UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

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

For the quarter ended September 30, 2006

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

For the transition period from                      to                     

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

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

Large Accelerated Filer þ      Accelerated Filer o      Non-Accelerated Filer 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 September 30, 2006, there were 281,157,915 shares of Common Stock outstanding.

 

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

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

		Three Months								Nine Months
		ended September 30								ended September 30
		2006				2005				2006				2005
REVENUES AND NON-OPERATING INCOME
Sales (excluding excise taxes) and other operating revenues		$	7,035			$	5,769			$	20,912			$	15,688
Non-operating income
Equity in income of HOVENSA L.L.C.			70				151				171				309
Gain on asset sales			—				—				369				18
Other, net			25				36				59				93
Total revenues and non-operating income			7,130				5,956				21,511				16,108
COSTS AND EXPENSES
Cost of products sold (excluding items shown separately below)			4,899				4,424				14,854				11,674
Production expenses			323				256				892				722
Marketing expenses			230				202				686				604
Exploration expenses, including dry holes and lease impairment			221				91				412				310
Other operating expenses			34				31				95				100
General and administrative expenses			115				83				354				254
Interest expense			49				54				150				169
Depreciation, depletion and amortization			323				251				871				767
Total costs and expenses			6,194				5,392				18,314				14,600
Income before income taxes			936				564				3,197				1,508
Provision for income taxes			639				292				1,640				718
NET INCOME		$	297			$	272			$	1,557			$	790
Preferred stock dividends			12				12				36				36
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS		$	285			$	260			$	1,521			$	754
NET INCOME PER SHARE*
BASIC		$	1.03			$	.95			$	5.52			$	2.77
DILUTED			.94				.87				4.93				2.54
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)*			316.0				313.2				315.5				311.4
COMMON STOCK DIVIDENDS PER SHARE*		$	.10			$	.10			$	.30			$	.30

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions of dollars, thousands of shares)

		September 30,
		2006				December 31,
		(Unaudited)				2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	546			$	315
Accounts receivable			3,229				3,655
Inventories			1,234				855
Other current assets			246				465
Total current assets			5,255				5,290
INVESTMENTS AND ADVANCES
HOVENSA L.L.C.			1,088				1,217
Other			191				172
Total investments and advances			1,279				1,389
PROPERTY, PLANT AND EQUIPMENT
Total — at cost			22,169				19,464
Less reserves for depreciation, depletion, amortization and lease impairment			10,227				9,952
Property, plant and equipment — net			11,942				9,512
NOTE RECEIVABLE			91				152
GOODWILL			1,249				977
DEFERRED INCOME TAXES			1,501				1,544
OTHER ASSETS			310				251
TOTAL ASSETS		$	21,627			$	19,115
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	4,626			$	4,995
Accrued liabilities			1,224				1,029
Taxes payable			508				397
Current maturities of long-term debt			29				26
Total current liabilities			6,387				6,447
LONG-TERM DEBT			3,746				3,759
DEFERRED INCOME TAXES			2,103				1,401
ASSET RETIREMENT OBLIGATIONS			864				564
OTHER LIABILITIES			797				658
Total liabilities			13,897				12,829
STOCKHOLDERS’ EQUITY
Preferred stock, par value $1.00, 20,000 shares authorized
7% cumulative mandatory convertible series
Authorized and outstanding — 13,500 shares ($675 million liquidation preference)			14				14
3% cumulative convertible series
Authorized — 330 shares
Outstanding — 324 shares ($16 million liquidation preference)			—				—
Common stock*, par value $1.00
Authorized — 600,000 shares
Outstanding — 281,158 shares at September 30, 2006;
279,197 shares at December 31, 2005			281				279
Capital in excess of par value*			1,686				1,656
Retained earnings			7,351				5,914
Accumulated other comprehensive loss			(1,602	)			(1,526	)
Deferred compensation			—				(51	)
Total stockholders’ equity			7,730				6,286
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	21,627			$	19,115

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Nine Months ended September 30
(in millions of dollars)

		2006				2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	1,557			$	790
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization			871				767
Exploratory dry hole costs			192				161
Lease impairment			79				57
Pre-tax gain on asset sales			(369	)			(18	)
Provision (benefit) for deferred income taxes			283				(127	)
Distributed (undistributed) earnings of HOVENSA L.L.C., net			129				(34	)
Changes in other operating assets and liabilities			(30	)			(45	)
Net cash provided by operating activities			2,712				1,551
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(2,883	)			(1,616	)
Proceeds from asset sales			444				3
Payment received on note receivable			61				60
Other			20				18
Net cash used in investing activities			(2,358	)			(1,535	)
CASH FLOWS FROM FINANCING ACTIVITIES
Debt with maturities of greater than 90 days
Borrowings			21				104
Repayments			(31	)			(152	)
Cash dividends paid			(148	)			(147	)
Stock options exercised			35				61
Net cash used in financing activities			(123	)			(134	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			231				(118	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			315				877
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	546			$	759

