e10vq
Table of Contents

 
 
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 June 30, 2009
or
     
o   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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (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 o No þ
At June 30, 2009, there were 327,052,233 shares of Common Stock outstanding.
 
 

 


TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


Table of Contents

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)
(In millions, except per share data)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
REVENUES AND NON-OPERATING INCOME
                               
Sales (excluding excise taxes) and other operating revenues
  $ 6,751     $ 11,711     $ 13,666     $ 22,358  
Equity in income (loss) of HOVENSA L.L.C.
    (75 )     (19 )     (116 )     (29 )
Other, net
    79       37       77       100  
 
                       
Total revenues and non-operating income
    6,755       11,729       13,627       22,429  
 
                       
COSTS AND EXPENSES
                               
Cost of products sold (excluding items shown separately below)
    4,705       8,337       9,887       16,042  
Production expenses
    444       494       853       918  
Marketing expenses
    245       267       502       500  
Exploration expenses, including dry holes and lease impairment
    312       158       505       310  
Other operating expenses
    43       47       91       92  
General and administrative expenses
    136       156       296       308  
Interest expense
    95       65       172       132  
Depreciation, depletion and amortization
    558       482       1,044       934  
 
                       
Total costs and expenses
    6,538       10,006       13,350       19,236  
 
                       
INCOME BEFORE INCOME TAXES
    217       1,723       277       3,193  
Provision for income taxes
    115       812       192       1,530  
 
                       
NET INCOME
    102       911     85       1,663  
Less: Net income attributable to noncontrolling interests
    2       11       44       4  
 
                       
NET INCOME ATTRIBUTABLE TO HESS CORPORATION
  $ 100     $ 900     $ 41     $ 1,659  
 
                       
NET INCOME PER SHARE ATTRIBUTABLE TO HESS CORPORATION
                               
BASIC
  $ .31     $ 2.81     $ .13     $ 5.20  
DILUTED
    .31       2.76       .13       5.11  
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)
    325.8       326.2       325.7       325.0  
COMMON STOCK DIVIDENDS PER SHARE
  $ .10     $ .10     $ .20     $ .20  
See accompanying notes to consolidated financial statements.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In millions of dollars, thousands of shares)
                 
    June 30,     December 31,  
    2009     2008  
ASSETS
CURRENT ASSETS
               
Cash and cash equivalents
  $ 1,063     $ 908  
Accounts receivable
    4,097       4,297  
Inventories
    1,358       1,308  
Other current assets
    990       819  
 
           
Total current assets
    7,508       7,332  
 
           
INVESTMENTS IN AFFILIATES
               
HOVENSA L.L.C.
    804       919  
Other
    209       208  
 
           
Total investments in affiliates
    1,013       1,127  
 
           
PROPERTY, PLANT AND EQUIPMENT
               
Total — at cost
    28,387       27,437  
Less reserves for depreciation, depletion, amortization and lease impairment
    11,966       11,166  
 
           
Property, plant and equipment — net
    16,421       16,271  
 
           
GOODWILL
    1,225       1,225  
DEFERRED INCOME TAXES
    2,413       2,292  
OTHER ASSETS
    336       342  
 
           
TOTAL ASSETS
  $ 28,916     $ 28,589  
 
           
 
               
LIABILITIES AND EQUITY
 
               
CURRENT LIABILITIES
               
Accounts payable
  $ 5,331     $ 5,045  
Accrued liabilities
    1,679       1,905  
Taxes payable
    468       637  
Current maturities of long-term debt
    135       143  
 
           
Total current liabilities
    7,613       7,730  
 
           
LONG-TERM DEBT
    4,178       3,812  
DEFERRED INCOME TAXES
    2,235       2,241  
ASSET RETIREMENT OBLIGATIONS
    1,249       1,164  
OTHER LIABILITIES
    1,263       1,251  
 
           
Total liabilities
    16,538       16,198  
 
           
EQUITY
               
Hess Corporation Stockholders’ Equity
               
Common stock, par value $1.00
               
Authorized — 600,000 shares
               
Issued 327,052 shares at June 30, 2009; 326,133 shares at December 31, 2008
    327       326  
Capital in excess of par value
    2,415       2,347  
Retained earnings
    11,617       11,642  
Accumulated other comprehensive income (loss)
    (2,100 )     (2,008 )
 
           
Total Hess Corporation stockholders’ equity
    12,259       12,307  
Noncontrolling interests
    119       84  
 
           
Total equity
    12,378       12,391  
 
           
TOTAL LIABILITIES AND EQUITY
  $ 28,916     $ 28,589  
 
           
See accompanying notes to consolidated financial statements.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In millions of dollars)
                 
    Six Months Ended  
    June 30,  
    2009     2008  
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net income
  $ 85     $ 1,663  
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation, depletion and amortization
    1,044       934  
Exploratory dry hole costs and lease impairment
    304       105  
Benefit for deferred income taxes
    (304 )     (112 )
Equity in (income) loss of HOVENSA L.L.C., net of distributions
    116       79  
Changes in operating assets and liabilities and other
    (4 )     246  
 
           
Net cash provided by operating activities
    1,241       2,915  
 
           
CASH FLOWS FROM INVESTING ACTIVITIES
               
Capital expenditures
    (1,389 )     (2,005 )
Other, net
    32       39  
 
           
Net cash used in investing activities
    (1,357 )     (1,966 )
 
           
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net repayments of debt with maturities of 90 days or less
    (850 )     (3 )
Debt with maturities of greater than 90 days
               
Borrowings
    1,247        
Repayments
    (39 )     (32 )
Cash dividends paid
    (98 )     (97 )
Distributions to noncontrolling interests
    (1 )     (48 )
Employee stock options exercised, including income tax benefits
    12       103  
 
           
Net cash provided by (used in) financing activities
    271       (77 )
 
           
NET INCREASE IN CASH AND CASH EQUIVALENTS
    155       872  
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    908       607  
 
           
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 1,063     $ 1,479  
 
           
See accompanying notes to consolidated financial statements.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.   Basis of Presentation
     The financial statements included in this report reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of Hess Corporation’s (the Corporation) consolidated financial position at June 30, 2009 and December 31, 2008 and the consolidated results of operations for the three and six-month periods ended June 30, 2009 and 2008 and the consolidated cash flows for the six month periods ended June 30, 2009 and 2008. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.
     The financial statements were prepared in accordance with the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain notes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) have been condensed or omitted from these interim financial statements. These statements, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Corporation’s Form 10-K for the year ended December 31, 2008.
     Effective January 1, 2009, the Corporation adopted Financial Accounting Standards Board (FASB) Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (FAS 160), which changes the accounting for and reporting of noncontrolling interests in a consolidated subsidiary. As required, the Corporation retrospectively applied the presentation and disclosure requirements of FAS 160. At June 30, 2009 and December 31, 2008 noncontrolling interests of $119 million and $84 million, respectively, have been classified as a component of equity. Previously the noncontrolling interests had been classified in other liabilities. Net income attributable to the noncontrolling interests of $2 million for the three months ended and $44 million for the six months ended June 30, 2009 and $11 million for the three months ended and $4 million for the six months ended June 30, 2008 are included in net income. Certain amounts in the consolidated financial statements and footnotes have been reclassified to conform with the presentation requirements of
FAS 160.
     Effective January 1, 2009, the Corporation also adopted FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, which expands the disclosure requirements for an entity’s use of derivative instruments. See Note 8, Derivative Instruments, Hedging, and Trading Activities, for these disclosures.
     The Corporation adopted FASB Staff Position FAS No. 157-2, Effective Date of FASB Statement No. 157, effective January 1, 2009, which requires the application of the fair value measurement and disclosure provisions of FAS 157 to nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis. The impact of adoption was not material to the Corporation’s consolidated financial statements.
     Effective June 30, 2009, the Corporation adopted FASB Statement No. 165 (FAS 165), Subsequent Events. FAS 165 provides guidance on the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of FAS 165 did not impact the Corporation’s existing practice of evaluating subsequent events through the date the financial statements are filed with the SEC. These financial statements were evaluated for subsequent events through August 7, 2009.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
     In June 2009, the FASB issued Statements No. 166, Accounting for Transfers of Financial Assets- an amendment of FASB Statement No. 140 (FAS 166) and No. 167, Amendments to FASB Interpretation No. FIN 46(R) (FAS 167). FAS 166 eliminates the concept of a qualifying special-purpose entity, which did not require consolidation under existing GAAP, and limits the circumstances in which transferred financial assets should be derecognized. FAS 167 requires additional analysis of variable interest entities to determine if consolidation is necessary. The Corporation is currently evaluating the impact of FAS 166 and FAS 167 on its financial statements and, as required, will adopt the provisions of these standards effective January 1, 2010.
2.   Inventories
     Inventories consist of the following (in millions):
                 
