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| AHC > SEC Filings for AHC > Form 10-Q on 5-May-2006 | All Recent SEC Filings |
5-May-2006
Quarterly Report
Overview
On May 3, 2006, Amerada Hess Corporation changed its name to Hess Corporation
(the Corporation). 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 $695 million for the first quarter of 2006,
compared with $219 million in the first quarter of 2005.
Exploration and Production: Exploration and Production net income was
$706 million for the first quarter of 2006, compared with $263 million in the
first quarter of 2005. Exploration and Production's first quarter results
included an after tax gain from asset sales of $186 million and benefited from
strong oil prices and reduced hedge positions. Worldwide crude oil and natural
gas production was 361,000 barrels of oil equivalent per day (boepd) in the
first quarter of 2006 compared with 358,000 boepd in the same period of 2005.
The Corporation anticipates that its production for the full year of 2006 will
average between 360,000 and 380,000 boepd.
The Corporation completed the following significant transactions in the first
quarter:
• In January 2006, in conjunction with its Oasis Group partners, the
Corporation 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 licenses and a payment
in January 2006 by the Corporation to the Libyan National Oil Corporation of
$260 million. The Corporation will make an additional payment of
$106 million in the fourth quarter of 2006 related to certain investments in
fixed assets made by the Libyan National Oil Corporation since 1986.
Production from the Libyan operations averaged 23,000 boepd in the first
quarter of 2006, but there were no liftings in the first quarter. The
Corporation's first lifting of Libyan crude oil is scheduled for May.
• 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.
• In the first quarter of 2006, the Corporation sold its interests in certain producing properties located in the Permian Basin in Texas and New Mexico for $358 million resulting in an after-tax gain of $186 million.
• At the Okume Complex in Equatorial Guinea, the two deepwater tension leg platforms and four shallow water jackets have been installed. First production is expected in the first quarter of 2007.
• In Southeast Asia, the Phu Horm and Pangkah developments are progressing with first production scheduled to commence in the first quarter and first half of 2007, respectively.
• In the deepwater Gulf of Mexico, the Corporation is drilling the Pony and Ouachita prospects. The Barossa exploration well encountered non-commercial quantities of hydrocarbons and was plugged and abandoned.
Marketing and Refining: Marketing and Refining earnings were $49 million for
the first quarter of 2006, compared with $63 million in the first quarter of
2005. In the first quarter of 2006, earnings from HOVENSA were adversely
impacted by the unscheduled shutdown and maintenance of the Fluid Catalytic
Cracking (FCC) unit which lasted for approximately 20 days. The Corporation
received a cash distribution of $200 million from HOVENSA in the first quarter
of 2006.
Results of Operations
The after-tax results by major operating activity were as follows (in
millions, except per share data):
Three months ended
March 31
2006 2005
Exploration and Production $ 706 $ 263
Marketing and Refining 49 63
Corporate (23 ) (69 )
Interest expense (37 ) (38 )
Net income $ 695 $ 219
Net income per share (diluted) $ 6.62 $ 2.12
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Three months ended
March 31
2006 2005
Exploration and Production
Gains from asset sales $ 186 $ 11
Legal settlement - 11
Corporate
Tax on repatriated earnings - (41 )
$ 186 $ (19 )
The net gain from asset sales in the first quarter of 2006 reflects the
disposition of certain producing properties located in the Permian Basin in
Texas and New Mexico ($289 million gain before income taxes). The first quarter
2005 gain from asset sales related to the exchange of a mature North Sea asset
for an increased interest in the Pangkah natural gas development in Indonesia
($18 million gain before income taxes). In addition, first quarter 2005 earnings
include a gain recorded on a legal settlement reflecting the favorable
resolution of contingencies on a prior year asset sale ($19 million gain before
income taxes) that is included in non-operating income. The Corporation also
recorded an income tax charge in the first quarter of 2005 related to
repatriation of foreign earnings under the American Jobs Creation Act of 2004.
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 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 ended
March 31
2006 2005
Sales and other operating revenues $ 1,551 $ 1,030
Non-operating income 301 47
Total revenues 1,852 1,077
Costs and expenses
Production expenses, including related taxes 265 225
Exploration expenses, including dry holes and lease impairment 112 133
General, administrative and other expenses 45 29
Depreciation, depletion and amortization 251 241
Total costs and expenses 673 628
Results of operations before income taxes 1,179 449
Provision for income taxes 473 186
Results of operations $ 706 $ 263
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After considering the gains from asset sales and the legal settlement
described above, 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 realized selling prices of crude oil and
natural gas increased Exploration and Production revenues by approximately
$550 million in the first quarter of 2006 compared with 2005. The Corporation's
average selling prices were as follows:
Three months ended
March 31
2006 2005
Average selling prices (including hedging)
Crude oil (per barrel)
United States $ 57.39 $ 32.18
Europe 54.98 31.21
Africa 45.67 30.06
Asia and other 59.04 45.32
Natural gas liquids (per barrel)
United States $ 44.21 $ 32.83
Europe 47.16 31.69
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Average selling prices (excluding hedging)
Crude oil (per barrel)
United States $ 57.39 $ 45.18
Europe 56.89 46.82
Africa 61.61 44.84
Asia and other 59.04 45.32
Natural gas liquids (per barrel) United States $ 44.21 $ 32.83 Europe 47.16 31.69
Natural gas (per Mcf)
United States $ 7.73 $ 6.15
Europe 8.39 5.41
Asia and other 3.89 3.93
Crude oil hedges reduced earnings by $65 million ($101 million before income
taxes) in the first quarter of 2006 compared with $195 million ($308 million
before income taxes) in the first quarter of 2005.