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 and Recently Issued Accounting Pronouncements
		On May 3, 2006, Amerada Hess Corporation changed its name to Hess Corporation (the Corporation).
		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 the Corporation’s consolidated financial position at September 30, 2006 and December 31, 2005 and the consolidated results of operations for the three- and nine-month periods ended September 30, 2006 and 2005 and the consolidated cash flows for the nine month periods ended September 30, 2006 and 2005. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.
		Certain notes and other information 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, 2005.
		Effective January 1, 2006, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment (FAS 123R). FAS 123R requires that the fair value of all stock based compensation to employees, including grants of stock options, be expensed over the vesting period. Through December 31, 2005, the Corporation used the intrinsic value method to account for employee stock options. Because the exercise prices of employee stock options equaled or exceeded the market price of the stock on the date of grant, the Corporation did not recognize compensation expense under the intrinsic value method. See note 10 to the consolidated financial statements.
		In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (FAS 158). FAS 158 requires recognition on the balance sheet of the overfunded or underfunded status of a defined benefit postretirement plan measured as the difference between the fair value of plan assets and the benefit obligation. FAS 158 also requires additional disclosure about certain effects on net periodic benefit costs that arise from delayed recognition of actuarial gains and losses and prior service costs and credits. As required, the Corporation plans to prospectively adopt the provisions of FAS 158 on December 31, 2006. The Corporation is currently evaluating the impact of adoption on its financial statements. However, if the Corporation had adopted FAS 158 on January 1, 2006, it would have decreased stockholders’ equity by approximately $100 million through an adjustment to accumulated other comprehensive loss.
		In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes the financial statement recognition and measurement criteria for a tax position taken or expected to be taken in a tax return. The Corporation is currently evaluating the impact of adoption on its

PART I — FINANCIAL INFORMATION (CONT’D.)

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

		financial statements but does not expect a material change to its financial position. As required, the Corporation will adopt the provisions of FIN 48 on January 1, 2007.
		In September 2006, the Financial Accounting Standards Board issued FASB Staff Position (FSP) AUG AIR-1, Accounting for Planned Major Maintenance Activities. This FSP eliminates the accrue-in-advance method of accounting for planned major maintenance. As a result, the Corporation will recognize expenses associated with refinery turnarounds when such costs are incurred. The Corporation will retrospectively change its method of accounting for refinery turnarounds on January 1, 2007, the effective date of this pronouncement. The change is not expected to have a material effect on the Corporation’s financial position or cash flows, but will impact the timing of recognition of major maintenance expenses in the results of operations.

2.		Stock Split
		On May 3, 2006, the Corporation’s shareholders voted to increase the number of authorized common shares from 200 million to 600 million and the board of directors declared a three-for-one stock split. The stock split was completed in the form of a stock dividend that was issued on May 31, 2006 to shareholders of record on May 17, 2006. The common share par value remained at $1.00 per share. All common share and per share amounts in these financial statements and notes are on an after-split basis for all periods presented.
3.		Acquisitions and Divestitures
		In January 2006, the Corporation, in conjunction with its Oasis Group partners, re-entered its former oil and gas production operations in the Waha concessions in Libya, in which the Corporation holds an 8.16% interest. The re-entry terms include a 25-year extension of the concessions and a payment in January 2006 by the Corporation to the Libyan National Oil Corporation of $260 million. The Corporation also accrued $106 million that will be paid in the fourth quarter of 2006, related to certain investments in fixed assets made by the Libyan National Oil Corporation since 1986. This transaction was accounted for as a business combination.
		The following table summarizes the preliminary allocation of the purchase price to assets and liabilities acquired (in millions):

Property, plant and equipment and other		$	366
Goodwill			236
Total assets acquired			602
Deferred tax liabilities			(236	)
Net assets acquired		$	366

PART I — FINANCIAL INFORMATION (CONT’D.)

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

		The goodwill recorded in this transaction relates to the deferred tax liability recorded for the difference in book and tax bases of the assets acquired. The goodwill is not expected to be deductible for income tax purposes. The primary reason for the Libyan investment was to acquire long-lived crude oil reserves. Production from Libya averaged 23,000 barrels of oil equivalent per day in the nine months ended September 30, 2006 and liftings commenced in the second quarter.
		In January 2006, the Corporation acquired a 55% working interest in the deepwater section of the West Mediterranean Block 1 Concession (the West Med Block) in Egypt for $413 million. The Corporation has a 25-year development lease for the West Med Block, which contains four existing natural gas discoveries and additional exploration opportunities. This transaction was accounted for as an acquisition of assets.
		In the first quarter of 2006, the Corporation completed the sale of its interests in certain producing properties located in the Permian Basin in Texas and New Mexico for $358 million. This asset sale resulted in an after-tax gain of $186 million ($289 million before income taxes). These assets were producing at a combined net rate of approximately 5,500 barrels of oil equivalent per day.
		In June 2006, the Corporation completed the sale of certain U.S. Gulf Coast onshore oil and gas producing assets for $86 million resulting in an after-tax gain of $50 million ($80 million before income taxes). These assets were producing at a combined net rate of approximately 2,600 barrels of oil equivalent per day.
4.		Inventories
		Inventories consist of the following (in millions):