    June 30,     December 31,  
    2009     2008  
Crude oil and other charge stocks
  $ 396     $ 383  
Refined products and natural gas
    1,193       988  
Less: LIFO adjustment
    (664 )     (500 )
 
           
 
    925       871  
Merchandise, materials and supplies
    433       437  
 
           
Total inventories
  $ 1,358     $ 1,308  
 
           
3.   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):
                 
    June 30,     December 31,  
    2009     2008  
Summarized balance sheet
               
Cash and short-term investments
  $ 201     $ 75  
Other current assets
    683       664  
Net fixed assets
    2,089       2,136  
Other assets
    53       58  
Current liabilities
    (996 )     (679 )
Long-term debt
    (356 )     (356 )
Deferred liabilities and credits
    (107 )     (104 )
 
           
Members’ equity
  $ 1,567     $ 1,794  
 
           
                                 
    Three months     Six months  
    ended June 30,     ended June 30,  
    2009     2008     2009     2008  
Summarized income statement
                               
Total revenues
  $ 2,640     $ 5,446     $ 4,663     $ 9,757  
Cost and expenses
    (2,787 )     (5,482 )     (4,891 )     (9,811 )
 
                       
Net loss
  $ (147 )   $ (36 )   $ (228 )   $ (54 )
 
                       
Hess Corporation’s share, before income taxes
  $ (75 )   $ (19 )   $ (116 )   $ (29 )
 
                       
     During the first half of 2008, the Corporation received a cash distribution of $50 million from HOVENSA.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4.   Capitalized Exploratory Well Costs
     The following table discloses the net changes in capitalized exploratory well costs pending determination of proved reserves for the six months ended June 30, 2009 (in millions):
         
Beginning balance at January 1
  $ 1,094  
Additions to capitalized exploratory well costs pending the determination of proved reserves
    162  
Reclassifications to wells, facilities, and equipment based on the determination of proved reserves
    (10 )
Capitalized exploratory wells charged to expense
    (54 )
 
     
Ending balance at June 30
  $ 1,192  
 
     
     The preceding table excludes costs related to exploratory dry holes of $131 million which were incurred and subsequently expensed in 2009. Capitalized exploratory well costs greater than one year old after completion of drilling were $665 million as of June 30, 2009 and $381 million as of December 31, 2008. This increase is primarily related to the Pony and Tubular Bells projects in the deepwater Gulf of Mexico, where development options are being evaluated.
5.   Long-Term Debt
     In February 2009, the Corporation issued $250 million of 5 year senior unsecured notes with a coupon of 7% and $1 billion of 10 year senior unsecured notes with a coupon of 8.125%. The majority of the proceeds were used to repay revolving credit debt and outstanding borrowings on other credit facilities.
6.   Foreign Currency
     Pre-tax foreign currency gains amounted to the following (in millions):
                                 
    Three months   Six months
    ended June 30,   ended June 30,
    2009   2008   2009   2008
Foreign currency gains
      35       11     31       44
     The pre-tax amount of foreign currency gains is included in other, net within revenues and non-operating income.
7.   Retirement Plans
     Components of net periodic pension cost consisted of the following (in millions):
                                 
    Three months   Six months
    ended June 30,   ended June 30,
    2009   2008   2009   2008
Service cost
      10       10       20       20
Interest cost
      20       20       40       40
Expected return on plan assets
      (15 )     (20 )     (30 )     (40 )
Amortization of net loss
      14       3       28       6  
 
                 
Pension expense
      29       13       58       26  
 
               
     In 2009, the Corporation expects to contribute approximately $100 million to its pension plans. Through June 30, 2009, the Corporation had contributed $43 million to its pension plans.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8.   Derivative Instruments, Hedging, and Trading Activities
     The Corporation utilizes derivative instruments for both non-trading and trading activities. In non-trading activities, the Corporation uses futures, forwards, options and swaps individually or in combination, to mitigate its exposure to fluctuations in prices of crude oil, natural gas, refined products and electricity, and changes in foreign currency exchange rates. In trading activities, the Corporation, principally through a consolidated partnership (in which the Corporation has a 50% voting interest), trades energy commodities and energy derivatives, including futures, forwards, options and swaps, based on expectations of future market conditions. The following information includes 100% of the trading partnership’s accounts.
     The Corporation maintains a control environment under the direction of its chief risk officer and through its corporate risk policy, which the Corporation’s senior management has approved. Controls include volumetric, term and value-at-risk limits. Risk limits are monitored daily and exceptions are reported to business units and to senior management. The Corporation’s risk management department also performs independent verifications of sources of fair values and validations of valuation models. These controls apply to all of the Corporation’s non-trading and trading activities, including the consolidated trading partnership.
     The table below shows the total volume of the Corporation’s trading and non-trading derivative instruments outstanding at June 30, 2009:
         
    Volume*
Commodity Contracts
       
Crude oil, refined products, and natural gas liquids (millions of barrels)
      2,149
Natural gas (millions of mcf)
      9,282
Electricity (millions of megawatt hours)
      191
Other Contracts
       
Foreign exchange (millions of U.S. dollars)
      2,116
 
*   Gross notional amounts represent both long and short positions, including long and short positions that offset in a closed position that has not reached contractual maturity. Gross notional amounts do not quantify risk or represent assets or liabilities of the Corporation, but are used in the calculation of cash settlements under the contracts.
     The Corporation records all derivative instruments on the balance sheet at fair value (see Note 9, Fair Value Measurements). The table below reflects the gross and net fair values of the Corporation’s derivative instruments as of June 30, 2009 (in millions):
                 
    Accounts     Accounts  
    Receivable     Payable  
Derivative contracts designated as hedging instruments
               
Commodity
  $ 1,118     $ (1,940 )
 
           
 
               
Derivative contracts not designated as hedging instruments*
               
Commodity
    11,881       (13,106 )
Foreign exchange
    78       (39 )
Other
    12       (13 )
 
           
Total derivative contracts not designated as hedging instruments
    11,971       (13,158 )
 
           
 
               
Gross fair value of derivative contracts
    13,089       (15,098 )
Master netting arrangements
    (11,270 )     11,270  
Cash collateral (received) posted
    (281 )     94  
 
