Hess Q4 2022 Earnings Report

Hess EPS Results

• Actual EPS: $1.78
• Consensus EPS: $1.69
• Beat/Miss: Beat by +$0.09
• One Year Ago EPS: $0.85

Hess Revenue Results

• Actual Revenue: $3.05 billion
• Expected Revenue: $2.83 billion
• Beat/Miss: Beat by +$223.36 million
• YoY Revenue Growth: +35.40%

Hess Announcement Details

• Quarter: Q4 2022
• Date: 1/25/2023
• Time: Before Market Opens
• Conference Call Date: Wednesday, January 25, 2023
• Conference Call Time: 10:00AM ET

Hess (NYSE:HES), an exploration and production company, explores, develops, produces, purchases, transports, and sells crude oil, natural gas liquids (NGLs), and natural gas. The company operates in two segments, Exploration and Production, and Midstream. It conducts production operations primarily in the United States, Guyana, the Malaysia/Thailand Joint Development Area, and Malaysia; and exploration activities principally offshore Guyana, the U.S. Gulf of Mexico, and offshore Suriname and Canada. The company is also involved in gathering, compressing, and processing natural gas; fractionating NGLs; gathering, terminaling, loading, and transporting crude oil and NGL through rail car; and storing and terminaling propane, as well as providing water handling services primarily in the Bakken Shale plays in the Williston Basin area of North Dakota. The company was incorporated in 1920 and is headquartered in New York, New York.

Hess Q4 2022 Earnings Call Transcript

Key Takeaways

• Hess forecasts a 25% annual cash flow growth at $65 Brent between 2021–2026, with debt/EBITDAX under 1x and plans to return up to 75% of free cash flow through dividends and share buybacks.
• On the Stabroek Block in Guyana, Hess (30% interest) has 4 sanctioned developments breakeven at $25–35/bbl, with 360 kbd from Liza 1&2, Payara (220 kbd) starting end-2023, Yellowtail in 2025, Waru approval expected Q1 and a significant 200-ft oil discovery at Fang2.
• In the Bakken, Hess will run a four-rig program with ~110 wells in 2023, drilling/completion costs of ~$6.9 M/well despite ~10–15% inflation and targeting 165–170 kbd net production this year, growing to ~200 kbd by 2025.
• Offshore, Hess plans to drill four Gulf of Mexico wells (including the Pickerel prospect spudding in April) and invest in wells and facilities in Southeast Asia, maintaining ~30 kbd and 60–65 kbd net production in those regions respectively.
• Hess committed $750 M to Guyana forest carbon credits through 2032, targets net-zero Scope 1&2 emissions by 2050 and has been on the Dow Jones Sustainability North America Index for 13 years and the World Index for the first time.

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to the fourth quarter 2022 Hess Corporation conference call. My name is Kevin, and I'll be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Jay Wilson, vice president of investor relations. Please proceed.

[Jay Wilson, VP of Investor Relations at Hess Corporation]

Thank you, Kevin. Good morning, everyone, and thank you for participating in our fourth quarter earnings conference call. Our earnings release was issued this morning and appears on our website, www.hess.com. Today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include those set forth in the Risk Factors section of Hess's annual and quarterly reports filed with the SEC. Also, on today's conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website.

[Jay Wilson, VP of Investor Relations at Hess Corporation]

On the line with me today are John Hess, Chief Executive Officer, Greg Hill, Chief Operating Officer, and John Rielly, Chief Financial Officer. I'll now turn the call over to John Hess.

[John Hess, CEO at Hess Corporation]

Thank you, Jay. Good morning and welcome to our fourth quarter conference call. Today I will share some thoughts about the oil markets and then discuss our continued progress in executing our strategy. Greg Hill will then cover our operations, and John Rielly will review our financial results. Oil and gas will be needed for decades to come and are fundamental to ensure an affordable, just, and secure energy transition. The world faces a massive dual challenge. We will require approximately 20% more energy globally by 2050, and over the same period we need to reach net zero emissions. At the end of last year, the International Energy Agency, or IEA, published its latest World Energy Outlook that offers three scenarios, and they are scenarios, not forecasts, for how to meet this dual challenge.

[John Hess, CEO at Hess Corporation]

In all three of the IEA scenarios, the world is facing a structural deficit in energy supply. Significantly more investment is required both in oil and gas and also in clean energies. According to the IEA, a reasonable estimate for the global oil and gas investment required to meet demand growth is approximately $500 billion each year for the next 10 years, as compared with approximately $300 billion–$400 billion invested annually in the last five years. In terms of clean energies, an annual investment of between $3 trillion and $4 trillion is needed each year for the next 10 years, significantly more than last year's investment of approximately $1.2 trillion.

[John Hess, CEO at Hess Corporation]

Business leaders and government officials must have a sober understanding of this investment challenge, especially since capital is becoming more scarce and more expensive in the current financial environment. The energy transition is going to take a long time, cost a lot of money, and require many technologies that do not exist today. To have an orderly energy transition, policymakers must have climate literacy, energy literacy, and economic literacy. Our strategy is to grow our resource base, deliver a low cost of supply, and generate industry-leading cash flow growth, and at the same time maintain our industry leadership in environmental, social, and governance performance and disclosure. Our successful execution of this strategy has uniquely positioned our company to deliver significant value to shareholders for years to come, both by growing intrinsic value and by growing cash returns.