		September 30,				December 31,
		2006				2005
Crude oil and other charge stocks		$	261			$	161
Refined and other finished products			1,411				1,149
Less LIFO adjustment			(725	)			(656	)
			947				654
Merchandise, materials and supplies			287				201
Total inventories		$	1,234			$	855

During the first quarter of 2005, the Corporation liquidated LIFO inventories, which decreased cost of products sold by approximately $11 million.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

5.		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):

		September 30,				December 31,
		2006				2005
Summarized balance sheet
Cash and short-term investments		$	578			$	875
Other current assets			804				814
Net fixed assets			2,063				1,950
Other long-term assets			34				39
Current liabilities			(1,021	)			(996	)
Long-term debt			(252	)			(252	)
Other long-term liabilities			(86	)			(57	)
Partners’ equity		$	2,120			$	2,373

		Three months								Nine months
		ended September 30								ended September 30
		2006				2005				2006				2005
Summarized income statement
Total revenues		$	3,338			$	2,806			$	9,086			$	7,622
Costs and expenses			(3,196	)			(2,502	)			(8,739	)			(7,000	)
Net income		$	142			$	304			$	347			$	622
Hess Corporation’s share, before income taxes		$	70			$	151			$	171			$	309

During the first nine months of 2006 and 2005, the Corporation received cash distributions from HOVENSA of $300 million and $275 million, respectively.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

6.		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, 2006 (in millions):

Beginning balance at January 1		$	244
Additions to capitalized exploratory well costs pending the determination of proved reserves			262
Reclassifications to wells, facilities, and equipment based on the determination of proved reserves			(141	)
Ending balance at September 30		$	365

		The preceding table excludes dry hole costs of $192 million related to exploration wells that were drilled and expensed within the first nine months of 2006. Capitalized exploratory well costs greater than one year old after completion of drilling were $61 million as of September 30, 2006 and $150 million as of December 31, 2005.
7.		Long-Term Debt
		In May 2006, the Corporation amended and restated its existing syndicated, revolving credit facility to increase the credit line to $3 billion from $2.5 billion and extend the term to May 2011 from December 2009. This facility can be used for borrowings and letters of credit. Current borrowings under the amended facility bear interest at .525% above the London Interbank Offered Rate and a facility fee of .125% per annum is payable on the amount of the credit line. 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.
		Capitalized interest on development projects amounted to the following (in millions):

		Three months								Nine months
		ended September 30								ended September 30
		2006				2005				2006				2005
Capitalized interest		$	25			$	22			$	75			$	57

8.		Foreign Currency
		Pre-tax foreign currency gains (losses) amounted to the following (in millions):

		Three months								Nine months
		ended September 30								ended September 30
		2006				2005				2006				2005
Foreign currency gains (losses)		$	(2	)		$	5			$	11			$	(1	)

PART I — FINANCIAL INFORMATION (CONT’D.)

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

9.		Pension Plans
		Components of pension expense consisted of the following (in millions):

		Three months								Nine months
		ended September 30								ended September 30
		2006				2005				2006				2005
Service cost		$	9			$	9			$	26			$	23
Interest cost			17				15				49				43
Expected return on plan assets			(18	)			(16	)			(49	)			(43	)
Amortization of prior service cost			—				1				1				2
Amortization of net loss			8				6				20				18
Pension expense		$	16			$	15			$	47			$	43

In 2006, the Corporation expects to contribute $40 million to its funded pension plans and $20 million to the trust established for its unfunded pension plan. Through September 30, 2006, the Corporation contributed $25 million to its funded pension plans and $20 million to the trust for its unfunded pension plan.

10.		Share-based Compensation
		The Corporation has elected to use the modified prospective application method for the adoption of FAS 123R. Under this method, compensation cost includes expense for restricted stock, previously awarded unvested stock options outstanding at January 1, 2006 based on the grant date fair-values used for disclosure purposes under previous accounting requirements, and stock options awarded subsequent to January 1, 2006 determined under the provisions of FAS 123R.
		For the nine months ended September 30, 2006, share-based compensation expense was $49 million ($32 million after income taxes), of which $22 million ($14 million after income taxes) related to stock options and the remainder related to restricted stock. Stock option expense recorded in the first nine months of 2006 reduced basic and diluted earnings per share by $.05 and $.04, respectively. If FAS 123R had been adopted on January 1, 2005, pro-forma net income for the nine months ended September 30, 2005 would have been $776 million (compared with reported net income of $790 million) and diluted earnings per share would have been $2.49 per share (compared with reported diluted earnings per share of $2.54). The cumulative effect on prior years of this change in accounting principle was immaterial.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