           
Net fair value of derivative contracts
  $ 1,538     $ (3,734 )
 
           
 
*   Includes trading derivatives and derivatives used for risk management.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
     The Corporation generally enters into master netting arrangements to mitigate counterparty credit risk. Master netting arrangements are standardized contracts that govern all specified transactions with the same counterparty and allow the Corporation to terminate all contracts upon occurrence of certain events, such as a counterparty’s default or bankruptcy. Because these arrangements provide the right of offset, and the Corporation’s intent and practice is to offset amounts in the case of contract terminations, the Corporation records fair value on a net basis in accordance with FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts.
Non-trading activities
     Cash Flow Hedges: The Corporation uses commodity contracts to hedge variability of expected future cash flows and forecasted transactions (cash flow hedges). At June 30, 2009, the Corporation used cash flow hedges principally to fix the cost of supply in its energy marketing business. The length of time over which the Corporation hedges exposure to variability in future cash flows is predominantly two years or less. For contracts outstanding at June 30, 2009, the maximum length of time was five years.
     The Corporation records the effective portion of changes in the fair value of cash flow hedges as a component of other comprehensive income. Amounts recorded in accumulated other comprehensive income are reclassified into cost of products sold in the same period that the hedged item is recognized in earnings. The ineffective portion of changes in the fair value of cash flow hedges is recognized immediately in cost of products sold.
     The Corporation may use futures and swaps to hedge crude oil and natural gas production in its Exploration and Production business. In October 2008, the Corporation closed its Brent crude oil cash flow hedges by entering into offsetting contracts with the same counterparty, covering 24,000 barrels per day from 2009 through 2012. As a result, the Corporation no longer accounts for these contracts as cash flow hedges. Because the underlying cash flows from the originally hedged production are still probable, the deferred losses within accumulated other comprehensive income as of the date the contracts were closed will be recorded in sales and other operating revenues as the contracts mature. There were no open hedges of crude oil or natural gas production at June 30, 2009.
     At June 30, 2009, the after-tax deferred losses in accumulated other comprehensive income relating to cash flow hedges were $1,591 million. The Corporation estimates that approximately $715 million of this amount will be reclassified into earnings over the next twelve months.
     Other Risk Management Derivatives: The Corporation mitigates certain risks in its energy marketing business using commodity contracts that it does not designate as hedges. Changes in fair value of the commodity contracts, which include forward purchases and sales of energy marketing products, are recognized currently in earnings. Revenues from the sales contracts are recognized in sales and other operating revenues and supply contract purchases are recognized in cost of products sold. The Corporation also uses foreign exchange contracts that it does not designate as hedges with the intent to reduce its exposure to fluctuations in foreign exchange rates. Changes in the fair value of the foreign exchange contracts are recognized currently in other non-operating income. Net pretax gains on these derivative contracts amounted to the following (in millions):
                 
    Three months     Six months  
    ended June 30,     ended June 30,  
    2009     2009  
Commodity
  $ 7     $ 89  
Foreign exchange
    110       107  
 
           
Total
  $ 117     $ 196  
 
           

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Trading Activities
     In trading activities, the Corporation is primarily exposed to changes in crude oil, natural gas, and refined product prices. Pre-tax gains (losses) recorded in sales and other operating revenues from trading activities amounted to the following (in millions):
                 
    Three months     Six months  
    ended June 30,     ended June 30,  
    2009     2009  
Commodity
  $ 10     $ 100  
Foreign exchange
    23       30  
Other
    7       15  
 
           
Total
  $ 40     $ 145  
 
           
Credit Risk
     The Corporation is exposed to credit risks that may at times be concentrated with certain counterparties or groups of counterparties. Accounts receivable are generated from a diverse domestic and international customer base. The Corporation reduces its risk related to certain counterparties by using master netting arrangements and requiring collateral, generally cash or letters of credit. The Corporation records the cash collateral received or posted as an offset of the fair value of derivatives executed with the same counterparty.
     At June 30, 2009, the Corporation had a total of $4,290 million of outstanding letters of credit, primarily issued to satisfy margin and collateral requirements. Certain of the Corporation’s agreements also contain contingent collateral provisions that could require the Corporation to post additional collateral if the Corporation’s credit rating declines. As of June 30, 2009, the net liability related to derivatives with contingent collateral provisions was approximately $2,960 million before cash collateral posted of approximately $65 million. At June 30, 2009, all three major credit rating agencies that rate the Corporation’s debt had assigned an investment grade rating. If two of the three agencies were to downgrade the Corporation’s rating to below investment grade, the Corporation would be required as of June 30, 2009 to post additional collateral of approximately $334 million.

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PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9.   Fair Value Measurements
     The Corporation measures fair value in accordance with the provisions of FASB Statement No. 157, Fair Value Measurements, (FAS 157). FAS 157 establishes a hierarchy for the inputs used to measure fair value based on the source of the input, which generally range from quoted prices for identical instruments in a principal trading market (Level 1) to estimates determined using related market data (Level 3). Multiple inputs may be used to measure fair value, however, the level of fair value for each financial asset or liability presented below is based on the lowest significant input level within this fair value hierarchy. The following table provides the fair value of the Corporation’s financial assets and (liabilities) based on this hierarchy (in millions):
                                         
                            Collateral and   Balance at
                            counterparty   June 30,
    Level 1   Level 2   Level 3   netting   2009
Supplemental pension plan investments
  $   54   $     $   14   $     $   68
Derivative contracts
                                       
Assets
      160       1,338       468       (428 )     1,538  
Liabilities
      (166 )     (3,112 )     (697 )     241       (3,734 )
     The following table provides changes in financial assets and liabilities that are measured at fair value based on Level 3 inputs (in millions):
                 
    Three months     Six months  
    ended June 30,     ended June 30,  
    2009     2009  
Balance at beginning of period
  $ (165 )   $ 149  
Unrealized gains (losses)
               
Included in earnings
    (12 )     50  
Included in other comprehensive income (loss)
    (19 )     (224 )
Purchases, sales or other settlements during the period
    16       16  
Net transfers in to (out of) Level 3
    (35 )     (206 )
 
           
Balance at end of period
  $ (215 )   $ (215 )
 
           
 
     The carrying amounts of the Corporation’s financial instruments generally approximate their fair values at June 30, 2009 except fixed rate long term debt, which had a carrying value of $4,313 million and a fair value of $4,611 million.

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PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10.   Weighted Average Common Shares
     The weighted average numbers of common shares used in the basic and diluted earnings per share computations are as follows (thousands of shares):
                                 
    Three months   Six months
    ended June 30,   ended June 30,
    2009   2008   2009   2008
Common shares – basic
      323,975       320,936       323,676       319,167
Effect of dilutive securities
                               
Restricted common stock
      986       1,515       1,128       1,945
Stock options
      818       3,192       885       3,343
Convertible preferred stock
            534             534
 
               
Common shares – diluted
      325,779       326,177       325,689       324,989
 
                 
     The Corporation issued 3,050,250 stock options and 1,022,050 shares of restricted stock in the first six months of 2009. The table above excludes the effect of out-of-the-money options on 3,546,000 shares and 4,073,000 shares for the quarter and six months ended June 30, 2009, respectively.
11.   Equity and Comprehensive Income
     The table below summarizes changes in equity (amounts in millions):
                         
    Hess     Non-        
    Stockholders’     Controlling          
    Equity     Interest     Total Equity  
Balance January 1, 2009
  $ 12,307     $ 84     $ 12,391  
 
                 
Net Income
    41       44       85  
Deferred gains (losses) on cash flow hedges, after tax
                       
