the Valhall and Hod fields, offshore Norway. In the third quarter of 2010, the Corporation increased its interests in the Valhall and Hod fields from 28% and 25% to 64% and 63%, respectively. Natural gas production in the first quarter of 2011 was lower than the same period in 2010, primarily due to the sale in February 2011 of certain natural gas producing assets in the United Kingdom North Sea.

          Africa: Crude oil production in Africa was lower in the first quarter of 2011 compared to the corresponding period in 2010, primarily due to the exchange of the Corporation’s interests in Gabon in September 2010 for additional interests in the Valhall and Hod fields in Norway, the suspension of production in Libya, lower production at the Ceiba Field in Equatorial Guinea and lower production entitlement in Algeria as a result of higher selling prices.

          Asia and other: The decrease in natural gas production in the first quarter of 2011 compared to the first quarter of 2010 was principally due to lower nominations at the Joint Development Area of Malaysia/Thailand.

          Sales volumes: Lower crude oil sales volumes decreased revenue by approximately $100 million in the first quarter of 2011 compared with the corresponding period of 2010.

     Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, increased by approximately $70 million in the first quarter of 2011 compared with the same period of 2010. The increase principally reflects higher price driven production taxes and increased operating expenses.

     Depreciation, depletion and amortization charges were higher in the first quarter of 2011 compared with the corresponding period in 2010, principally reflecting increased production at the Valhall, Hod and Bakken fields.

     As a result of the new production guidance, E&P total production unit costs are now expected to be in the range of $33.50 to $35.50 per barrel for the full year of 2011, up from $29.50 to $31.50 per barrel. E&P cash operating costs are expected to be in the range of $18 to $19 per barrel and depreciation, depletion and amortization expenses are expected to be in the range of $15.50 to $16.50 per barrel. The higher unit costs are primarily due to the assumed loss of lower cost Libyan barrels for the remainder of 2011 and the effect of increases in commodity price-driven production taxes in other geographical areas.

Exploration expenses: Exploration expenses were higher in the first quarter of 2011 compared with the same period in 2010, principally reflecting higher dry hole expenses, together with higher geological and seismic expenses and lease amortization. Dry hole expenses for the first quarter of 2011 consist primarily of costs related to the Cherry well in the North Red Sea, offshore Egypt, which totaled $121 million ($77 million after-taxes) for drilling activity through March 31, 2011.

Income Taxes: The effective income tax rate for E&P operations in the first quarter of 2011 was 42% compared to 45% for the first quarter of 2010, excluding items affecting the comparability between periods, largely due to lower income in Libya following the suspension of operations. In March 2011, the government of the United Kingdom proposed increasing the supplementary tax on petroleum operations to 32% from 20% with an effective date of March 24, 2011. Assuming enactment of the proposal in the third quarter of 2011, the Corporation expects to record a charge that will include a provision for the incremental tax on earnings from the effective date to the date of enactment and a non-cash charge to adjust the deferred tax liability. On the assumption that operations in Libya are suspended for the remainder of 2011 and including the impact of the U.K. supplementary tax on 2011 operating earnings, the E&P effective income tax rate for the year is now expected to be in the range of 38% to 42%, down from 45% to 49%.

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

		Three Months
		Ended March 31,
		2011				2010
		(Millions of dollars)
Pre-tax		$	(1	)		$	(7	)
After-tax			(2	)			(2	)

PART I — FINANCIAL INFORMATION (CONT’D.)

     Results of Operations (continued)

     Other, net: First quarter 2011 results included income of $343 million ($310 million after income taxes) related to the completion of the sale of the Corporation’s interests in the Easington Catchment Area (Hess 30%), the Bacton Area (Hess 23%), the Everest Field (Hess 19%) and the Lomond Field (Hess 17%) which are natural gas producing assets located in the United Kingdom North Sea. First quarter of 2010 results included income of $58 million related to the sale of the Corporation’s interest in the Jambi Merang natural gas development project in Indonesia. These gains are reflected in the table of items affecting the comparability between periods on page 16.

     The Corporation’s future E&P earnings may be impacted by external factors, such as volatility in the selling prices of crude oil and natural gas, reserve and production changes, exploration expenses, industry cost inflation, changes in foreign exchange rates and income tax rates, the effects of weather, political risk, environmental risk and catastrophic risk. For a more comprehensive description of the risks that may affect the Corporation’s E&P business see the status of Libyan operations beginning on page 15 and Item 1A. Risk Factors Related to Our Business and Operations in the December 31, 2010 Annual Report on Form 10-K.

     Marketing and Refining

     M&R activities generated income of $39 million in the first quarter of 2011 compared to $87 million in the first quarter of 2010. The Corporation’s downstream operations include 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 M&R activities include a fluid catalytic cracking facility (FCC) in Port Reading, New Jersey, as well as retail gasoline stations, energy marketing and trading operations.

     Refining: Refining operations generated losses of $48 million in the first quarter of 2011 and $56 million in the first quarter of 2010. The Corporation’s losses from its equity investment in HOVENSA were $48 million in the first quarter of 2011 and $52 million, after income taxes, in the first quarter of 2010. HOVENSA’s results for the first quarter of 2011 include income from LIFO inventory liquidations of which the Corporation’s share was $40 million. Income taxes have not been recorded on the Corporation’s share of HOVENSA’s 2011 results due to cumulative operating losses.

     During the first quarter of 2011, HOVENSA shut down certain processing units on the west side of its refinery, which reduced its refinery’s crude oil distillation capacity to 350,000 from 500,000 barrels per day, with no impact on the capacity of its coker or FCC unit. HOVENSA also had a fire in a unit on the west side of the refinery. The decommissioning activities and other unplanned operational downtime impacted refinery utilization in the quarter. During the first quarter of 2010, HOVENSA completed a planned turnaround of its FCC unit at a cost to the Corporation of approximately $20 million after income taxes.

     Port Reading’s after-tax income was $2 million in the first quarter of 2011 compared with after-tax losses of $4 million in the corresponding period of 2010, principally reflecting higher margins.

     The following table summarizes refinery capacity and utilization rates:

						Refinery utilization
		Refinery				Three Months Ended
		capacity				March 31,
		(thousands of
		barrels per day)				2011				2010
HOVENSA
Crude			350	(*)			75.2	%			75.1	%
Fluid catalytic cracker			150				65.6	%			41.2	%
Coker			58				41.6	%			85.0	%
Port Reading			70				94.0	%			88.8	%