[John Hess, CEO at Hess Corporation]

In terms of cash flow growth, we have an industry-leading rate of change story and an industry-leading duration story providing a unique value proposition. Based upon a flat Brent oil price of $65 per barrel, our cash flow is forecast to increase by approximately 25% annually between 2021 and 2026, more than twice as fast as our top line growth. Our balance sheet will also continue to strengthen with our debt to EBITDAX ratio currently under 1 time. As our portfolio becomes increasingly free cash flow positive, we are committed to returning up to 75% of our annual free cash flow to shareholders, with the remainder going to strengthen the balance sheet by increasing our cash position or further reducing our debt to ensure that we can fund our high return investment opportunities through the cycle.

[John Hess, CEO at Hess Corporation]

Executing this strategy in 2022, we decreased our debt by $500 million, increased our regular quarterly dividend by 50%, and completed a $650 million stock repurchase program. Looking ahead, we plan to continue increasing our regular dividend to a level that is attractive to income-oriented investors but sustainable in a low oil price environment. As our free cash flow generation steadily increases in future years, share repurchases are expected to represent a growing proportion of our return of capital.

[John Hess, CEO at Hess Corporation]

By investing only in high return, low cost opportunities, we have built a differentiated and balanced portfolio focused on Guyana, the Bakken, Deepwater Gulf of Mexico, and Southeast Asia. Key to our strategy is Guyana, which is home to the Stabroek Block, one of the largest oil provinces discovered in the world over the last 20 years, where Hess has a 30% interest and ExxonMobil is the operator. Since 2015, we have had more than 30 discoveries on the block, including 9 last year, underpinning a gross discovered recoverable resource estimate of more than 11 billion barrels of oil equivalent, with multi-billion barrels of exploration potential remaining. We are pleased to announce today a significant new oil discovery at the Fangtooth Southeast-one well, located approximately 8 miles southeast of the original Fangtooth-one discovery.

[John Hess, CEO at Hess Corporation]

The Fangtooth Southeast-one well encountered approximately 200 feet of oil-bearing sandstone reservoirs and was drilled to 5,397 feet of water. Fangtooth was our first standalone deep exploration prospect on the Stabroek Block. This area has the potential to underpin a future oil development. Our 4 sanctioned oil developments on the Stabroek Block have a break-even Brent oil price of between $25 and $35 per barrel. We have line of sight to 6 floating production storage and offloading vessels or FPSOs. $7 billion, of which more than 80% will be allocated to Guyana and the Bakken.

[John Hess, CEO at Hess Corporation]

Our financial priorities are to continue to allocate capital to our high return, low cost investment opportunities, to keep a strong cash position and balance sheet, and to grow our dividend and as market conditions and our return of capital framework provide, to increase share repurchases. In Guyana, the Liza Phase One and Liza Phase Two developments are currently operating at their combined gross production capacity of more than 360,000 barrels of oil per day. Our third development, Payara, remains on schedule for startup by the end of 2023, with a gross production capacity of approximately 220,000 barrels of oil per day. Our fourth development, Yellowtail, is expected to come online in 2025 with a gross production capacity of approximately 250,000 barrels of oil per day.

[John Hess, CEO at Hess Corporation]

A plan of development for our fifth development at Uaru, with a gross production capacity of approximately 250,000 barrels of oil per day, was submitted to the Government of Guyana in November, and final approval is expected by the end of the first quarter. We also will continue an active exploration and appraisal program in Guyana with approximately 10 wells planned for the Stabroek Block in 2023. In the Bakken, we plan to continue operating a four-rig program, which will enable us to generate significant free cash flow, lower our unit cash costs, and further optimize our infrastructure. We have a robust inventory of high return drilling locations to enable us to grow net production to an average of 200,000 barrels of oil equivalent per day in 2025.

[John Hess, CEO at Hess Corporation]

Greg and his team continue to do an outstanding job of applying lean manufacturing principles to create a culture of innovation, improve efficiency and manage inflationary cost pressures. We will continue to invest in our operated cash engines offshore in 2023, where we also see attractive investment opportunities. In the Gulf of Mexico, we plan to drill 2 infrastructure tieback wells and 2 exploration wells. In Southeast Asia, we will invest in drilling and production facilities at both the North Malay Basin and Joint Development Area assets. As we continue to execute our strategy, our commitment to sustainability will remain a top priority.

[John Hess, CEO at Hess Corporation]

In December, we announced one of the largest private sector forest preservation agreements in the world to purchase high quality, independently verified REDD+ carbon credits for a minimum of $750 million between 2022 and 2032 directly from the Government of Guyana. Protecting the world's forests and the important role they play as natural carbon sinks is foundational to the Paris Agreement's aim of limiting the global average temperature rise to well below 2 degrees Celsius. Avoiding global deforestation was one of the major commitments made at the COP26 climate summit, where more than 130 countries, including Guyana, pledged to end deforestation by 2030.

[John Hess, CEO at Hess Corporation]

The Government of Guyana plans to invest the proceeds from our carbon credits purchase agreement in sustainable development to improve the lives of the people of Guyana, with 15% of the proceeds directed to indigenous communities. This agreement adds to our company's ongoing and successful emissions reduction efforts and is an important part of our commitment to achieve net zero Scope 1 and Scope 2 greenhouse gas emissions on a net equity basis by 2050. The agreement further strengthens our strategic partnership with Guyana and demonstrates our long-term commitment to the country and its people, building upon the national healthcare initiative we announced earlier in 2022. We are proud to have been recognized throughout 2022 as an industry leader in our environmental, social, and governance performance and disclosure.

[John Hess, CEO at Hess Corporation]

In November, Hess earned a place on the Dow Jones Sustainability Index for North America for the 13th consecutive year, for the first time was included in the Dow Jones Sustainability World Index. In December, we also achieved leadership status in CDP's annual global climate analysis for the 14th consecutive year. In summary, we continue to successfully execute our strategy, which offers a unique value proposition, both to grow our intrinsic value and to grow our cash returns by increasing our resource base, delivering a low cost of supply, and generating industry-leading cash flow growth. As our portfolio becomes increasingly free cash flow positive, we will continue to prioritize the return of capital to our shareholders through further dividend increases and share repurchases. I will now turn the call over to Greg Hill for an operational update.