Effect of hedge losses recognized in income
    419             419  
Net change in fair value of cash flow hedges
    (532 )           (532 )
Change in foreign currency translation adjustments and other
    2       (8 )     (6 )
Change in post retirement plan liabilities, after tax
    19             19  
 
                 
Comprehensive income (loss)
    (51 )     36       (15 )
 
                 
Activity related to restricted common stock awards, net
    27             27  
Employee stock options, including income tax benefits
    42             42  
Cash dividends declared
    (66 )           (66 )
Distributions to non-controlling interests
          (1 )     (1 )
 
                 
Balance June 30, 2009
  $ 12,259     $ 119     $ 12,378  
 
                 
 
                       
Balance January 1, 2008
  $ 9,774     $ 226     $ 10,000  
 
                 
Net Income
    1,659       4       1,663  
Deferred gains (losses) on cash flow hedges, after tax
                       
Effect of hedge losses recognized in income
    187             187  
Net change in fair value of cash flow hedges
    (653 )           (653 )
Change in foreign currency translation adjustments and other
    29       4       33  
Change in post retirement plan liabilities, after tax
    5             5  
 
                 
Comprehensive income (loss)
    1,227       8       1,235  
 
                 
Activity related to restricted common stock awards, net
    32             32  
Employee stock options, including income tax benefits
    130             130  
Cash dividends declared
    (65 )           (65 )
Distributions to non-controlling interests
          (48 )     (48 )
 
                 
Balance June 30, 2008
  $ 11,098     $ 186     $ 11,284  
 
                 
     Comprehensive income was $248 million ($239 million attributable to Hess Corporation) for the three months ended June 30, 2009 and $290 million ($279 million attributable to Hess Corporation) for the three months ended June 30, 2008.

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PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
12.   Segment Information
     The Corporation’s results by operating segment were as follows (in millions):
                                 
    Three months     Six months  
    ended June 30,     ended June 30,  
    2009     2008     2009     2008  
Operating revenues
                               
Exploration and Production
  $ 1,825     $ 3,234     $ 3,027     $ 5,886  
Marketing and Refining
    4,952       8,558       10,693       16,621  
Less: Transfers between affiliates
    (26 )     (81 )     (54 )     (149 )
 
                       
Total*
  $ 6,751     $ 11,711     $ 13,666     $ 22,358  
 
                       
 
                               
Net income (loss) attributable to Hess Corporation
                               
Exploration and Production
  $ 215     $ 1,025     $ 151     $ 1,849  
Marketing and Refining
    (30 )     (52 )     72       (36 )
Corporate, including interest
    (85 )     (73 )     (182 )     (154 )
 
                       
Total
  $ 100     $ 900     $ 41     $ 1,659  
 
                       
 
*   Operating revenues exclude excise and similar taxes of approximately $500 million and $550 million in the second quarter of 2009 and 2008, respectively, and $1,000 million and $1,050 million during the first half of 2009 and 2008, respectively.
     Identifiable assets by operating segment were as follows (in millions):
                 
    June 30,     December 31,  
    2009     2008  
Identifiable assets
               
Exploration and Production
  $ 20,637     $ 19,506  
Marketing and Refining
    6,371       6,680  
Corporate
    1,908       2,403  
 
           
Total
  $ 28,916     $ 28,589  
 
           

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PART I — FINANCIAL INFORMATION (CONT’D.)
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.
Overview
     Hess Corporation (the Corporation) is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. The M&R segment manufactures refined petroleum products and purchases, trades and markets refined petroleum products, natural gas and electricity. The Corporation reported net income of $100 million in the second quarter of 2009, compared with $900 million in the second quarter of 2008.
     Exploration and Production: E&P reported income of $215 million for the second quarter of 2009, compared with income of $1,025 million in the second quarter of 2008. The decrease in earnings mainly reflects significantly lower average oil and gas selling prices.
     In the second quarter of 2009, the Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $49.27 per barrel compared with $104.29 per barrel in the second quarter of 2008. The Corporation’s average worldwide natural gas selling price was $4.56 per thousand cubic feet (mcf) in the second quarter of 2009 compared with $7.81 per mcf in the second quarter of 2008.
     Worldwide crude oil and natural gas production was 407,000 barrels of oil equivalent per day (boepd) in the second quarter of 2009 compared with 393,000 boepd in the same period of 2008. The Corporation now anticipates that its production for the full year of 2009 will average between 390,000 and 400,000 boepd.
The following is an update of Exploration and Production activities during the second quarter of 2009.
    Production increased during the second quarter at the Shenzi Field (Hess 28%) in the deepwater Gulf of Mexico, which commenced production at the end of the first quarter of 2009. Net production averaged 21,000 boepd for the quarter.
 
    In July, the Corporation announced that the Guarani well on the BM-S-22 (Hess 40%) license in the Santos Basin offshore Brazil has been completed and no notice of discovery was filed with the Brazilian government by the field operator. The Corporation’s portion of the well costs was expensed in the second quarter. The next steps are to analyze the significant amount of log and core data gathered from the first two wells, and to plan the location of a third well to further evaluate the BM-S-22 license.
 
    The Corporation commenced a planned 12 well program on permit WA-390-P (Hess 100%) offshore Western Australia designed to further appraise the block.
     Marketing and Refining: M&R reported a loss of $30 million for the second quarter of 2009, compared with a loss of $52 million in the second quarter of 2008, primarily reflecting improved energy marketing and trading results, partially offset by lower refining and retail margins.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Results of Operations
     The after-tax results by major operating activity were as follows (in millions, except per share data):
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Exploration and Production
  $ 215     $ 1,025     $ 151     $ 1,849  
Marketing and Refining
    (30 )     (52 )     72       (36 )
Corporate
    (26 )     (33 )     (75 )     (72 )
Interest expense
    (59 )     (40 )     (107 )     (82 )
 
                       
Net income (loss) attributable to Hess Corporation
  $ 100     $ 900     $ 41     $ 1,659  
 
                       
Net income (loss) per share (diluted)
  $ .31     $ 2.76     $ .13     $ 5.11  
 
                       
Items Affecting Comparability Between Periods
     The following table summarizes, on an after-tax basis, items of income (expense) that are included in net income and affect comparability between periods (amounts in millions). The items in the table below are explained and the pre-tax amounts are shown on pages 17 and 19.
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Exploration and Production
  $ (31 )   $     $ (44 )   $  
Corporate
                (16 )      
 
                       
Total
  $ (31 )   $     $ (60 )   $  
 
                       
     In the discussion that follows, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings. Management believes that after-tax amounts are preferable to pre-tax amounts for explaining variances in earnings, since they show the entire effect of a transaction. After-tax amounts are determined by applying the appropriate income tax rate in each tax jurisdiction to pre-tax amounts.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Results of Operations (continued)
Comparison of Results
Exploration and Production
     Following is a summarized income statement of the Corporation’s E&P operations (in millions):
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Sales and other operating revenues*
  $ 1,699     $ 3,075     $ 2,830     $ 5,682  
Non-operating income
    57       22       65       69  
 
                       
Total revenues and non-operating income
    1,756       3,097       2,895       5,751  
 
                       
Cost and expenses
                               
Production expenses, including related taxes
    444       494       853       918  
Exploration expenses, including dry holes and lease impairment
    312       158       505       310  
General, administrative and other expenses
    61       73       117       136  
Depreciation, depletion and amortization
    538       462       1,003       896  
 