The Corporation’s stock option activity in the nine months ended September 30, 2006 consisted of the following:

						Weighted Average
		Options				Exercise Price Per Share
		(Thousands)
Outstanding at January 1, 2006			11,451			$	24.09
Granted			2,804				49.55
Exercised			(1,080	)			22.81
Forfeited			(85	)			38.69
Outstanding at September 30, 2006			13,090			$	29.56
Exercisable at September 30, 2006			7,005			$	22.09

		The intrinsic value of outstanding options and exercisable options at September 30, 2006 was $155 million and $135 million, respectively. At September 30, 2006, assuming forfeitures of 2% per year, the number of outstanding options that are expected to vest is 12,903,000 shares with a weighted average exercise price of $29.40 per share. At September 30, 2006 the weighted average remaining term of exercisable options was 6 years and the remaining term of all outstanding options was 7 years.
		The Corporation uses the Black-Scholes model to estimate the fair value of employee stock options. The following weighted average assumptions were utilized for stock options awarded for the nine months ended September 30:

		2006				2005
Risk free interest rate			4.53	%			3.94	%
Stock price volatility			.321				.300
Dividend yield			.81	%			1.31	%
Expected term in years			5				7
Weighted average fair value per option granted		$	16.54			$	10.48

The assumption above for the risk free interest rate is based on the expected terms of the options and is obtained from published sources. The stock price volatility is determined from historical experience using the same period as the expected terms of the options. The expected stock option term is based on historical exercise patterns and the expected future holding period.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

The Corporation’s restricted stock activity in the first nine months of 2006 consisted of the following:

		Shares of Restricted				Weighted-Average
		Common Stock Awarded				Price on Date of Grant
		(Thousands)
Outstanding at January 1, 2006			4,363			$	22.32
Granted			958				50.51
Distributed			(102	)			26.96
Forfeited			(62	)			28.84
Outstanding at September 30, 2006			5,157			$	27.39

At September 30, 2006, the number of common shares reserved for issuance under the 1995 Long-Term Incentive Plan is as follows (in thousands):

Total common shares reserved for issuance			24,846
Less: stock options outstanding			13,090
Available for future awards of restricted stock and stock options			11,756

		Based on restricted stock and stock option awards outstanding at September 30, 2006, unearned compensation expense, before income taxes, will be recognized as follows: remainder of 2006 — $18 million, 2007 — $56 million and 2008 — $33 million.
11.		Provision for Income Taxes

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

		Three months								Nine months
		ended September 30								ended September 30
		2006				2005				2006				2005
Current		$	546			$	302			$	1,357			$	845
Deferred			48				(10	)			238				(122	)
Adjustment of deferred tax liability for foreign income tax rate change			45				—				45				(5	)
Total		$	639			$	292			$	1,640			$	718

		In July 2006, the United Kingdom increased by 10% the supplementary tax on petroleum operations with an effective date of January 1, 2006. As a result, in the third quarter of 2006 the Corporation recorded a charge of $105 million consisting of an incremental income tax of $60 million on operating earnings for the first half of 2006 and $45 million to adjust the United Kingdom deferred tax liability.
		In the third quarter, the Algerian government amended its hydrocarbon laws to introduce a windfall profits tax ranging from 5% to 50% on profits in excess of $30 per barrel for Brent crude oil applicable to foreign companies with which it has entered into Production Sharing Contracts. The detailed regulations for calculating the tax have not been issued by the Algerian Government. Until these regulations are published it is not possible to reasonably estimate the financial impact on the Corporation.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

		For the three and nine-month periods ended September 30, 2005, income taxes include charges of $31 million and $72 million, respectively, related to the repatriation of foreign earnings under the American Jobs Creation Act of 2004.
12.		Stockholders’ Equity and Weighted Average Common Shares
		At September 30, 2006, the Corporation has outstanding 13,500,000 shares of 7% cumulative mandatory convertible preferred stock (“7% Preferred”). The 7% Preferred has a liquidation preference of $675 million ($50 per share). After adjustment for the stock split, the following conversion terms apply to the 7% Preferred. Each 7% Preferred share will automatically convert on December 1, 2006 into 2.4915 to 3.0897 shares of common stock, depending on the average closing price of the Corporation’s common stock over a 20-day period before conversion. The conversion rate will be 2.4915 shares of common stock for each share of 7% Preferred, if the common stock price is $20.07 or greater, and up to 3.0897 shares of common stock for each preferred share, if the common stock price is lower. Holders of the 7% Preferred have the right to convert their shares at any time prior to December 1, 2006 at the rate of 2.4915 shares of common stock for each preferred share converted.
		At September 30, 2006, the Corporation has outstanding 323,715 shares of 3% cumulative convertible preferred stock (“3% Preferred”) which carry a liquidation value of $16 million ($50 per share). After adjustment for the stock split, each share of the 3% Preferred is convertible at the option of the holder into 1.8783 shares of common stock.
		The weighted average number 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
		2006				2005(*)				2006				2005(*)
Common shares — basic			275,680				273,575				275,320				272,250
Effect of dilutive securities:
Convertible preferred stock			34,243				34,248				34,243				34,249
Stock options			3,237				2,560				3,187				2,285
Restricted common stock			2,889				2,851				2,701				2,582
Common shares — diluted			316,049				313,234				315,451				311,366

PART I — FINANCIAL INFORMATION (CONT’D.)