[Greg Hill, COO at Hess Corporation]

Thanks, John. 2022 was another year of strong strategic execution and operational performance for Hess. Proved reserves at the end of 2022 stood at approximately 1.26 billion barrels of oil equivalent. Net proved reserve additions of 184 million barrels of oil equivalent were primarily the result of the Yellowtail sanction in Guyana and the Bakken. Excluding asset sales, we replaced 144% of 2022 production at a finding and development cost of approximately $14.80 per barrel of oil equivalent. Turning to production. In the fourth quarter of 2022, company-wide net production averaged 376,000 barrels of oil equivalent per day, excluding Libya, which was above our guidance of approximately 370,000 barrels of oil equivalent per day.

[Greg Hill, COO at Hess Corporation]

Strong performance across the portfolio more than offset the severe winter weather impacts experienced in the Bakken during the month of December. For the full year 2023, we forecast net production to average between 355,000 and 365,000 barrels of oil equivalent per day, an increase of approximately 10% compared with 2022 production of 327,000 barrels of oil equivalent per day, excluding Libya. For the first quarter of 2023, we forecast company-wide net production to average between 345,000 and 355,000 barrels of oil equivalent per day.

[Greg Hill, COO at Hess Corporation]

In the Bakken, fourth quarter net production of 158,000 barrels of oil equivalent per day was below our guidance of 165,000–170,000 barrels of oil equivalent per day, reflecting severe winter weather impacts in December, which limited our new wells online to only 15 in the quarter. For the full year 2022, net production averaged 154,000 barrels of oil equivalent per day. In 2023, we plan to operate 4 rigs and expect to drill approximately 110 gross operated wells and bring online approximately 110 new wells. In the first quarter of 2023, we plan to drill approximately 25 wells and bring 25 new wells online. In 2022, our drilling and completion costs per Bakken well averaged $6.4 million.

[Greg Hill, COO at Hess Corporation]

In 2023, we estimate industry inflation will average between 10% and 15%. However, we expect to mitigate this impact through the application of lean manufacturing and technology and forecast our DNC costs to average approximately $6.9 million per well or about 8% above last year. For the full year 2023, we forecast Bakken net production will average between 165,000 and 170,000 barrels of oil equivalent per day. First quarter net production is forecast to average between 155,000 and 160,000 barrels of oil equivalent per day, reflecting weather contingencies and the carryover effects from the severe winter weather in December.

[Greg Hill, COO at Hess Corporation]

Net Bakken production is forecast to steadily grow over the course of 2023 and 2024 and average approximately 200,000 barrels of oil equivalent per day in 2025. We expect to hold this level of production for nearly a decade. Moving to the offshore. In the Deepwater Gulf of Mexico, net production averaged 35,000 barrels of oil equivalent per day in the fourth quarter and 31,000 barrels of oil equivalent per day for the full year 2022. For the first quarter and full year 2023, we forecast net production in the Gulf of Mexico will average approximately 30,000 barrels of oil equivalent per day, reflecting normal field declines and planned maintenance. The Deepwater Gulf of Mexico remains an important cash engine for the company, as well as a platform for growth.

[Greg Hill, COO at Hess Corporation]

In 2023, we plan to participate in four wells, one infrastructure-led exploration well, one hub-class exploration well, and two tieback wells. The infrastructure-led exploration well will be the Hess-operated Pickerel prospect located in Mississippi Canyon Block 727, which is expected to spud in April and will be brought online through existing infrastructure at Tubular Bells. The well will target the same Miocene interval that was successfully drilled at Esox and tied back to Tubular Bells in 2020. The hub-class exploration well will be spud in the second half of the year and will be a Hess-operated opportunity in the Northern Green Canyon area in the Gulf of Mexico, targeting high-quality subsalt Miocene sands in areas where the application of the latest seismic imaging technology has improved the sub-salt image. The two tieback wells will be spud in the fourth quarter.

[Greg Hill, COO at Hess Corporation]

One well will be at Stampede and the second well will be at the Shell-operated Llano field. First oil from both wells is expected in 2024. In Southeast Asia, net production from the joint development area in North Malay Basin, where Hess has a 50% interest, averaged 67,000 barrels of oil equivalent per day in the fourth quarter and 64,000 barrels of oil equivalent per day for the full year 2022. For the first quarter and full year 2023, we forecast net production in Southeast Asia to average between 60,000 and 65,000 barrels of oil equivalent per day. Turning to Guyana, where Hess has a 30% interest in the Stabroek Block and ExxonMobil is the operator, the partnership delivered exceptional facilities reliability, project delivery and exploration success in 2022.

[Greg Hill, COO at Hess Corporation]

Net production from Guyana averaged 116,000 barrels of oil per day in the fourth quarter of 2022, and 78,000 barrels of oil per day for the full year 2022, both above our guidance. For the first quarter and the full year 2023, we forecast net production in Guyana to average approximately 100,000 barrels of oil per day. Turning to developments, Liza Phase One was successfully debottlenecked in 2022 and has been operating at or above its revised nameplate capacity of 140,000 barrels of oil per day. Liza Phase Two, utilizing Liza Unity FPSO, achieved first oil in February of last year, and production ramp up from start-up to nameplate capacity was achieved in about five months, which is world-class performance in the deepwater.