                       
Total costs and expenses
    1,355       1,187       2,478       2,260  
 
                       
Results of operations before income taxes
    401       1,910       417       3,491  
Provision for income taxes
    186       885       266       1,642  
 
                       
Results of operations attributable to Hess Corporation
  $ 215     $ 1,025     $ 151     $ 1,849  
 
                       
 
*   Amounts differ from E&P operating revenues in Note 12 “Segment Information” primarily due to the exclusion of sales of hydrocarbons purchased from unrelated third parties.
After considering the items affecting comparability between periods, the remaining changes in E&P earnings are primarily attributable to changes in selling prices, sales volumes and exploration expenses as discussed below.
Selling prices: Lower average realized selling prices of crude oil and natural gas decreased E&P revenues by approximately $1,860 million and $3,060 million in the second quarter and first half of 2009 compared with the corresponding periods of 2008. The Corporation’s average selling prices were as follows:
                                 
    Three months ended   Six months ended
    June 30,     June 30,  
    2009     2008     2009     2008  
Average selling prices
                               
Crude oil — per barrel (including hedging)
                               
United States
  $ 55.53     $ 120.23     $ 49.56     $ 106.42  
Europe
    47.41       104.98       41.09       93.32  
Africa
    47.16       97.32       40.29       88.44  
Asia and other
    55.84       120.59       51.50       106.28  
Worldwide
    49.27       104.29       42.62       93.75  
 
                               
Crude oil — per barrel (excluding hedging)
                               
United States
  $ 55.53     $ 120.23     $ 49.56     $ 106.42  
Europe
    47.41       104.98       41.09       93.32  
Africa
    57.13       117.49       51.58       105.98  
Asia and other
    55.84       120.59       51.50       106.28  
Worldwide
    54.03       113.79       47.84       101.66  
 
                               
Natural gas liquids — per barrel
                               
United States
  $ 31.03     $ 76.60     $ 30.12     $ 70.71  
Europe
    36.51       92.67       36.61       85.78  
Asia and other
    35.92             35.92        
Worldwide
    32.97       81.52       32.25       74.90  
 
                               

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PART I — FINANCIAL INFORMATION (CONT’D.)
Results of Operations (continued)
                                 
    Three months ended   Six months ended
    June 30,     June 30,  
    2009     2008     2009     2008  
Natural gas — per mcf (including hedging)
                               
United States
  $ 3.26     $ 11.00     $ 3.61     $ 9.69  
Europe
    4.53       10.33       5.56       9.61  
Asia and other
    4.82       5.23       4.76       5.12  
Worldwide
    4.56       7.81       4.82       7.43  
 
                               
Natural gas — per mcf (excluding hedging)
                               
United States
  $ 3.26     $ 11.00     $ 3.61     $ 9.69  
Europe
    4.53       10.84       5.56       9.90  
Asia and other
    4.82       5.23       4.76       5.12  
Worldwide
    4.56       8.01       4.82       7.55  
     In October 2008, the Corporation closed its Brent crude oil cash flow hedges by entering into offsetting contracts with the same counterparty, covering 24,000 barrels per day from 2009 through 2012. The deferred after tax loss as of the date the hedge positions were closed will be recorded in earnings as the contracts mature. The estimated annual after-tax loss from the closed positions will be approximately $335 million from 2009 through 2012. Crude oil hedges reduced E&P earnings by $83 million and $165 million in the second quarter and first half of 2009 ($133 million and $264 million before income taxes). Crude oil and natural gas hedges reduced E&P earnings by $144 million and $239 million in the second quarter and first half of 2008 ($234 million and $386 million before income taxes).
Sales and production volumes: The Corporation’s crude oil and natural gas production was 407,000 boepd in the second quarter of 2009 compared with 393,000 boepd in the same period of 2008. Production in the first half of 2009 was 398,000 boepd compared with 392,000 boepd for the same period in 2008. The Corporation anticipates that its full year production will average between 390,000 and 400,000 boepd.
The Corporation’s net daily worldwide production by region was as follows (in thousands):
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Crude oil (barrels per day)
                               
United States
    58       36       45       36  
Europe
    76       83       82       83  
Africa
    124       128       125       123  
Asia and other
    16       12       16       15  
 
                               
Total
    274       259       268       257  
 
                               
 
                               
Natural gas liquids (barrels per day)
                               
United States
    10       11       10       11  
Europe
    3       4       3       4  
Asia and other
    1                    
 
                               
Total
    14       15       13       15  
 
                               
 
                               
Natural gas (mcf per day)
                               
United States
    92       83       85       88  
Europe
    160       267       170       282  
Asia and other
    459       364       449       353  
 
                               
Total
    711       714       704       723  
 
                               
Barrels of oil equivalent per day*
    407       393       398       392  
 
                               
 
*   Natural gas production is converted assuming six mcf equals one barrel.
     United States: Crude oil production in the United States was higher in the second quarter and first half of 2009 compared to the corresponding periods in 2008, primarily due to the Shenzi field which commenced production at the end of the first quarter of 2009.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Results of Operations (continued)
     Europe: Crude oil production in Europe in the second quarter and first half of 2009 was lower than the same periods in 2008, primarily due to an unplanned 75 day shutdown at the Valhall field in Norway and natural decline in the U.K. North Sea, partly offset by increased production in Russia. Natural gas production in the second quarter and first half of 2009 was lower than the same periods in 2008, primarily due to decline at the Atlantic and Cromarty fields in the U.K. North Sea and the shutdown at the Valhall field in Norway.
     Asia and Other: The increase in natural gas production in the second quarter and first half of 2009 compared to the corresponding periods in 2008 was principally due to Phase 2 gas sales from Block A-18 of the Joint Development Area of Malaysia and Thailand (JDA), which commenced in November 2008.
     Sales Volumes: Higher crude oil and natural gas sales volumes increased revenue by approximately $480 million in the second quarter of 2009 and $200 million in the first half of 2009, compared with the corresponding periods of 2008. During the second quarter of 2009, the Corporation’s sales volumes exceeded production volumes which resulted in an increase in second quarter after tax income of approximately $50 million.
Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, decreased by $87 million and $109 million in the second quarter and first half of 2009 compared with the corresponding periods of 2008, excluding the impact of items affecting comparability discussed below. The decrease in expenses reflects lower commodity price-driven production taxes, the cessation of production at two fields in the U.K. North Sea, the favorable impact of foreign exchange rates and cost saving initiatives.
     Depreciation, depletion and amortization expenses increased by $50 million and $55 million in the second quarter and first half of 2009 compared with the corresponding periods of 2008, excluding the impact of items affecting comparability discussed below. The increase was primarily due to production increases in the U.S. and the JDA, partly offset by lower production in Norway and the U.K. North Sea.
     In the second quarter of 2009, after-tax charges of $31 million ($51 million before income taxes) were recorded to reduce the carrying values of production equipment in the U.K. North Sea and materials inventory in Equatorial Guinea and the United States. In the first quarter of 2009, the Corporation recorded an after-tax charge of $13 million ($26 million before income taxes) to reduce the carrying values of two short-lived fields in the U.K. North Sea. The pre-tax amount of the reductions in carrying value of production equipment and the short-lived fields is reflected in depreciation, depletion and amortization and the reduction in carrying values of inventory of $25 million is reflected in production expenses in the statement of consolidated income.
     Excluding the impact of items affecting comparability discussed above, E&P cash operating costs for full year 2009 are expected to be in a range of $14 to $15 per boe and total production unit costs (cash operating costs plus depreciation, depletion, and amortization) are anticipated to be in the range of $27 to $29 per boe.
Exploration expenses: Exploration expenses were higher by $154 million and $195 million in the second quarter and first half of 2009 compared with the same periods in 2008. The increases principally reflect higher dry hole expense and lease impairment.
Income taxes: The effective income tax rate for the six months ended June 30, 2009 for E&P operations was 60% compared to 47% for the six months ended June 30, 2008, excluding the impact of items affecting comparability discussed above. The higher rate in 2009 primarily reflects the impact of Libyan taxes in a lower commodity price environment. The effective tax rate for the full year 2009 is estimated to be in the range of 53% to 57%.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Results of Operations (continued)
Foreign Exchange: The after-tax foreign currency gain relating to E&P activities was $1 million in the second quarter of 2009 and 2008. The after-tax foreign currency loss was $5 million for the six months ended June 30, 2009, compared to a gain of $12 million for the same period in 2008.
     The Corporation’s future E&P 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.
Marketing and Refining
     Results from M&R activities amounted to a loss of $30 million in the second quarter of 2009 compared with a loss of $52 million in the second quarter of 2008. M&R generated income of $72 million for the six months ended June 30, 2009 compared to a loss of $36 million for the six months ended June 30, 2008. 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), which is accounted for using the equity method. Additional M&R 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 operations generated losses of $26 million and $44 million in the second quarter and the first half of 2009, compared with income of $3 million in the second quarter and a breakeven result in the first half of 2008. The Corporation’s share of HOVENSA’s results, after income taxes, amounted to losses of $46 million and $71 million in the second quarter and first half of 2009 compared with losses of $12 million and $18 million in the second quarter and first half of 2008. These decreases primarily reflect lower refining margins. Port Reading’s after-tax earnings were $19 million in the second quarter and $27 million in the first half of 2009 compared with $14 million and $16 million for the same periods in 2008, reflecting improved margins.
The following table summarizes refinery capacity and utilization rates:
                                         
