UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

For the quarter ended March 31, 2018

or

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  ☒    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  ☒    No  ☐

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

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

At March 31, 2018, there were 308,055,101 shares of Common Stock outstanding.

 

 

 

 

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HESS CORPORATION

Form 10-Q

TABLE OF CONTENTS

 

 

 

Unless the context indicates otherwise, references to “Hess”, the “Corporation”, “Registrant”, “we”, “us”, “our” and “its” refer to the consolidated business operations of Hess Corporation and its subsidiaries.

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PART I - FINANCIAL INFORMATION

 

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

See accompanying Notes to Consolidated Financial Statements.

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PART I - FINANCIAL INFORMATION (CONT’D.)

 

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)

 

See accompanying Notes to Consolidated Financial Statements.

 

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PART I - FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

 

See accompanying Notes to Consolidated Financial Statements.

 

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PART I - FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)

 

See accompanying Notes to Consolidated Financial Statements.

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PART I - FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED EQUITY (UNAUDITED)

 

See accompanying Notes to Consolidated Financial Statements.

 

 

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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 our consolidated financial position at March 31, 2018 and December 31, 2017, the consolidated results of operations for the three months ended March 31, 2018 and 2017, and consolidated cash flows for the three months ended March 31, 2018 and 2017.  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 generally accepted accounting principles (GAAP) in the United States 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, 2017.

In the first quarter of 2018, we adopted Accounting Standards Codification (ASC) Topic, ASC 606, Revenue from Contracts with Customers, using the modified retrospective method.  The adoption of this standard did not affect the timing of revenue recognition for our uncompleted contracts at January 1, 2018, and as a result, no cumulative effect adjustment to Retained earnings was recognized.  Accounts receivables from contracts with customers is presented separately in the Consolidated Balance Sheet with the prior year balance recast to conform to the current period presentation.  In addition, as the adoption of ASC 606 did not affect previous conclusions regarding our involvement as a principal versus agent in contracts with customers, there were no changes in presentation to the Statement of Consolidated Income.

In the first quarter of 2018, we adopted Accounting Standards Update (ASU) 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  This ASU prohibits the capitalization of the non-service cost components of net periodic benefit cost in connection with the production or construction of an asset.  This provision will be applied prospectively effective January 1, 2018.  The provision requiring that non-service cost components of net periodic benefit cost to be presented separately from the service cost component in the Statements of Consolidated Income was applied retrospectively.  We elected the practical expedient allowing the use of the amounts previously disclosed in the notes to our consolidated financial statements as the basis for applying this provision retrospectively as the capitalization of the non-service cost components of net periodic benefit cost was not material during the comparative periods.  This resulted in a reclassification of $2 million of expense for the first quarter of 2017 from Operating costs and expenses, and General and administrative expenses to Other, net.

In the first quarter of 2018, we adopted ASU 2017-12, Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities.  This ASU makes certain targeted improvements to simplify the application of the existing hedge accounting guidance.  The adoption of this ASU resulted in an increase to Retained earnings and a decrease in Accumulated other comprehensive income (loss) of $1 million to remove the cumulative effect of hedging ineffectiveness previously recognized in earnings for contracts designated as hedging instruments that were outstanding at January 1, 2018.  

In the first quarter of 2018, we adopted ASU 2016-18, Statement of Cash Flows (Topic 230):  Restricted Cash (a consensus of the FASB Emerging Issues Task Force).  This ASU requires that the total change in cash and cash equivalents and restricted cash be reflected on the statement of cash flows.  A reconciliation to the balance sheet is also required when cash and cash equivalents and restricted cash are not separately presented on the balance sheet, or are presented in more than one line item on the balance sheet.  The adoption of this ASU did not have a material impact on our Consolidated Statements of Cash Flows.

In the first quarter of 2018, we adopted ASU 2016-15, Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force).  This ASU is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.  The guidance addresses eight specific classification issues for which current guidance is either unclear or is non-specific.  The requirement that fees paid to third-parties and premiums incurred in connection with the repayment of debt be classified as financing cash outflows is among the classification issues addressed by this ASU.  The adoption of this ASU did not have a material impact on our Consolidated Statements of Cash Flows.

To conform with the Statement of Consolidated Income presentation in our December 31, 2017 Form 10-K, we have revised the presentation of Sales and other operating revenues and Marketing, including purchased oil and gas for the three months ended March 31, 2017 associated with the recovery of certain natural gas processing costs from third parties, by reducing each by $19 million.  This revision did not impact net income, our Consolidated Balance Sheet, Statement of Consolidated Comprehensive Income, Statement of Consolidated Cash Flows, nor Statement of Consolidated

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PART I - FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Equity.  Amounts reported as Sales and other operating revenue and Marketing, including purchased oil and gas (formerly Costs of products sold) in our March 31, 2017 Form 10-Q were $1,277 million and $219 million, respectively.