[Greg Hill, COO at Hess Corporation]

The Liza Unity is currently operating at or above its nameplate capacity of 220,000 barrels of oil per day. Production optimization opportunities are currently being considered for late 2023. The third development, Payara, is approximately 93% complete. The Prosperity FPSO is expected to depart from Singapore in late first quarter and commence hookup and commissioning activities following arrival in Guyana. The project remains ahead of schedule and is anticipated to achieve first oil by the end of 2023. Yellowtail, our fourth development, is approximately 40% complete and remains on track for first oil in 2025. The One Guyana FPSO's hull is completed and is expected to enter dry dock in Singapore in April. Topside fabrication activities have commenced at module fabrication sites in Singapore and China, and development drilling is underway.

[Greg Hill, COO at Hess Corporation]

The final development plan for our fifth development, Uaru, was submitted in November. We are currently awaiting approval by the Government of Guyana, which we anticipate by the end of the first quarter. Pending government approvals, our sixth development, Whiptail, is expected to be sanctioned early next year. Turning to exploration. The Fangtooth Southeast-one well, located approximately eight miles southeast of the original Fangtooth-one discovery well, resulted in a significant new oil discovery. This area could form the basis for a future oil development on the Stabroek Block. The Fangtooth Southeast-one well encountered approximately 200 feet of oil-bearing sandstone reservoirs. Further appraisal activities are underway. We continue to see multi-billion barrels of additional exploration potential on the Stabroek Block. In 2023, we plan to drill approximately 10 exploration and appraisal wells that will target a variety of prospects and play types.

[Greg Hill, COO at Hess Corporation]

These will include lower risk wells near existing discoveries and several penetrations that will test deeper intervals. With regard to upcoming wells, operations are continuing at the Tarpon Fish-1 well in the northwest corner of the Stabroek Block, approximately 43 miles northwest of the Liza-1 well. The well is in the first test of Cretaceous Age clastic reservoirs in northwest Stabroek. The well will also test a deeper Jurassic Age carbonate prospect. Lancetfish-1 is a deep play exploration well located approximately 2.5 miles northeast of the Fangtooth SE-1 well that underlies a portion of the Liza field. Drilling operations are underway on the Noble Don Taylor drillship. There is a well called Basher, which will target a deep prospect in the Fangtooth area, and a well called Blackfin, which will penetrate an up-dip Upper Campanian prospect east of Barreleye.

[Greg Hill, COO at Hess Corporation]

Moving to offshore Canada, we plan to participate in the BP-operated Ephesus-one well in the Northern Orphan Basin. The well will target a very large submarine fan of Tertiary Age. The Stena IceMAX rig is expected to arrive on location in the second quarter to spud the well, which is located in approximately 4,000 feet of water. BP has a 50% working interest and Hess and Chevron each have 25%. In summary, our execution in 2022 was again strong and 2023 will be an exciting year. With the Bakken returning to a steady growth trajectory, with an active drilling program in the Gulf of Mexico and with the advancement of our major projects and further delineation of the significant upside in Guyana, all of which position us to deliver industry-leading performance and significant shareholder value for many years to come.

[Greg Hill, COO at Hess Corporation]

I will now turn the call over to John Rielly. Thank you.

[John Rielly, CFO at Hess Corporation]

Thanks, Greg. In my remarks today, I will compare results from the fourth quarter of 2022 to the third quarter of 2022. We had net income of $624 million in the fourth quarter of 2022, compared with $515 million in the third quarter of 2022. On an adjusted basis, which excludes items affecting comparability of earnings, we had net income of $548 million in the fourth quarter of 2022, compared with $583 million in the previous quarter. Turning to E&P. E&P adjusted net income was $591 million in the fourth quarter, compared with $626 million in the third quarter. The changes in the after-tax components of E&P earnings between the fourth and third quarter of 2022 were as follows.

[John Rielly, CFO at Hess Corporation]

Higher sales volumes increased earnings by $246 million. Lower realized selling prices decreased earnings by $288 million. Higher DD&A expense decreased earnings by $29 million. Lower cash costs and midstream tariffs increased earnings by $19 million. Lower exploration expenses increased earnings by $13 million. All other items increased earnings by $4 million, for an overall decrease in fourth quarter earnings of $35 million. For the fourth quarter, our E&P sales volumes were overlifted compared with production by approximately 1.3 million barrels, which increased our after-tax income by approximately $60 million. Turning to midstream. The midstream segment had net income of $64 million in the fourth quarter of 2022, compared with $68 million in the third quarter.

[John Rielly, CFO at Hess Corporation]

Midstream EBITDA, before non-controlling interest, amounted to $244 million in the fourth quarter of 2022, compared to $252 million in the previous quarter. Turning to our financial position. At December 31st, excluding the midstream segment, cash and cash equivalents were $2.48 billion. Total liquidity was $5.73 billion, including available committed credit facilities. Debt and finance lease obligations totaled $5.6 billion. During the fourth quarter, we completed the sale of our 8% interest in the Waha concession in Libya for net proceeds of $150 million. We purchased 5 million REDD+ carbon credits from the government of Guyana for $75 million. Total cash returned to shareholders in the fourth quarter through share repurchases and dividends amounted to $405 million.

[John Rielly, CFO at Hess Corporation]

We repurchased approximately 2.3 million shares of common stock for $310 million in the fourth quarter, bringing total share repurchases in 2022 to $650 million at an average price of approximately $120 per share. Net cash provided by operating activities before changes in working capital was $1.4 billion in both the fourth and third quarter. In the fourth quarter, net cash provided by operating activities after changes in operating assets and liabilities was $1.25 billion, compared with $1.34 billion in the third quarter. E&P capital and exploratory expenditures were $818 million in the fourth quarter, compared to $701 million in the third quarter. Turning to guidance. First for E&P.