            Refinery utilization
    Refinery   Three months ended   Six months ended
    capacity   June 30,   June 30,
    (thousands of                
    barrels per day)   2009   2008   2009   2008
HOVENSA
                                       
Crude
    500       88.4 %     94.2 %     85.2 %     91.6 %
Fluid catalytic cracker
    150       71.2 %     73.1 %     71.3 %     73.7 %
Coker
    58       91.2 %     99.5 %     85.9 %     95.5 %
Port Reading
    70       93.0 %     91.3 %     90.6 %     89.2 %
Marketing: Marketing results, which consist principally of energy marketing and retail gasoline operations, were losses of $13 million in the second quarter of 2009 compared with losses of $40 million in the same period of 2008, reflecting improved energy marketing results. Earnings were $88 million in the first half of 2009 compared to a loss of $8 million for the six months ended June 30, 2008, reflecting improved energy marketing results. Total refined product sales volumes were 455,000 barrels per day and 478,000 barrels per day in the second quarter and first half of 2009, compared with 454,000 barrels per day and 475,000 barrels per day in the second quarter and first half of 2008. Total energy marketing natural gas sales volumes were approximately 1.7 million mcf per day and 2.1 million mcf per day in the second quarter and first half of 2009, which were comparable to the volumes in the corresponding 2008 periods. In addition, energy marketing sold electricity volumes at the rate of 4,500 megawatts (round the clock) and 4,100 megawatts (round the clock) in the second quarter and first half of 2009 compared with 3,100 megawatts (round the clock) in the second quarter and first half of 2008.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Results of Operations (continued)
     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 results of the trading partnership, amounted to income of $9 million and $28 million in the second quarter and first half of 2009 compared with losses of $15 million and $28 million in the second quarter and first half of 2008.
     Marketing expenses decreased by 8% in the second quarter of 2009 compared with the same period in 2008 due to lower retail expenses. Marketing expenses were comparable for the first six months of 2009 and 2008.
     The Corporation’s future M&R earnings may be impacted by volatility in margins, competitive industry conditions, government regulatory changes, credit risk and supply and demand factors, including the effects of weather.
Corporate
The following table summarizes corporate expenses (in millions):
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Corporate expenses (including the item described below)
  $ 34     $ 48     $ 117     $ 106  
Income tax benefits
    (8 )     (15 )     (42 )     (34 )
 
                       
 
    26       33       75       72  
 
                               
Items affecting comparability between periods, after-tax
                (16 )      
 
                       
Net corporate expenses
  $ 26     $ 33     $ 59     $ 72  
 
                       
     After-tax corporate expenses were lower in the second quarter and first half of 2009 compared with the same periods in 2008, mainly due to higher income from pension related investments and lower costs as a result of cost saving initiatives. In the first half of 2009, a charge of $25 million before income taxes ($16 million after tax) relating to retirement benefits and employee severance costs was recorded in general and administrative expenses. After-tax corporate expenses in 2009 are estimated to be in the range of $155 to $165 million, excluding items affecting comparability.
Interest
     Interest expense was as follows (in millions):
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
Total interest incurred
  $ 97     $ 66     $ 175     $ 134  
Less: capitalized interest
    2       1       3       2  
 
                       
Interest expense before income taxes
    95       65       172       132  
Income tax benefits
    (36 )     (25 )     (65 )     (50 )
 
                       
After-tax interest expense
  $ 59     $ 40     $ 107     $ 82  
 
                       

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PART I — FINANCIAL INFORMATION (CONT’D.)
Results of Operations (continued)
     Increased interest expense for the second quarter and first half of 2009 principally reflects higher average debt resulting from the Corporation’s $1.25 billion debt offering in February 2009 (see Note 5, Long-Term Debt) and higher fees relating to letters of credit.
Sales and Other Operating Revenues
     Sales and other operating revenues decreased by 42% and 39% in the second quarter and first half of 2009 compared with the corresponding periods of 2008, primarily due to lower crude oil, natural gas and refined product selling prices. The decrease in cost of products sold principally reflects lower prices of refined products and purchased natural gas.
Liquidity and Capital Resources
     The following table sets forth certain relevant measures of the Corporation’s liquidity and capital resources (in millions, except ratios):
                 
    June 30,   December 31,
    2009   2008
Cash and cash equivalents
  $ 1,063     $ 908  
Current portion of long-term debt
    135       143  
Total debt
    4,313       3,955  
Total equity
    12,378       12,391  
Debt to capitalization ratio*
    25.8 %     24.2 %
 
*   Total debt as a percentage of the sum of total debt plus total equity.
Cash Flows
     The following table sets forth a summary of the Corporation’s cash flows (in millions):
                 
    Six months ended  
    June 30,  
    2009     2008  
Net cash provided by (used in):
               
Operating activities
  $ 1,241     $ 2,915  
Investing activities
    (1,357 )     (1,966 )
Financing activities
    271       (77 )
 
           
Net increase in cash and cash equivalents
  $ 155     $ 872  
 
           
Operating Activities: Net cash provided by operating activities decreased in the first half of 2009 compared with 2008, principally reflecting decreased earnings.
Investing Activities: The following table summarizes the Corporation’s capital expenditures (in millions):
                 
    Six months ended  
    June 30,  
    2009     2008  
Exploration and Production
  $ 1,328     $ 1,938  
Marketing, Refining and Corporate
    61       67  
 
           
Total
  $ 1,389     $ 2,005  
 
           