New Accounting Pronouncements:  In February 2016, the FASB issued ASU 2016-02, Leases, as a new Accounting Standards Codification (ASC) Topic, ASC 842.  The new standard will require assets and liabilities to be reported on the Consolidated Balance Sheet for all leases with lease terms greater than one year, including leases currently treated as operating leases under the existing standard.  This ASU is effective for us beginning in the first quarter of 2019, with early adoption permitted.  We have developed and are executing a project plan for the implementation of ASC 842 in the first quarter of 2019.  We are progressing our assessment of existing leases and evaluating our disclosure processes with reference to the requirements of the standard.  We continue to assess the impact of the ASU on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses.  This ASU makes changes to the impairment model for trade receivables, net investments in leases, debt securities, loans and certain other instruments.  The standard requires the use of a forward-looking "expected loss" model compared to the current "incurred loss" model.  This ASU is effective for us beginning in the first quarter of 2020, with early adoption permitted beginning in the first quarter of 2019.  We are currently assessing the impact of the ASU on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other – Simplifying the Test for Goodwill Impairment.  This ASU modifies the concept of goodwill impairment from a condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of the reporting unit exceeds its fair value.  Thus, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value.  The impairment charge would be limited by the amount of goodwill allocated to the reporting unit.  This ASU removes the requirement to determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination.  This ASU is effective for us beginning in the first quarter of 2020, with early adoption permitted.  We are currently assessing the impact of the ASU on our consolidated financial statements.

2.  Revenue

In the first quarter of 2018, revenue from contracts with customers on a disaggregated basis was as follows:

 

Exploration and Production

The E&P segment recognizes revenue from the sale of crude oil, natural gas liquids (NGLs), and natural gas as performance obligations under contracts with customers are satisfied.  Our responsibilities to deliver each unit of quantity of crude oil, NGL, and natural gas under these contracts represent separate, distinct performance obligations.  These performance obligations are satisfied at the point in time control of each unit of quantity transfers to the customer.  Pricing is determined subsequent to contract inception, but prior to the transfer of control or shortly thereafter if required per contractual terms, with reference to a particular market or pricing index, plus or minus adjustments reflecting quality or location differentials.  As a result, the entire transaction price at contract inception is variable.  We do not apply a constraint to the transaction price at contract inception.

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PART I - FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Our responsibility to stand-ready to provide a minimum volume over each commitment period under long-term international gas contracts with take-or-pay provisions represent separate, distinct performance obligations.  Shortfall payments received from customers that occur when volumes purchased are below the minimum volume commitment under contracts with customer make-up rights are deferred upon receipt as a contract liability.  Revenue is recognized at the earlier of when we deliver the make-up volumes in subsequent periods or when it becomes remote that the customer will exercise their make-up rights.  Price discounts owed against future deliveries of international natural gas due to delivery of natural gas volumes below minimum volume commitments are recognized as reductions to revenue in the commitment period when the shortfall occurs.

Certain crude oil, NGL, and natural gas volumes are purchased by Hess from third-parties, including working interest partners and royalty owners in certain Hess-operated properties, before they are sold to customers.  Where control over the crude oil, NGLs, or natural gas transfers to Hess before the volumes are transferred to the customer, revenue and the associated cost of purchased volumes are presented on a gross basis in the Statement of Consolidated Income.  Where control of crude oil, NGLs, or natural gas is not transferred to Hess, revenue is presented net of the associated cost of purchased volumes.

Contract types

The following is a summary of contract types for our E&P segment:

Crude oil, natural gas liquids, and natural gas – U.S.:  Contracts with customers for the sale of U.S. crude oil, NGLs, and natural gas primarily include those contracts that involve the short-term sale of volumes during a specified period, and those contracts that automatically renew on a periodic basis until either party cancels.  We have certain long-term contracts with customers for the sale of U.S. natural gas and NGLs that have remaining durations of less than ten years.  Contracts may specify a fixed volume for delivery subject to tolerance thresholds, or may specify a percentage of production to be delivered from a particular location.  Pricing is determined with reference to a particular market or pricing index, plus or minus adjustments reflecting quality or location differentials, prior to transfer of control.

Crude oil – International:  Contracts with customers for the sale of international crude