[John Rielly, CFO at Hess Corporation]

We project E&P cash costs to be in the range of $14.00–$14.50 per barrel of oil equivalent for the first quarter, which includes a planned workover at the Penn State field in the Gulf of Mexico. The full year 2023, E&P cash costs are expected to be in the range of $13.50–$14.50 per barrel of oil equivalent. DD&A expense is forecast to be in the range of $13.00–$13.50 per barrel of oil equivalent for the first quarter, and $13.00–$14.00 per barrel of oil equivalent for the full year 2023.

[John Rielly, CFO at Hess Corporation]

This results in projected total E&P unit operating costs to be in the range of $27–$28 per barrel of oil equivalent for the first quarter, and $26.50–$28.50 per barrel of oil equivalent for the full year 2023. Exploration expenses, excluding dry hole costs, are expected to be in the range of $35 million–$40 million in the first quarter and $160 million–$170 million for the full year 2023. The midstream tariff is projected to be in the range of $290 million–$300 million for the first quarter and $1.23 billion–$1.25 billion for the full year 2023.

[John Rielly, CFO at Hess Corporation]

E&P income tax expense is expected to be in the range of $160 million–$170 million for the first quarter and $590 million–$600 million for the full year 2023. As of January 24, 2023, we have purchased WTI put options for 75,000 barrels of oil per day for 2023, with an average monthly floor price of $70 per barrel. We plan to increase our hedge position to a similar level as 2022, depending on market conditions. Based on our current position, we expect non-cash option premium amortization, which will be reflected in our realized selling prices to reduce our earnings by approximately $25 million in the first quarter and by approximately $120 million for the full year 2023.

[John Rielly, CFO at Hess Corporation]

Our E&P capital and exploratory expenditures are expected to be approximately $850 million in the first quarter and approximately $3.7 billion for the full year 2023. For Midstream, we anticipate net income attributable to Hess from the Midstream segment to be in the range of $55 million–$60 million for the first quarter and $255 million–$265 million for the full year 2023. Corporate expenses are estimated to be approximately $35 million for the first quarter and $120 million–$130 million for the full year 2023.

[John Rielly, CFO at Hess Corporation]

Interest expense is estimated to be in the range of $80 million–$85 million for the first quarter and $305 million–$315 million for the full year 2023. This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

[Operator]

Ladies and gentlemen, if you have a question, please press star one one on your phone. If your question has been answered and you wish to withdraw your question, please press star one one again. The questions will be taken in the order received. Please press star one one to begin, and we'll pause for a moment while we compile our Q&A roster. Our first question comes from Arun Jayaram with JPMorgan. Your line is open.

[Arun Jayaram, Research Analyst at JPMorgan]

Yeah, good morning.

[John Rielly, CFO at Hess Corporation]

Morning.

[Arun Jayaram, Research Analyst at JPMorgan]

Greg, I was wondering if you could give us a bit of a teach-in on these deeper sand channels that you're exploring and have had success at Fangtooth. I know you're drilling Lancetfish. Give us a sense of, are you still in the campaign? A little bit of a, of a teach-in on what you're exploring for.

[Greg Hill, COO at Hess Corporation]

Well, thanks. Thanks for the question, Arun. You know, as we've said before, if you look at the deeper interval, it's only 3,000 feet below the Upper Campanian in which the majority of our discoveries. If you look at that interval, it really underlies a lot of the Stabroek Block. Over the past couple years, we've had a number of penetrations in that tails of existing wells. I think importantly, the Fangtooth discovery was our first standalone deep prospect. The Fangtooth-1 well, the first well, had 164 feet of pay. The Fangtooth SE well, which is located 8.5 miles southeast of that original discovery well, it had 200 feet of oil-bearing pay.

[Greg Hill, COO at Hess Corporation]

We're going to continue to appraise that this year, probably get a DST in it. As you mentioned, there are some other channels in and around Fangtooth. There's one called Lancetfish that's northeast of Fangtooth, and there's a prospect called Basher, which is actually west of Fangtooth. The combination of all that is pretty exciting. You know, as John mentioned in his opening remarks, you know, it could mean a potential future oil development in there. We will also continue to explore, you know, the deep as we kinda go through the next couple years. I think it's very encouraging, and we'll just continue to add to the, you know, to the discovered resource and also the significant exploration upside we see.

[Arun Jayaram, Research Analyst at JPMorgan]

Got it. Just a follow-up. I know, Greg, you mentioned you'll do a DST later this year. What is it about Fangtooth that's kinda moving it up the development queue, perhaps maybe after Whiptail to be the seventh boat on the Stabroek Block?

[Greg Hill, COO at Hess Corporation]

I think it's, you know, it's that we're seeing a good quality reservoir and again, oil bearing. So, you know, our strategy is to continue to progress the oil developments, you know, as quickly as we can on the Stabroek Block. So, you know, a good quality sand and oil bearing. So it's coming up in the queue.

[Arun Jayaram, Research Analyst at JPMorgan]

Great. Thanks a lot.

[Operator]

One moment for our next question. Our next question comes from Jeanine Wai with Barclays. Your line is open.

[Jeanine Wai, Senior Analyst at Barclays]

Hi. Good morning, everyone. Thanks for taking our questions.

[John Rielly, CFO at Hess Corporation]

Morning, Jeanine.

[Jeanine Wai, Senior Analyst at Barclays]

Good morning. Maybe just going to cash returns real quick here. You're committed to returning up to 75% of annual adjusted free cash flow through dividends and buybacks. Can you talk about what determines where you fall within that range for 2023, whether it's related to oil prices, the balance sheet or maybe anything else? I mean, we note that you have a really healthy cash balance right now, and your debt maturities in 2024 and 2027 are pretty manageable.

[John Rielly, CFO at Hess Corporation]

Yeah. Yeah. No. Excellent question, Jeanine. You know, as I said earlier, you know, with this capital budget of $3.7 billion, you know, our first priority is to continue to allocate capital to our high return, low cost investment opportunities. That's really priority number one for this year. Along with that, the next priority is to keep a very strong cash position and balance sheet. You heard John saying we bought some puts to provide the downside protection, still have unlimited upside appreciation for our shareholders, but wanna protect the downside, you know, where it's a volatile market, and we wanna make sure the downside's protected.

[John Rielly, CFO at Hess Corporation]

In terms of return on capital, yes, over the year, 75% of that free cash flow will be returned to our shareholders, as we did last year. The first priority within that, Jeanine, is to grow our dividend. You know, our board meets regularly and will give.

[John Hess, CEO at Hess Corporation]

Strong consideration to increasing our dividend during this quarter. As the year goes on, as market conditions and our return of capital framework provide, then strong consideration will be to increase share repurchases as we did last year.

[Jeanine Wai, Senior Analyst at Barclays]

Okay, great. Thank you.

[John Hess, CEO at Hess Corporation]

Thank you.

[Jeanine Wai, Senior Analyst at Barclays]

Maybe turning back to Guyana here. The Uaru development project, I believe, is anticipated to be around $12.7 billion. Would you be able to comment on the moving pieces versus the Yellowtail cost estimate? For example, how much is related to additional scope versus inflation? Are there other things that aren't included in that $12.7 billion? Should we consider that as the baseline for future projects which look to be, you know, the similar size or maybe even bigger? Thank you.

[Greg Hill, COO at Hess Corporation]

Yeah. The, the $12.7 billion, you know, is consistent with the estimate that the operator, you know, submitted as part of their EIA to the, to the government of Guyana. You know, that number is gonna be finalized as the project progresses. And once we sanction it, we'll give the final details. You know, in any case, the, the final cost of Uaru reflects a couple things. It reflects current market conditions and then also additional scope. One example is the SURF is twice as big as Yellowtail, for example, because it connects a number of, you know, further away kind of reservoir systems. We'll give you a final color on that, you know, once the, once the project is finally sanctioned.

[John Hess, CEO at Hess Corporation]

I think, Jeanine, what's also important is, Uaru still offers some of the best returns in the industry. Even though there is cost inflation, with the resource we're developing, the fact that it's low cost, low carbon, it still offers some of the best returns in the industry.

[Jeanine Wai, Senior Analyst at Barclays]

Great. Thank you, gentlemen.

[Operator]

One moment for our next question. Our next question comes from Doug Leggate with Bank of America. Your line is open.

[Doug Leggate, Managing Director and Head of Global Oil & Gas Equity Research at Bank of America]

Well, hi. Good morning, everyone.

[John Hess, CEO at Hess Corporation]

Morning.

[Doug Leggate, Managing Director and Head of Global Oil & Gas Equity Research at Bank of America]

Guys, I wonder if I could ask a kind of a longer-term question. Exxon had signaled a couple years ago that if the deeper horizon worked, John, I think you've talked with us a number of times, we could be looking at double the resource potential. At the time they were talking 10, so that would be $20 billion. It seems crazy to think that. My question is, are you going to have enough time? Because the exploration phase, as I understand, it runs out in 2026, and this thing continues to get bigger. We're already in 2023. What needs to happen for you guys to retain everything that you ultimately could find over the next several years?

[Doug Leggate, Managing Director and Head of Global Oil & Gas Equity Research at Bank of America]

What does that mean for development timelines and, you know, I guess relinquishment of block acreage and so on?

[John Hess, CEO at Hess Corporation]

Yeah, Doug, excellent question. You know, we still see multi-billion barrels of exploration potential remaining. Greg, made some, you know, great context remarks on the deeper horizon at 18,000 feet versus where most of our development efforts and exploration efforts have happened at 15,000 feet. We're still in the early innings of defining the deeper potential. Definitely multi-billion barrels potential remaining. To get after that's why ExxonMobil, who's doing an excellent job developing this block, has a 6-rig program. 3 of them are for development activities, and 3 really are for exploration and appraisal. We're gonna continue to have a very active exploration appraisal program this year and future years to make sure we capture all the high value resources that we think are on the block.

[Doug Leggate, Managing Director and Head of Global Oil & Gas Equity Research at Bank of America]

Just to be clear, John, you think you're gonna have enough time in terms of securing the development approvals before 2026? Do you have an extension on that to secure the development approval?

[John Hess, CEO at Hess Corporation]

No. The reason we're doing the exploration appraisal program, Doug, is to get ahead of that, to make sure we capture all the resources that we can. We work closely with our joint venture led by ExxonMobil and the government to do that.

[Doug Leggate, Managing Director and Head of Global Oil & Gas Equity Research at Bank of America]

Thank you. My, I appreciate that, John. My follow-up, whoever wants to take this is just kind of a 2-parter, if you don't mind, because I think you did mention Uaru's EIS, but you've also given guidance on Guyana for this year, which has got a lot of kind of cryptic comments perhaps around, you know, downtime for debottlenecking Liza and so on. There's a lot of things going on in terms of that 2, 4-year visibility. My question is this, first of all, can you give us some kind of a guide as to what the downtime and ultimate capacity would look like for Liza 2 as we go through this year? You know, some sort of trajectory, I guess.

[Doug Leggate, Managing Director and Head of Global Oil & Gas Equity Research at Bank of America]

My kind of part B is, you know, a lot of people are freaking out over the $12.7 billion number that Exxon put in their EIS. We know that the absolute cost recovery is not that big of a deal, but you guys typically have come in lower than that because of contingency. Can you tell us what Hess's number is relative to that $12.7 billion? Thanks.