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

13.		Comprehensive Income
		Comprehensive income (loss) was as follows (in millions):

		Three months								Nine months
		ended September 30								ended September 30
		2006				2005				2006				2005
Net income		$	297			$	272			$	1,557			$	790
Deferred gains (losses) on cash flow hedges, after tax
Effect of hedge losses recognized in income			102				282				257				699
Net change in fair value of cash flow hedges			186				(276	)			(356	)			(1,513	)
Change in foreign currency translation adjustment			(10	)			(1	)			23				(24	)
Comprehensive income (loss)		$	575			$	277			$	1,481			$	(48	)

		The Corporation reclassifies hedging gains and losses included in other comprehensive income (loss) to earnings at the time the hedged transactions are recognized. Hedging decreased Exploration and Production results by $81 million ($128 million before income taxes) in the third quarter of 2006 and $294 million ($479 million before income taxes) in the third quarter of 2005. Hedging decreased Exploration and Production results by $228 million ($357 million before income taxes) in the nine months ended September 30, 2006 and $720 million ($1,150 million before income taxes) in the nine months ended September 30, 2005.
		At September 30, 2006, accumulated other comprehensive income (loss) included after-tax unrealized deferred losses of $1,403 million primarily related to crude oil contracts used as hedges of future Exploration and Production sales. The pre-tax amount of deferred hedge losses is reflected in accounts payable and the related income tax benefits are recorded as deferred tax assets on the balance sheet.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

14.		Segment Information
		The Corporation’s results by operating segment were as follows (in millions):

		Three months								Nine months
		ended September 30								ended September 30
		2006				2005				2006				2005
Operating revenues
Exploration and Production (*)		$	1,736			$	1,077			$	5,085			$	3,236
Marketing and Refining			5,360				4,774				16,051				12,703
Total (**)		$	7,096			$	5,851			$	21,136			$	15,939
Net income (loss)
Exploration and Production		$	206			$	235			$	1,413			$	760
Marketing and Refining			153				125				323				286
Corporate, including interest			(62	)			(88	)			(179	)			(256	)
Total		$	297			$	272			$	1,557			$	790

Identifiable assets by operating segment were as follows (in millions):

		September 30,				December 31,
		2006				2005
Exploration and Production		$	13,838			$	10,961
Marketing and Refining			5,892				6,337
Corporate			1,897				1,817
Total		$	21,627			$	19,115

PART I — FINANCIAL INFORMATION (CONT’D)

Item 2.		Management’s Discussion and Analysis of Results of Operations and Financial Condition.
		Overview
		On May 3, 2006, Amerada Hess Corporation changed its name to Hess Corporation (the Corporation) and declared a three-for-one stock split in the form of a stock dividend that was issued on May 31, 2006. The Corporation is a global integrated energy company that operates in two segments, Exploration and Production and Marketing and Refining. The Exploration and Production segment explores for, develops, produces and sells crude oil and natural gas. The Marketing and Refining segment manufactures, purchases, trades and markets refined petroleum products and other energy products. Net income was $297 million for the third quarter of 2006, compared with $272 million for the third quarter of 2005.
		Exploration and Production: Exploration and Production net income was $206 million for the third quarter of 2006, compared with $235 million in the third quarter of 2005. The third quarter 2006 results include a $105 million charge related to a United Kingdom supplementary tax enacted in July 2006. Worldwide crude oil and natural gas production was 352,000 barrels of oil equivalent per day (boepd) in the third quarter of 2006 compared with 312,000 boepd in the same period of 2005. The Corporation anticipates that its production for the full year of 2006 will be approximately 360,000 boepd.
		The following is an update of Exploration and Production activities during the third quarter of 2006:

	•		The Okume Complex and Phu Horm developments in Equatorial Guinea and Thailand, respectively, are both on schedule to commence production in the first quarter of 2007.
	•		The Pangkah development in Indonesia is expected to begin production in the second quarter of 2007.
	•		The Tubular Bells appraisal well on Mississippi Canyon Block 682 (Hess 20%) successfully encountered hydrocarbons approximately 5 miles from the initial discovery well. The operator intends to drill two sidetrack wells which will further delineate the field.
	•		The Corporation recorded dry hole costs of $152 million ($93 million after-tax), primarily associated with two deepwater Gulf of Mexico exploration wells.

PART I — FINANCIAL INFORMATION (CONT’D)

       Overview (Continued)

•

Drilling of the sidetrack well at the Corporation’s Pony discovery on Green Canyon Block 468 commenced at the end of September 2006 and will target the prospective section about 4,000 feet northeast of the discovery well.