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PART I — FINANCIAL INFORMATION (CONT’D.)
Liquidity and Capital Resources (continued)
Financing Activities: In the first half of 2009, net borrowings totaled $358 million. In February 2009, the Corporation issued $250 million of 5 year senior unsecured notes with a coupon of 7% and $1 billion of 10 year senior unsecured notes with a coupon of 8.125%. The majority of the proceeds were used to repay outstanding borrowings. Dividends paid were $98 million in the first half of 2009 compared with $97 million in the first half of 2008. Additional proceeds from financing activities were $11 million in the first half of 2009 and $55 million in the same period of 2008, primarily reflecting the exercise of employee stock options, partially offset by distributions to noncontrolling interests.
Future Capital Requirements and Resources
     The Corporation anticipates investing a total of approximately $3.2 billion in capital and exploratory expenditures during 2009, of which $3.1 billion relates to Exploration and Production operations. The Corporation has the ability to fund its 2009 operations, including capital expenditures, dividends, pension contributions and required debt repayments, with existing cash on-hand, cash flow from operations and its available credit facilities. Crude oil and natural gas prices are volatile and difficult to predict. In addition, unplanned increases in the Corporation’s capital expenditure program could occur. The Corporation will take steps as necessary to protect its financial flexibility and may pursue other sources of liquidity, including the issuance of debt securities, the issuance of equity securities, and/or asset sales.
     The table below summarizes the capacity, usage, and remaining availability of the Corporation’s borrowing and letter of credit facilities at June 30, 2009 (in millions):
                                                 
    Expiration                     Letters of             Remaining  
    Date     Capacity     Borrowings     Credit Issued     Total Used     Capacity  
Revolving credit facility
  May 2012*   $ 3,000     $     $ 36     $ 36     $ 2,964  
Asset backed credit facility
  October 2009     500             500       500        
Committed lines
  Various**     1,665             1,596       1,596       69  
Uncommitted lines
  Various**     2,158             2,158       2,158        
 
                                     
Total
          $ 7,323     $     $ 4,290     $ 4,290     $ 3,033  
 
                                     
 
*   $75 million expires in May 2011.
 
**   Committed and uncommitted lines have expiration dates primarily through 2010.
     The Corporation maintains a $3.0 billion syndicated, revolving credit facility, of which $2,925 million is committed through May 2012. This facility can be used for borrowings and letters of credit. At June 30, 2009, available capacity under the facility was $2,964 million.
     The Corporation has a 364-day asset-backed credit facility securitized by certain accounts receivable from its Marketing and Refining operations. At June 30, 2009, under the terms of this financing arrangement, the Corporation has the ability to borrow or issue letters of credit of up to $500 million, subject to the availability of sufficient levels of eligible receivables. At June 30, 2009, outstanding letters of credit under this facility were collateralized by $921 million of accounts receivable, which are held by a wholly owned subsidiary. These receivables are not available to pay the general obligations of the Corporation before satisfaction of the outstanding obligations under the asset backed facility. In July 2009, the Corporation amended the asset-backed facility to increase the capacity to $1.0 billion, subject to the availability of eligible receivables, and to extend the expiration date to July 2010.
     The Corporation also has a shelf registration under which it may issue additional debt securities, warrants, common stock or preferred stock.
     At June 30, 2009, a loan agreement covenant based on the Corporation’s debt to capitalization ratio permitted the Corporation to borrow up to an additional $16.3 billion for the construction or acquisition of assets. Under a separate loan agreement covenant, the Corporation has the ability to borrow up to $3.5 billion of additional secured debt at June 30, 2009.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Liquidity and Capital Resources (continued)
     The Corporation’s $4,290 million of letters of credit outstanding at June 30, 2009 were primarily issued to satisfy margin and collateral requirements. See also Note 8 “Derivative Instruments, Hedging, and Trading Activities”.
Off-Balance Sheet Arrangements
     The Corporation has leveraged leases not included in its balance sheet, primarily related to retail gasoline stations that the Corporation operates. The net present value of these leases was $486 million at June 30, 2009. The Corporation’s June 30, 2009 debt to capitalization ratio would increase from 25.8% to 27.9% if the leases were included as debt.
     The Corporation guarantees the payment of up to 50% of HOVENSA’s crude oil purchases from suppliers other than PDVSA. At June 30, 2009, the guarantee amounted to $134 million. This amount fluctuates based on the volume of crude oil purchased and related prices. In addition, the Corporation has agreed to provide funding up to a maximum of $15 million to the extent HOVENSA does not have funds to meet its senior debt obligations.
Change in Accounting Policies
     Effective January 1, 2009, the Corporation adopted Financial Accounting Standards Board (FASB) Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (FAS 160), which changes the accounting for and reporting of noncontrolling interests in a consolidated subsidiary. As required, the Corporation retrospectively applied the presentation and disclosure requirements of FAS 160. At June 30, 2009 and December 31, 2008, noncontrolling interests of $119 million and $84 million, respectively, have been classified as a component of equity. Previously the noncontrolling interests had been classified in other liabilities. Net income attributable to the noncontrolling interests of $2 million for the three months ended and $44 million for the six months ended June 30, 2009 and $11 million for the three months ended and $4 million for the six months ended June 30, 2008 are included in net income. Certain amounts in the consolidated financial statements and footnotes have been reclassified to conform with the presentation requirements of
FAS 160.
     Effective January 1, 2009, the Corporation also adopted FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, which expands the disclosure requirements for an entity’s use of derivative instruments. See Note 8, Derivative Instruments, Hedging, and Trading Activities, for these disclosures.
     The Corporation adopted FASB Staff Position FAS No. 157-2, Effective Date of FASB Statement No. 157, effective January 1, 2009, which requires the application of the fair value measurement and disclosure provisions of FAS 157 to nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis. The impact of adoption was not material to the Corporation’s consolidated financial statements.
     Effective June 30, 2009, the Corporation adopted FASB Statement No. 165 (FAS 165), Subsequent Events. FAS 165 provides guidance on the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of FAS 165 did not impact the Corporation’s existing practice of evaluating subsequent events through the date the financial statements are filed with the SEC. These financial statements were evaluated for subsequent events through August 6, 2009.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Recently Issued Accounting Standards
     In June 2009, the FASB issued Statements No. 166, Accounting for Transfers of Financial Assets- an amendment of FASB Statement No. 140 (FAS 166) and No. 167, Amendments to FASB Interpretation No. FIN 46(R) (FAS 167). FAS 166 eliminates the concept of a qualifying special-purpose entity, which did not require consolidation under existing GAAP, and limits the circumstances in which transferred financial assets should be derecognized. FAS 167 requires additional analysis of variable interest entities to determine if consolidation is necessary. The Corporation is currently evaluating the impact of FAS 166 and FAS 167 on its financial statements and, as required, will adopt the provisions of these standards effective January 1, 2010.
Market Risk Disclosure
     In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the prices of crude oil, natural gas, refined products and electricity, as well as to changes in interest rates and foreign currency values. In the disclosures that follow, these operations are referred to as non-trading activities. The Corporation also has trading operations, principally through a 50% voting interest in a trading partnership. These trading operations are also exposed to commodity risks primarily related to the prices of crude oil, natural gas and refined products.
Instruments: The Corporation primarily uses forward commodity contracts, foreign exchange forward contracts, futures, swaps, options and energy securities in its non-trading and trading activities.
Value-at-Risk: The Corporation uses value-at-risk to monitor and control commodity risk within its trading and non-trading activities. The value-at-risk model uses historical simulation and the results represent the potential loss in fair value over one day at a 95% confidence level. The model captures both first and second order sensitivities for options. The potential change in fair value based on commodity price risk is presented in the non-trading and trading sections below.
Non-Trading: The Corporation’s non-trading activities may include hedging of crude oil and natural gas production. Futures and swaps are used to fix the selling prices of a portion of the Corporation’s future production and the related gains or losses are an integral part of the Corporation’s selling prices. In October 2008, the Corporation closed its Brent crude oil hedges by entering into offsetting positions with the same counterparty covering 24,000 barrels per day from 2009 through 2012. The estimated annual after-tax loss that will be reflected in earnings related to the closed crude oil positions will be $335 million from 2009 to 2012. There were no open hedges of crude oil or natural gas production at June 30, 2009.
     The Corporation also markets energy commodities including refined petroleum products, natural gas, and electricity. The Corporation uses futures, swaps, and options to manage the risk in its marketing activities. The Corporation estimates that at June 30, 2009, the value-at-risk for commodity related derivatives that are settled in cash and used in non-trading activities was $10 million compared with $13 million at December 31, 2008. The results may vary from time to time as hedge levels change.
     The Corporation uses foreign exchange contracts to reduce its exposure to fluctuating foreign exchange rates by entering into forward contracts for various currencies, including the British pound, the Norwegian krone, the Danish krone, and the Thai baht.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Market Risk Disclosure (continued)
Trading: In trading activities, the Corporation is primarily exposed to changes in crude oil, natural gas and refined product prices. The trading partnership in which the Corporation has a 50% voting interest trades energy commodities and derivatives. The accounts of the partnership are consolidated with those of the Corporation. The Corporation also takes trading positions for its own account. The information that follows represents 100% of the trading partnership and the Corporation’s proprietary trading accounts.
     Total net realized gains for the first half of 2009 amounted to $528 million compared with losses of $259 million for the first six months of 2008. The following table provides an assessment of the factors affecting the changes in fair value of trading activities (in millions):
                 