Sales and production volumes: The Corporation's oil and natural gas
production, on a barrel of oil equivalent basis was 361,000 boepd in the first
quarter of 2006 compared with 358,000 boepd in the same period of 2005. The
Corporation anticipates that its production for the full year of 2006 will
average between 360,000 and 380,000 boepd. The Corporation's net daily worldwide
production by region was as follows (in thousands):
Three months ended
March 31
2006 2005
Crude oil (barrels per day)
United States 41 49
Europe 113 120
Africa 82 64
Asia and other 10 5
Total 246 238
Natural gas liquids (barrels per day)
United States 9 13
Europe 4 7
Total 13 20
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Barrels of oil equivalent per day (*) 361 358
(*) Natural gas production is converted assuming six Mcf equals one barrel.
Crude oil and natural gas production in the United States was lower in the
first quarter of 2006 due to the loss of production caused by the effect of
hurricanes in 2005, asset sales and natural decline. Production in Europe was
lower due to increased maintenance at a number of facilities and natural
decline, partially offset by increased production from Russia. Increased crude
oil production in Africa in the first quarter of 2006 was due to production from
Libya at the rate of 23,000 boepd, partially offset by lower production in
Algeria. Higher crude oil prices in 2006 reduced the Corporation's entitlement
to Algerian production. 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).
Lower crude oil and natural gas sales volumes reduced revenue by
approximately $30 million in the first quarter of 2006 compared with the first
quarter of 2005.
Operating costs and depreciation, depletion and amortization: Cash operating
costs, consisting of production expenses and general and administrative
expenses, increased by $56 million in the first quarter of 2006 compared with
the corresponding period of 2005. The increase reflects higher production taxes
and increased costs of services and materials. Depreciation, depletion and
amortization charges were higher in the first quarter of 2006 reflecting higher
production volumes and per barrel rates.
Exploration expenses: Exploration expenses were lower in the first quarter of
2006 compared with 2005 by $21 million. The decrease principally reflects lower
dry hole costs, partially offset by higher seismic expense.
Other: After-tax foreign currency gains amounted to $7 million ($10 million
before income taxes) in the first quarter of 2006 and $8 million ($3 million
before income taxes) in the first quarter of 2005. The pre-tax amounts of
foreign currency gains are included in other non-operating income.
The effective income tax rate for Exploration and Production operations in
the first quarter of 2006 and 2005 was 42%.
Refinery utilization
Refinery Three months
capacity ended March 31
(thousands of
barrels per day) 2006 2005
HOVENSA
Crude 500 84.0 %(*) 89.8 %
Fluid catalytic cracker 150 66.4 %(**) 57.2 %(*)
Coker 58 85.7 %(**) 92.9 %
Port Reading 65 98.6 % 56.5 %(*)
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(*) Reflects
reduced
utilization
primarily
resulting
from
scheduled
maintenance.
(**) Utilization
for these
units was
impacted by
unscheduled
refinery
maintenance.
Interest
Interest expense was as follows (in millions):
Three months ended
March 31
2006 2005
Total interest incurred $ 81 $ 75
Less capitalized interest 24 14
Interest expense before income taxes 57 61
Less income taxes 20 23
After-tax interest expense $ 37 $ 38
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Sales and Other Operating Revenues
Sales and other operating revenues increased by 44% in the first quarter of
2006 compared with the corresponding period of 2005. This increase principally
reflects increased realized selling prices of crude oil. Natural gas and refined
products selling prices also increased. The increase in cost of goods sold
reflects the increased costs of refined products purchased.
March 31, December 31, 2006 2005 Cash and cash equivalents $ 504 $ 315 Short-term debt and current maturities of long-term debt 107 26 Total debt 3,775 3,785 Stockholders' equity 6,759 6,286 Debt to capitalization ratio* 35.8 % 37.6 %
* Total debt as a percentage of the sum of total debt plus stockholders' equity.
Cash Flows: The following table sets forth a summary of the Corporation's cash flows (in millions):
Three months ended
March 31
2006 2005
Net cash provided by (used in):
Operating activities $ 1,198 $ 461
Investing activities (937 ) (444 )
Financing activities (72 ) (60 )
Net increase (decrease) in cash and cash equivalents $ 189 $ (43 )
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Operating Activities: Net cash provided by operating activities increased in
the first quarter of 2006 compared with 2005, reflecting higher earnings,
changes in operating assets and liabilities and an increased distribution from
HOVENSA. In the first quarter of 2006, the Corporation received a cash
distribution of $200 million from HOVENSA compared with $112 million in 2005.
Investing Activities: The following table summarizes the Corporation's
capital expenditures (in millions):
Three months ended
March 31
2006 2005
Exploration and Production
Exploration $ 130 $ 56
Production and development 480 357
Acquisitions (including leasehold) 693 25
1,303 438
Marketing and Refining 33 29
Total $ 1,336 $ 467
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