[Greg Hill, COO at Hess Corporation]

Yeah. Thanks, Doug. Let me take your first question. You know, as I mentioned in my opening remarks, you know, we're looking at a potential debottlenecking, you know, sometime in the latter half of 2023, you know, for phase two. Now, you know, as we've spoken before, each one of these is gonna be bespoke depending on the vessel. You typically want a year of dynamic data before you engineer the project to understand where the pinch points are on the vessel. You know, as I've said in the past, I think you can expect kind of a 10% you know, uplift in any kind of debottlenecking. I think that's in the range of possibilities here as well. Again, we're just in the early stages of engineering that.

[Greg Hill, COO at Hess Corporation]

That would, you know, maybe come on, you know, in the fourth quarter. We've included some downtime for that, you know, in the guidance, you know, for Guyana. I think, you know, the quarter four of 2022 basically had no downtime. As we project forward to 2023, we're really trying to include pigging and, you know, the normal maintenance downtime, some debottlenecking downtime, you know, in those production estimates for next year. Also, you know, the tax barrels are a little bit different, what John can talk about. John can also talk about the CapEx for Uaru's. John Rielly?

[John Rielly, CFO at Hess Corporation]

Yes. On the 12.7, Doug, you know, right now, we're gonna wait for the final sanction when we come out with our estimates. You are correct, there's always a contingency in at the beginning of these projects, and rightfully so, you know, several years of construction. What we can say is that ExxonMobil has done a fantastic job on every single project, you know, meeting or beating their estimates on cost and on time on execution. John Hess said it, you know, earlier, this project will have world-class break even, will be world-class returns there in Uaru's. We're excited about that. Final details, once the government has approved it, we can provide.

[Doug Leggate, Managing Director and Head of Global Oil & Gas Equity Research at Bank of America]

it's not lost on us, it's 30% bigger. Thanks so much, John. I appreciate it.

[Operator]

One moment for our next question. Our next question comes from Paul Cheng with Scotiabank. Your line is open.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

Hey, guys. Good morning.

[Greg Hill, COO at Hess Corporation]

Morning.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

Couple questions. I think the first is two part, is for John Rielly, just to clarify. When you say 75,000 for $70, is that Brent or WTI? Also that, when you're talking about in the fourth quarter, the $75 million, the carbon credit purchase, where did you show up in the income statement and the cash flow for the fourth quarter?

[John Rielly, CFO at Hess Corporation]

Sure. Let me do your first question, was on the hedges that we put on. We have WTI put options on right now, so that's $75,000. Like I said, we do intend to get to a similar level as last year. Combined between WTI and Brent, we had about 150,000 barrels a day hedged last year. Again, you should be looking for us to add to this position. Currently that $75 is for WTI put options at $70.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

John, for the $120 million on the premium for the full year, is that just for this, not in anticipation of the increase in the put option you're going to put?

[John Rielly, CFO at Hess Corporation]

That is correct. That is just for the 75,000 we have. you know, simple math, if you want to double it to get to 150, you could double it, but we will give you updates on that as we, you know, increase our hedge position. Your second question on the carbon credits. What we have, that $75 million purchase on the carbon credits, you'll see it on our balance sheet in other long-term assets. When you look at, there's nothing on the income statement because that is an asset being held. On the cash flow statement, it is in working capital.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

Okay. My final question is for Greg. Bakken, can you tell us that what is the winter storm impact in the fourth quarter? I understand the first quarter you're being conservative, contingency on the weather. For the full year production, seems like it's a tad low compared to what we have expected, even after taking into consideration of the first quarter. Is the number of wells that you plan for this year end up is going to be lighter than previously, or is there anything that you can share? It does seems to be low comparing to what I think previously has been discussing.

[Greg Hill, COO at Hess Corporation]

No. I think, let me, let me talk first about the snowfall. The, you know, the severe snowfall coupled with really low wind chill, you know, significantly impacted our ability to mobilize resources. You just can't put people to work, you know, at minus 30, minus 40 wind chill. What that did was it significantly increased our backlog of down wells. Importantly, it delayed bringing new wells online. We projected, you know, 25 new wells online coming on in the fourth quarter. That number was 15, so we lost 10 wells. If you assume those things come on at 1,100, 1,200 barrels a day, you can see that's a fairly significant impact. I think we're in recovery mode. We expect to recover in the quarter from that.

[Greg Hill, COO at Hess Corporation]

It just takes time to, you know, build and dig out of that, literally. But importantly, Paul, I think, you know, the Bakken now is on this steady build, this steady cadence, this steady build, to get to that 200,000 barrel a day average in 2025. There will be this regular cadence. It will probably touch 200, you know, towards the end of 2024, but I think importantly, we will average 200,000 barrels a day in 2025. We're on a solid trajectory from...

[Greg Hill, COO at Hess Corporation]

Here to 2025 and not concerned at all about it. Wells are performing as expected. you know, you're coming in with these IP180s of 120, EURs of 1.2. That's in spite of going into a little bit less quality acreage. The reservoir is performing exactly as expected. These are just weather aberrations as you kind of go through the year. That's all it is.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

I see. Greg, do you have a estimate, what is the exit rate for this year in Bakken?

[Greg Hill, COO at Hess Corporation]

No, not yet. We will guide that as we go through the year, Paul. you know, I'm always kinda hesitant because fourth quarter is always a little odd on weather, so we wait until we're closer and kinda look forward at weather forecasts before we like to project that far out.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

Okay, thank you.

[Operator]

One moment for our next question. Our next question comes from Neil Mehta with Goldman Sachs. Your line is open.

[Neil Mehta, Managing Director and Head of North American Natural Resources Equity Research at Goldman Sachs]

Hey. Hey, thanks. Thanks, guys. I just wanted to follow up on Janine's question around capital returns. In the fourth quarter, you bought $310 million worth of stock, and I think you did $650 million last year. The share prices have done really well, congrats on that. Has the appreciation in the share price changed how aggressive you wanna be around buying back stock? You know, as we think about this year, you know, recognizing you're prioritizing the dividend, should we think that there'll be a ratable buyback as well?

[John Rielly, CFO at Hess Corporation]

Thanks, Neil. You know, just going back to what John has said, you know, a little early. You know, you reiterated our priorities, you know, invest in those high return opportunities, Guyana and Bakken, maintain that strong balance sheet. The first thing, as John had mentioned, we'll be looking at the dividend, 'cause that will give strong consideration first to that dividend increase. Then in line, you know, we're going to return cash up to the 75% through further share repurchases then. As we look at, as you said, with the stock appreciation, we are committed to that return framework, and we will return up to that 75% through both the dividends and share repurchases. The way we look at it right now is we currently only have 2 FPSOs on producing in Guyana.

[John Rielly, CFO at Hess Corporation]

We have Payara starting in this year. Remember every time an FPSO comes on and it, you know, once it's fully ramped, you know, Payara is gonna be about 55,000-60,000 barrels a day to us and $1 billion in cash flow. You have Yellowtail similarly in 2025, a little bit bigger, so, you know, 65,000 barrels a day approximately. When that is fully up and running, a little bit more cash flow than that billion. We've got Uaru in 2026, and we got up to 10 FPSOs to develop all the resources we have found. We believe in buying our shares in advance of that significant cash flow growth and NAV accretion that each of these FPSO generates. We believe that will deliver significant value to shareholders by continuing the share repurchases.

[Neil Mehta, Managing Director and Head of North American Natural Resources Equity Research at Goldman Sachs]

Thank you, John. The follow-up is just around post-2023 CapEx, recognizing again that there's a cost recovery element here. We just try to calibrate our models post-2023. Any moving pieces that you would point us to help us think about where we should set those numbers?

[John Rielly, CFO at Hess Corporation]

This is really early, Neil, so thanks for that question. As you move into next year, just think Bakken, you know, steady 4 rig program, you know, shouldn't be much changes there. Gulf of Mexico, we'll see what happens. You know, Greg had talked about the wells we're drilling this year, and we'll see what any follow-ons as it relates to that. It's a little early. Southeast Asia may be slowly coming down. You saw it came down a bit in 2023, from last year. Guyana, obviously the big spend. We'll continue to have, you know, 3 FPSOs kind of coming in line. Payara will be on, but we'll still have 3 FPSOs that are in the development phase.

[John Rielly, CFO at Hess Corporation]

With those, I mean, you see with current market, the current market's a bit up, so you can kind of take up those 3 FPSOs a bit as compared to what we have this year. The one other piece to add is the FPSO purchases, which we expect to have our first FPSO purchase in early 2024.

[Neil Mehta, Managing Director and Head of North American Natural Resources Equity Research at Goldman Sachs]

Yeah, thanks, John. Very helpful.

[Operator]

One moment for our next question. Our next question comes from Ryan Todd with Piper Sandler. Your line is open.

[Ryan Todd, Managing Director and Senior Research Analyst at Piper Sandler]

Hey, thanks. Maybe just a couple quick ones. First off, I appreciate you talked about some of the cost inflation that you've seen and been able to mitigate there in the Bakken. I don't know, you've talked about it indirectly with the Uaru number. What are you seeing in terms of cost inflation on the offshore? Rig rates are certainly up. I mean, as we look at things in Canada and Gulf of Mexico and across your portfolio, what type of inflation are you seeing year-over-year and where is it worse in the offshore?

[John Rielly, CFO at Hess Corporation]

Well, I think you know, as you mentioned, I mean, certainly rigs are going up, you know, kind of the, you know, mid to high 3s, you know, approaching 400, I think, for offshore rigs, you know, not unreasonable. Now remember, we're largely insulated from that because certainly the first 3 developments in Guyana, are actually, you know, already locked in, 4 actually with Yellowtail. So those costs are locked in. Some of the rig rates float a little bit and obviously, Oil Country Tubular Goods are up. I will say that ExxonMobil has done an outstanding job.

[Greg Hill, COO at Hess Corporation]

Of delivering improvements to offset both rig cost increases and Oil Country Tubular Goods increases. We're fairly insulated because of the projects we have going on, and as we mentioned, the cost in Uaru will reflect that market inflation, and we'll get into details all at once it's finally sanctioned. Those are sort of the levels we're seeing, but again, we're largely insulated from that, you know, in our portfolio because of the nature of Guyana.

[Ryan Todd, Managing Director and Senior Research Analyst at Piper Sandler]

Great. Thanks. Then maybe just a philosophical question on the hedging, I appreciate the detail on this year's hedging. As we think longer term, as, you know, as production capacity continues to increase in Guyana and that stable cash flow kind of grows, do you expect to reduce your hedging amount over time, or do you view that as just kind of a strategic importance from an insurance point of view?

[John Rielly, CFO at Hess Corporation]

We definitely view it as a strategic importance from an insurance point of view. I think you can clearly expect our WTI hedge levels to, you know, remain at similar levels that we have done before, again, the tax and royalty aspect of it. Percentage-wise, you know, on the Brent side, as production keeps growing, you know, as each time we bring on FPSOs, you could see maybe percentage-wise that we could have a lower hedge percentage overall. Again, I think you should expect us to have a good significant insurance protection each year, just to protect that downside and again, leave the upside for investors.

[Ryan Todd, Managing Director and Senior Research Analyst at Piper Sandler]

Okay. