Edgar Filing: HESS CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarter ended March 31, 2015

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

For the transition period from to

Commission File Number 1-1204

HESS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE

(State or Other Jurisdiction of Incorporation or Organization)

13-4921002

(I.R.S. Employer Identification Number)

1185 AVENUE OF THE AMERICAS, NEW YORK, N.Y.

(Address of Principal Executive Offices)

10036

(Zip Code)

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

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At March 31, 2015, there were 287,382,013 shares of Common Stock outstanding.

HESS CORPORATION

Form 10-Q

TABLE OF CONTENTS

Item No.		Page Number
	PART I FINANCIAL INFORMATION
1.	Financial Statements (Unaudited)
	Consolidated Balance Sheet at March 31, 2015 and December 31, 2014	2
	Statement of Consolidated Income for the three months ended March 31, 2015 and 2014	3
	Statement of Consolidated Comprehensive Income for the three months ended March 31, 2015 and 2014	4
	Statement of Consolidated Cash Flows for the three months ended March 31, 2015 and 2014	5
	Statement of Consolidated Equity for the periods ended March 31, 2015 and 2014	6
	Notes to Consolidated Financial Statements	7
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
3.	Quantitative and Qualitative Disclosures about Market Risk	27
4.	Controls and Procedures	27
	PART II OTHER INFORMATION
1.	Legal Proceedings	28
2.	Share Repurchase Activities	28
6.	Exhibits and Reports on Form 8-K	29
	Signatures	30
	Certifications

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements.

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (UNAUDITED)

	March 31,			December 31,
	2015			2014
	(In millions,
	except share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,506		$	2,444
Accounts receivable
Trade		1,405			1,642
Other		306			431
Inventories		546			527
Other current assets		560			1,643
Total current assets		4,323			6,687
PROPERTY, PLANT AND EQUIPMENT
Total — at cost		46,958			46,522
Less: Reserves for depreciation, depletion, amortization and lease impairment		19,750			19,005
Property, plant and equipment — net		27,208			27,517
GOODWILL		1,858			1,858
DEFERRED INCOME TAXES		2,356			2,169
OTHER ASSETS		356			347
TOTAL ASSETS	$	36,101		$	38,578
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$	681		$	708
Accrued liabilities		2,427			3,781
Taxes payable		290			294
Short-term debt and current maturities of long-term debt		69			68
Total current liabilities		3,467			4,851
LONG-TERM DEBT		5,911			5,919
DEFERRED INCOME TAXES		1,794			2,009
ASSET RETIREMENT OBLIGATIONS		2,086			2,281
OTHER LIABILITIES AND DEFERRED CREDITS		1,176			1,198
Total liabilities		14,434			16,258
EQUITY
Hess Corporation stockholders’ equity
Common stock, par value $1.00
Authorized — 600,000,000 shares
Issued — 287,382,013 shares at March 31, 2015; 285,834,964 shares at December 31, 2014		287			286
Capital in excess of par value		3,306			3,277
Retained earnings		19,578			20,052
Accumulated other comprehensive income (loss)		(1,504	)		(1,410	)
Total Hess Corporation stockholders’ equity		21,667			22,205
Noncontrolling interests		—			115
Total equity		21,667			22,320
TOTAL LIABILITIES AND EQUITY	$	36,101		$	38,578

See accompanying Notes to Consolidated Financial Statements.

PART I - FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)

	Three Months Ended
	March 31,
	2015			2014
	(In millions,
	except per share amounts)
REVENUES AND NON-OPERATING INCOME
Sales (excluding excise taxes) and other operating revenues	$	1,538		$	2,673
Other, net		12			(81	)
Total revenues and non-operating income		1,550			2,592
COSTS AND EXPENSES
Cost of products sold (excluding items shown separately below)		306			393
Operating costs and expenses		478			466
Production and severance taxes		36			62
Exploration expenses, including dry holes and lease impairment		269			119
General and administrative expenses		147			142
Interest expense		85			81
Depreciation, depletion and amortization		956			726
Total costs and expenses		2,277			1,989
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(727	)		603
Provision (benefit) for income taxes		(351	)		239
INCOME (LOSS) FROM CONTINUING OPERATIONS		(376	)		364
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES		(13	)		57
NET INCOME (LOSS)		(389	)		421
Less: Net income (loss) attributable to noncontrolling interests		—			35
NET INCOME (LOSS) ATTRIBUTABLE TO HESS CORPORATION	$	(389	)	$	386
NET INCOME (LOSS) ATTRIBUTABLE TO HESS CORPORATION PER SHARE
BASIC:
Continuing operations	$	(1.32	)	$	1.14
Discontinued operations		(0.05	)		0.07
NET INCOME (LOSS) PER SHARE	$	(1.37	)	$	1.21
DILUTED:
Continuing operations	$	(1.32	)	$	1.13
Discontinued operations		(0.05	)		0.07
NET INCOME (LOSS) PER SHARE	$	(1.37	)	$	1.20
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)		283.5			322.6
COMMON STOCK DIVIDENDS PER SHARE	$	0.25		$	0.25

See accompanying Notes to Consolidated Financial Statements.

PART I - FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended
	March 31,
	2015			2014
	(In millions)

NET INCOME (LOSS)	$	(389	)	$	421

OTHER COMPREHENSIVE INCOME (LOSS):

Derivatives designated as cash flow hedges
Effect of hedge (gains) losses reclassified to income		—			(5	)
Income taxes on effect of hedge (gains) losses reclassified to income		—			2
Net effect of hedge (gains) losses reclassified to income		—			(3	)
Change in fair value of cash flow hedges		20			14
Income taxes on change in fair value of cash flow hedges		(7	)		(5	)
Net change in fair value of cash flow hedges		13			9
Change in derivatives designated as cash flow hedges, after taxes		13			6

Pension and other postretirement plans
Amortization of net actuarial losses		19			8
Income taxes on amortization of net actuarial losses		(6	)		(3	)
Net effect of amortization of net actuarial losses		13			5
Change in pension and other postretirement plans, after taxes		13			5

Foreign currency translation adjustment
Foreign currency translation adjustment		(120	)		51
Change in foreign currency translation adjustment		(120	)		51

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		(94	)		62

COMPREHENSIVE INCOME (LOSS)		(483	)		483
Less: Comprehensive income (loss) attributable to noncontrolling interests		—			35
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO HESS CORPORATION	$	(483	)	$	448

See accompanying Notes to Consolidated Financial Statements.

PART I - FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)

	Three Months Ended
	March 31,
	2015			2014
	(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(389	)	$	421
Adjustments to reconcile net income (loss) to net cash provided by operating activities
(Gains) losses on asset sales, net		—			(10	)
Depreciation, depletion and amortization		956			726
Loss from equity affiliates		—			93
Exploratory dry hole costs		169			9
Exploration lease impairment		54			32
Stock compensation expense		26			22
Provision (benefit) for deferred income taxes		(347	)		112
(Income) loss from discontinued operations, net of income taxes		13			(57	)
Changes in operating assets and liabilities		(109	)		(231	)
Cash provided by (used in) operating activities - continuing operations		373			1,117
Cash provided by (used in) operating activities - discontinued operations		(11	)		41
Net cash provided by (used in) operating activities		362			1,158

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(1,237	)		(1,146	)
Proceeds from asset sales		—			1,237
Other, net		(10	)		(57	)
Cash provided by (used in) investing activities - continuing operations		(1,247	)		34
Cash provided by (used in) investing activities - discontinued operations		95			(296	)
Net cash provided by (used in) investing activities		(1,152	)		(262	)

CASH FLOWS FROM FINANCING ACTIVITIES
Debt with maturities of greater than 90 days
Repayments		(17	)		(333	)
Common stock acquired and retired		(67	)		(1,043	)
Cash dividends paid		(72	)		(79	)
Employee stock options exercised, including income tax benefits		8			33
Cash provided by (used in) financing activities - continuing operations		(148	)		(1,422	)
Cash provided by (used in) financing activities - discontinued operations		—			—
Net cash provided by (used in) financing activities		(148	)		(1,422	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(938	)		(526	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		2,444			1,814
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,506		$	1,288

See accompanying Notes to Consolidated Financial Statements.

PART I - FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED EQUITY (UNAUDITED)

										Accumulated
				Capital in						Other			Total Hess
	Common			Excess of			Retained			Comprehensive			Stockholders’			Noncontrolling			Total
	Stock			Par			Earnings			Income (Loss)			Equity			Interests			Equity
	(In millions)
BALANCE AT JANUARY 1, 2015	$	286		$	3,277		$	20,052		$	(1,410	)	$	22,205		$	115		$	22,320
Net income (loss)								(389	)					(389	)		—			(389	)
Other comprehensive income (loss)											(94	)		(94	)		—			(94	)
Comprehensive income (loss)														(483	)		—			(483	)
Activity related to restricted common stock awards, net		1			18			—			—			19			—			19
Employee stock options, including income tax benefits		—			9			—			—			9			—			9
Performance share units		—			5			—			—			5			—			5
Cash dividends declared		—			—			(72	)		—			(72	)		—			(72	)
Common stock acquired and retired		—			(3	)		(13	)		—			(16	)		—			(16	)
Noncontrolling interests, net		—			—			—			—			—			(115	)		(115	)
BALANCE AT MARCH 31, 2015	$	287		$	3,306		$	19,578		$	(1,504	)	$	21,667		$	—		$	21,667

BALANCE AT JANUARY 1, 2014	$	325		$	3,498		$	21,235		$	(338	)	$	24,720		$	64		$	24,784
Net income (loss)								386						386			35			421
Other comprehensive income (loss)											62			62			—			62
Comprehensive income (loss)														448			35			483
Activity related to restricted common stock awards, net		1			14			—			—			15			—			15
Employee stock options, including income tax benefits		1			34			—			—			35			—			35
Performance share units		—			3			—			—			3			—			3
Cash dividends declared		—			—			(79	)		—			(79	)		—			(79	)
Common stock acquired and retired		(13	)		(136	)		(849	)		—			(998	)		—			(998	)
Noncontrolling interests, net		—			—			—			—			—			(1	)		(1	)
BALANCE AT MARCH 31, 2014	$	314		$	3,413		$	20,693		$	(276	)	$	24,144		$	98		$	24,242

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 the Corporation’s consolidated financial position at March 31, 2015 and December 31, 2014 and the consolidated results of operations and cash flows for the three months ended March 31, 2015 and 2014. 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 Annual Report on Form 10-K for the year ended December 31, 2014.

The statements of consolidated income and consolidated cash flows for the three months ended March 31, 2014, have been recast to reflect the Corporation’s retail business which was sold in September 2014, and its energy trading joint venture, HETCO, which was sold in February 2015, as discontinued operations. Certain other information in the financial statements and notes has been reclassified to conform to the current period presentation.

New Accounting Pronouncements: In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The ASU amends the criteria for reporting discontinued operations to include only disposals representing a strategic shift in operations. The ASU also requires expanded disclosures regarding the assets, liabilities, income, and expenses of discontinued operations. This ASU became effective for the Corporation in the first quarter of 2015 and did not have a significant impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as a new Accounting Standards Codification (ASC) Topic ASC 606. This ASU is effective for the Corporation beginning in the first quarter of 2018, with early adoption permitted from the first quarter of 2017. The Corporation is currently assessing the impact of the ASU on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which makes changes to both the variable interest model and the voting model, affecting all reporting entities involved with limited partnerships or similar entities. This ASU is effective for the Corporation beginning in the first quarter of 2016, with early adoption permitted. The Corporation is currently assessing the impact of the ASU on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This ASU is effective for the Corporation beginning in the first quarter of 2016, with early adoption permitted. The Corporation is currently assessing the impact of the ASU on its consolidated financial statements.

PART I - FINANCIAL INFORMATION (CONT’D)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2. Discontinued Operations

The results of operations for the Corporation’s divested retail business and energy trading joint venture, HETCO, have been reported as discontinued operations in the Statement of Consolidated Income for all periods presented. The Corporation’s interest in HETCO was sold in February 2015 and the retail business was sold in September 2014.

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

	Three Months Ended
	March 31,
	2015			2014
	(In millions)
Sales and other operating revenues	$	14		$	3,167
Income (loss) from discontinued operations before income taxes	$	(24	)	$	73
Current tax provision (benefit)		—			—
Deferred tax provision (benefit)		(11	)		16
Provision (benefit) for income taxes		(11	)		16
Income (loss) from discontinued operations, net of income taxes	$	(13	)	$	57
Less: Net income (loss) attributable to noncontrolling interests		—			35
Income (loss) from discontinued operations attributable to Hess Corporation	$	(13	)	$	22

At December 31, 2014, HETCO assets totaling $1,035 million, which consisted of accounts receivable and other long‑lived assets, were reported in Other current assets, and liabilities totaling $797 million, which consisted primarily of accounts payable, were reported in Accrued liabilities in the Consolidated Balance Sheet.

3. Inventories

Inventories consisted of the following:

	March 31,		December 31,
	2015		2014
	(In millions)
Crude oil and natural gas liquids	$	284	$	246
Materials and supplies		262		281
Total inventories	$	546	$	527

4. 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, 2015 (in millions):

Balance at January 1	$	1,416
Additions to capitalized exploratory well costs pending the determination of proved reserves		160
Reclassifications to wells, facilities and equipment based on the determination of proved reserves		(70	)
Capitalized exploratory well costs charged to expense		(120	)
Balance at March 31, 2015	$	1,386

Capitalized exploratory well costs charged to expense in the preceding table excludes $49 million of exploratory well costs which were incurred and subsequently expensed in 2015. First quarter 2015 results included an after-tax charge of $67 million ($159 million pre-tax) to write-off a previously capitalized exploration well and related leasehold costs associated with the Dinarta Block in the Kurdistan Region of Iraq following the decision of the Corporation and its partner in March 2015 to cease further drilling activity in the region. Capitalized exploratory well costs greater than one year old after completion of drilling were $1,217 million at March 31, 2015. Approximately 70% of the capitalized well costs in excess of one year relates to Block WA-390-P, offshore Western Australia, where development planning and commercial activities for the Corporation’s natural gas discoveries are ongoing. In December 2014, the Corporation executed a non-binding letter of intent with the North West Shelf (NWS), a third party joint venture with existing natural gas processing and liquefaction

PART I - FINANCIAL INFORMATION (CONT’D)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

facilities. Successful execution of binding agreements with NWS is necessary before the Corporation can execute a gas sales agreement and sanction development of the project. Approximately 30% of the capitalized well costs in excess of one year relates to offshore Ghana where the Corporation has drilled seven successful exploration wells. Appraisal plans for the seven wells on the block were submitted to the Ghanaian government in June 2013 for approval. Four of the plans were approved and discussions continue with the government on the three remaining appraisal plans. In the third quarter of 2014, the Corporation completed a three well appraisal program in Ghana. Well results continue to be evaluated and development planning is progressing.

5. Debt

In January 2015, the Corporation entered into a new $4 billion syndicated revolving credit facility that expires in January 2020. The new facility, which replaced a $4 billion facility that was scheduled to expire in April 2016, can be used for borrowings and letters of credit. Based on the Corporation’s credit rating as of March 31, 2015, borrowings on the facility will generally bear interest at 1.075% above the London Interbank Offered Rate with the facility fee amounting to 0.175% per annum. 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 secured debt are substantially similar to the previous facility. At March 31, 2015, there were no borrowings outstanding or letters of credit issued against the syndicated revolving credit facility.

6. Exit and Severance Costs

During the three months ended March 31, 2015 and 2014, the Corporation recorded exit related costs of $6 million and $20 million, respectively. In addition, the Corporation incurred severance totaling $33 million in the first quarter of 2014, primarily related to the Corporation’s divestiture program announced in March 2013. During the first quarter of 2015, payments for accrued severance costs amounted to $28 million.

7. Retirement Plans

Components of net periodic pension cost consisted of the following:

	Three Months Ended
	March 31,
	2015			2014
	(In millions)
Service cost	$	17		$	12
Interest cost		26			25
Expected return on plan assets		(42	)		(40	)
Amortization of unrecognized net actuarial losses		19			8
Pension expense	$	20		$	5

In 2015, the Corporation expects to contribute approximately $55 million to its funded pension plans. Through March 31, 2015, the Corporation contributed approximately $13 million of this amount.

PART I - FINANCIAL INFORMATION (CONT’D)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

8. Weighted Average Common Shares

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

	Three Months Ended
	March 31,
	2015			2014
	(In millions,
	except per share amounts)
Net income (loss) from continuing operations attributable to Hess Corporation	$	(376	)	$	364
Income (loss) from discontinued operations, net of income taxes		(13	)		57
Less: Net income (loss) attributable to noncontrolling interests		—			35
Net income (loss) from discontinued operations attributable to Hess Corporation		(13	)		22
Net income (loss) attributable to Hess Corporation	$	(389	)	$	386

Weighted average common shares outstanding:
Basic		283.5			318.1
Effect of dilutive securities
Restricted common stock		—			1.5
Stock options		—			1.8
Performance share units		—			1.2
Diluted		283.5			322.6

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