		Marketing and Refining: Marketing and Refining earnings were $153 million for the third quarter of 2006, compared with $125 million in the third quarter of 2005. The increase in the third quarter of 2006 principally reflects higher marketing earnings resulting from stronger margins which were partially offset by lower refining earnings due to lower refined product margins.
		Results of Operations
		The after-tax results by major operating activity were as follows (in millions, except per share data):

		Three months								Nine months
		ended September 30								ended September 30
		2006				2005				2006				2005
Exploration and Production		$	206			$	235			$	1,413			$	760
Marketing and Refining			153				125				323				286
Corporate			(31	)			(54	)			(83	)			(151	)
Interest expense			(31	)			(34	)			(96	)			(105	)
Net income		$	297			$	272			$	1,557			$	790
Net income per share (diluted)		$	0.94			$	0.87	*		$	4.93			$	2.54	*

		Items Affecting Comparability Between Periods
		The following items of income (expense), on an after-tax basis, affect the comparability of earnings between periods (in millions):

		Three months								Nine months
		ended September 30								ended September 30
		2006				2005				2006				2005
Exploration and Production
Gains from asset sales		$	—			$	—			$	236			$	11
Income tax adjustments			(105	)			—				(45	)			11
Accrued office closing costs			—				—				(18	)			—
Hurricane related costs			—				(14	)			—				(14	)
Legal settlement			—				—				—				11
Corporate
Tax on repatriated earnings			—				(31	)			—				(72	)
Premiums on bond repurchases			—				—				—				(7	)
		$	(105	)		$	(45	)		$	173			$	(60	)

PART I — FINANCIAL INFORMATION (CONT’D)

		Results of Operations (Continued)
		In July 2006, the United Kingdom increased by 10% the supplementary tax on petroleum operations with an effective date of January 1, 2006. As a result, in the third quarter of 2006 the Corporation recorded a charge of $105 million consisting of an incremental income tax of $60 million on operating earnings for the first half of 2006 and $45 million to adjust the United Kingdom deferred tax liability. For the nine months ended September 30, 2006, only the one-time adjustment to the deferred tax liability of $45 million is included as an item affecting comparability between periods.
		The gain from asset sales for the nine months ended September 30, 2006 relates to the sale of certain United States producing properties located in the Permian Basin and Gulf Coast. The results for the first nine months of 2006 also include a charge for vacated leased office space.
		Earnings in the third quarter of 2005 include a charge of $14 million ($22 million before income taxes) resulting from hurricane related expenses. Substantially all of the pre-tax costs were recorded in production expenses. The Corporation recorded income tax charges of $31 million in the third quarter of 2005 and $72 million in the first nine months of 2005 related to the repatriation of $600 million and $1.9 billion, respectively, of foreign earnings under the American Jobs Creation Act of 2004.
		In this discussion, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings. Management believes that after-tax amounts are a preferable method of explaining variances in earnings, since they show the entire effect of a transaction rather than only the pre-tax amount. After-tax amounts are determined by applying the appropriate 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 Exploration and Production operations (in millions):

		Three months								Nine months
		ended September 30								ended September 30
		2006				2005				2006				2005
Sales and other operating revenues		$	1,665			$	1,042			$	4,842			$	3,110
Non-operating income			15				16				407				63
Total revenues			1,680				1,058				5,249				3,173
Costs and expenses
Production expenses, including related taxes			323				256				892				722
Exploration expenses, including dry holes and lease impairment			221				91				412				310
General, administrative and other expenses			46				32				163				100
Depreciation, depletion and amortization			306				236				823				724
Total costs and expenses			896				615				2,290				1,856
Results of operations before income taxes			784				443				2,959				1,317
Provision for income taxes			578				208				1,546				557
Results of operations		$	206			$	235			$	1,413			$	760

		After considering the items affecting comparability between periods, the remaining changes in Exploration and Production earnings are primarily attributable to changes in selling prices, sales volumes and operating costs and exploration expenses, as discussed below.
		Selling prices: Higher average selling prices and reduced crude oil hedge positions increased Exploration and Production revenues by approximately $465 million in the third quarter and $1,650 million in the first nine months of 2006 compared with the corresponding periods of 2005. The Corporation’s average selling prices were as follows:

PART I — FINANCIAL INFORMATION (CONT’D)

       Results of Operations (Continued)

		Three months								Nine months
		ended September 30								ended September 30
Average selling prices		2006				2005				2006				2005
Crude oil — per barrel (including hedging)
United States		$	65.41			$	34.86			$	62.22			$	33.10
Europe			59.97				34.59				58.41				33.00
Africa			54.52				35.16				51.86				31.34
Asia and other			67.24				62.04				64.39				54.25
Worldwide			58.81				35.74				57.10				33.13
Crude oil — per barrel (excluding hedging)
United States		$	65.41			$	58.32			$	62.22			$	50.16
Europe			62.79				59.47				60.85				51.93
Africa			66.43				59.30				65.52				50.54
Asia and other			67.24				62.04				64.39				54.25
Worldwide			64.73				59.28				62.75				51.23
Natural gas liquids — per barrel
United States		$	49.17			$	40.90			$	47.07			$	35.98
Europe			50.30				36.77				48.50				34.40
Worldwide			49.54				39.92				47.51				35.53
Natural gas — per Mcf
United States		$	5.99			$	8.53			$	6.68			$	6.94
Europe			5.37				4.12				6.47				4.79
Asia and other			3.91				4.12				3.93				4.01
Worldwide			4.94				5.26				5.59				5.18

Crude oil hedges reduced Exploration and Production earnings by $81 million and $228 million in the third quarter of 2006 and first nine months of 2006 ($128 million and $357 million before income taxes). Crude oil hedges reduced Exploration and Production earnings by $294 million and $720 million in the third quarter of 2005 and first nine months of 2005 ($479 million and $1,150 million before income taxes).

PART I — FINANCIAL INFORMATION (CONT’D)

       Results of Operations (Continued)

Sales and production volumes: The Corporation’s crude oil and natural gas production, on a barrel of oil equivalent basis was 352,000 boepd in the third quarter of 2006 compared with 312,000 boepd in the same period of 2005. Production in the first nine months of 2006 was 356,000 boepd compared with 341,000 boepd in the first nine months of 2005. The Corporation anticipates that its production for the full year of 2006 will be approximately 360,000 boepd. The Corporation’s net daily worldwide production by region was as follows (in thousands):

		Three months								Nine months
		ended September 30								ended September 30
		2006				2005				2006				2005
Crude oil (barrels per day)
United States			34				42				38				46
Europe			102				102				109				113
Africa			86				67				84				67
Asia and other			13				7				11				6
Total			235				218				242				232
Natural gas liquids (barrels per day)
United States			11				11				10				12
Europe			5				2				4				5
Total			16				13				14				17
Natural gas (Mcf per day)
United States			109				125				116				146
Europe			274				218				266				281
Asia and other			226				141				218				127
Total			609				484				600				554
Barrels of oil equivalent per day(*)			352				312				356				341

		Crude oil and natural gas production in the United States was lower in the third quarter and first nine months of 2006, principally due to asset sales and natural decline. In the third quarter of 2006, natural gas production in Europe increased due to new production from the Atlantic and Cromarty fields in the United Kingdom, which commenced in June 2006. Increased crude oil production in Africa in the third quarter and first nine months of 2006 was primarily due to production from Libya. Natural gas production in Asia was higher due to increased production from Block A-18 in the Joint Development Area between Malaysia and Thailand (JDA).
		Higher crude oil and natural gas sales volumes increased Exploration and Production revenues by approximately $160 million in the third quarter and $80 million in the first nine months of 2006 compared with the corresponding periods of 2005.

PART I — FINANCIAL INFORMATION (CONT’D)

Results of Operations (Continued)

     Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, totaled $369 million and $1,025 million in the third quarter and first nine months of 2006, an increase of $102 million and $224 million, respectively, from the corresponding periods of 2005. The increase reflects higher maintenance costs, increased costs of services and materials and higher production taxes resulting from higher oil prices. Depreciation, depletion and amortization charges increased in the third quarter and first nine months of 2006 reflecting increased production volumes and higher per barrel rates, due to new production from the Atlantic and Cromarty fields and higher asset retirement obligations.

     Exploration expenses: Exploration expenses were $221 million and $412 million in the third quarter and first nine months of 2006, an increase of $130 million and $102 million, from 2005. The increases reflect higher dry hole costs.

     Income Taxes: In July 2006, the United Kingdom increased by 10% the supplementary tax on petroleum operations with an effective date of January 1, 2006. As a result, in the third quarter of 2006 the Corporation recorded a charge of $105 million consisting of an incremental income tax of $60 million on operating earnings for the first half of 2006 and $45 million to adjust the United Kingdom deferred tax liability. In addition to this charge, the incremental tax on third quarter 2006 United Kingdom earnings was $21 million. The effective income tax rate for Exploration and Production operations in the first nine months of 2006 was 53% compared with 43% in the first nine months of 2005, due primarily to Libyan income taxes and the U.K. supplementary tax. We expect the Exploration & Production effective tax rate for the year to be in the range of 53% to 55%. For purposes of estimating our normalized 2006 effective tax rates, we have included the 10% supplementary tax on 2006 earnings, but have excluded the one-time adjustment to the United Kingdom deferred tax liability.

     In the third quarter, the Algerian government amended its hydrocarbon laws to introduce a windfall profits tax ranging from 5% to 50% on profits in excess of $30 per barrel for Brent crude oil applicable to foreign companies with which it has entered into Production Sharing Contracts. The detailed regulations for calculating the tax have not been issued by the Algerian Government. Until these regulations are published it is not possible to reasonably estimate the financial impact on the Corporation.

     The Corporation’s future Exploration and Production 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.

PART I — FINANCIAL INFORMATION (CONT’D)

Results of Operations (Continued)

Marketing and Refining

     Marketing and Refining earnings were $153 million in the third quarter of 2006 compared with $125 million in the corresponding period of 2005. Earnings from Marketing and Refining activities amounted to $323 million in the first nine months of 2006 compared with $286 million in 2005. The Corporation’s downstream operations include HOVENSA L.L.C. (HOVENSA), a 50% owned refining joint venture with a subsidiary of Petroleos de Venezuela S.A. (PDVSA). 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 earnings, which consist of the Corporation’s share of HOVENSA’s results, Port Reading earnings, interest income on the note receivable from PDVSA and other miscellaneous items, were $64 million in the third quarter of 2006 and $191 million in the first nine months of 2006 compared with $144 million in the third quarter and $263 million in the first nine months of 2005.

     The Corporation’s share of HOVENSA’s income after income taxes was $43 million in the third quarter of 2006 compared with $93 million in the third quarter of 2005. The decrease was primarily due to lower refined product margins. For the first nine months of 2006, the Corporation’s share of HOVENSA’s after-tax income was $105 million compared with $190 million in the first nine months of 2005, principally reflecting lower margins and maintenance activities.

     Interest income after income taxes on the PDVSA note was $2 million in the third quarter of 2006 and $7 million in the first nine months of 2006 compared with $3 million in the third quarter of 2005 and $10 million in the first nine months of 2005. At September 30, 2006, the remaining balance of the PDVSA note was $152 million, which is scheduled to be fully repaid by February 2009.

     Port Reading’s after tax earnings were $18 million in the third quarter of 2006 compared with $48 million in the third quarter of 2005, reflecting lower margins. Earnings at Port Reading were $77 million in the first nine months of 2006 compared with $62 million in the corresponding period of 2005. The increase reflects higher margins and sales volumes.

     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				2006				2005				2006				2005
		barrels per day)
HOVENSA
Crude			500				94.9	%			82.5	%			88.3	%			90.8	%
Fluid catalytic cracker			150				92.0	%			89.7	%			82.0	%			80.2	%
Coker			58				88.3	%			92.4	%			82.4	%			95.4	%
Port Reading			65				95.8	%			95.5	%			97.1	%			80.4	%

PART I — FINANCIAL INFORMATION (CONT’D)

Results of Operations (Continued)

     Marketing: Marketing earnings, which consist principally of retail gasoline and energy marketing activities, were $63 million in the third quarter of 2006 and $91 million in the first nine months of 2006 compared with a loss of $22 million in the third quarter of 2005 and $5 million of income in the first nine months of 2005. Retail gasoline operations were more profitable in the third quarter and first nine months of 2006 compared to the third quarter and first nine months of 2005 primarily due to higher margins. Earnings from energy marketing activities increased in the third quarter and first nine months of 2006 compared with the corresponding periods of 2005, reflecting improved margins. Total refined product sales volumes were 455,000 barrels per day in the first nine months of 2006 and 435,000 barrels per day in the first nine months of 2005.

     The Corporation has a 50% voting interest in a consolidated partnership that trades energy commodities and energy derivatives. The Corporation also takes trading positions for its own account. The Corporation’s after-tax results from trading activities, including its share of the earnings of the trading partnership, amounted to income of $26 million in the third quarter of 2006 and $41 million in the first nine months of 2006 compared with earnings of $3 million in the third quarter of 2005 and $18 million in the first nine months of 2005.

     Marketing expenses increased in the third quarter and first nine months of 2006 compared with the corresponding periods of 2005. The change is due to higher expenses resulting from an increased number of retail convenience stores, higher utility and compensation related costs, and growth in energy marketing operations.

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

Corporate

     After-tax corporate expenses were $31 million in the third quarter of 2006 and $83 million in the first nine months of 2006 compared with $54 million in the third quarter of 2005 and $151 million in the first nine months of 2005. The results for the third quarter and first nine months of 2005 include income tax charges of $31 million and $72 million, respectively, for the repatriation of foreign earnings under the American Jobs Creation Act of 2004. Net corporate expenses in the first nine months of 2005 also include expenses of $7 million ($10 million before income taxes) for premiums on bond repurchases. Excluding these items, the increase in corporate expenses in 2006 compared to 2005 reflects the expensing of stock options commencing January 1, 2006 and increases in insurance and employee related costs.

PART I — FINANCIAL INFORMATION (CONT’D)

Results of Operations (Continued)

Interest

     Interest expense was as follows (in millions):

		Three months								Nine months
		ended September 30								ended September 30
		2006				2005				2006				2005
Total interest incurred		$	74			$	76			$	225			$	226
Less capitalized interest			25				22				75				57
Interest expense before income taxes			49				54				150				169
Less income taxes			18				20				54				64
After-tax interest expense		$	31			$	34			$	96			$	105