    2009     2008  
Fair value of contracts outstanding at January 1
  $ 864     $ 154  
Change in fair value of contracts outstanding at the beginning of the year and still outstanding at June 30
    40       511  
Reversal of fair value for contracts closed during the period
    (498 )     22  
Fair value of contracts entered into during the period and still outstanding
    (79 )     (339 )
 
           
Fair value of contracts outstanding at June 30
  $ 327     $ 348  
 
           
     The Corporation measures fair value in accordance with FAS 157. The following table summarizes the sources of fair values of derivatives used in the Corporation’s trading activities at June 30, 2009 (in millions):
                                         
    Instruments Maturing  
                                    2012  
                                    and  
Source of Fair Value   Total     2009     2010     2011     beyond  
Level 1
  $ (41 )   $ 17     $ (174 )   $ 128     $ (12 )
Level 2
    341       114       189       (17 )     55  
Level 3
    27       2       3       26       (4 )
 
                             
Total
  $ 327     $ 133     $ 18     $ 137     $ 39  
 
                             
     The Corporation estimates that at June 30, 2009, the value-at-risk for trading activities, including commodities, was $10 million compared with $17 million at December 31, 2008. The results may change from time to time as strategies change to capture potential market rate movements.
     The following table summarizes the fair values of net receivables relating to the Corporation’s trading activities and the credit ratings of counterparties at June 30, 2009 (in millions):
         
Investment grade determined by outside sources
  $ 177  
Investment grade determined internally*
    74  
Less than investment grade
    47  
 
     
Fair value of net receivables outstanding at end of period
  $ 298  
 
     
 
*   Based on information provided by counterparties and other available sources.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Forward-Looking Information
     Certain sections of Management’s Discussion and Analysis of Results of Operations and Financial Condition, including references to the Corporation’s future results of operations and financial position, liquidity and capital resources, capital expenditures, oil and gas production, tax rates, debt repayment, hedging, derivative and market risk disclosures and off-balance sheet arrangements include forward-looking information. Forward-looking disclosures are based on the Corporation’s current understanding and assessment of these activities and reasonable assumptions about the future. Actual results may differ from these disclosures because of changes in market conditions, government actions and other factors.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Item 3. Quantitative and Qualitative Disclosures about Market Risk
     The information required by this item is presented under Item 2, “Management’s Discussion and Analysis of Results of Operations and Financial Condition – Market Risk Disclosure.”
Item 4. Controls and Procedures
     Based upon their evaluation of the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rules 13a — 15(e) and 15d — 15(e)) as of June 30, 2009, John B. Hess, Chief Executive Officer, and John P. Rielly, Chief Financial Officer, concluded that these disclosure controls and procedures were effective as of June 30, 2009.
     There was no change in internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 in the quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
     The Annual Meeting of Stockholders of the Registrant was held on May 6, 2009. The inspectors of election reported that 281,826,350 shares of common stock of the Registrant were represented in person or by proxy at the meeting, constituting 86.1% of the votes entitled to be cast. At the meeting, stockholders voted on:
    The election of five nominees for the Board of Directors for the three-year term expiring in 2012 and;
 
    The ratification of the selection by the Audit Committee of the Board of Directors of Ernst & Young LLP as the independent registered public accounting firm of the Registrant for the fiscal year ending December 31, 2009.
With respect to the election of directors, the inspectors of election reported as follows:
                 
    For   Withholding Authority
           Name   Nominee Listed   to Vote For Nominee Listed
John B. Hess
    278,232,918       3,593,432  
Samuel W. Bodman
    280,715,747       1,110,603  
Risa Lavizzo-Mourey
    280,644,070       1,182,280  
Craig G. Matthews
    280,552,517       1,273,833  
Ernst H. von Metzsch
    279,212,483       2,613,867  
     The inspectors reported that 279,223,971 votes were cast for the ratification of the selection of Ernst & Young LLP as the independent auditors of the Registrant for the fiscal year ending December 31, 2009, 2,550,801 votes were cast against said ratification and holders of 51,578 votes abstained.

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PART II — OTHER INFORMATION (CONT’D.)
Item 6. Exhibits and Reports on Form 8-K
  a.   Exhibits
     
10(1) Amended and Restated Change of Control Termination Benefits Agreement dated as of May 29, 2009 between Registrant and F. Borden Walker. Substantially identical agreements (differing only in the signatories thereto) were entered into between Registrant and John B. Hess and J. Barclay Collins.
 
     
10(2) Amended and Restated Change of Control Termination Benefits Agreements dated as of May 29, 2009 between Registrant and Brian J. Bohling. Substantially identical agreements (differing only in the signatories thereto) were entered into between Registrant and other executive officers (other than the named executive officers referred to in Exhibit 10(1)).
 
      31(1) Certification required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a))
 
      31(2) Certification required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a))
 
     
32(1) Certification required by Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)
 
     
32(2) Certification required by Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)
 
     
101(INS) XBRL Instance Document
 
     
101(SCH) XBRL Schema Document
 
     
101(CAL) XBRL Calculation Linkbase Document
 
     
101(LAB) XBRL Label Linkbase Document
 
     
101(PRE) XBRL Presentation Linkbase Document
 
     
101(DEF) XBRL Definition Linkbase Document
  b.   Reports on Form 8-K
 
      During the quarter ended June 30, 2009, Registrant filed the following report on Form 8-K:
  (i)   Filing dated April 29, 2009 reporting under Items 2.02 and 9.01 a news release dated April 29, 2009 reporting results for the first quarter of 2009.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  HESS CORPORATION
(REGISTRANT)
 
 
  By   /s/ John B. Hess    
    JOHN B. HESS   
    CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER 
 
         
  By   /s/ John P. Rielly    
    JOHN P. RIELLY   
    SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER 
 
 
Date: August 7, 2009

29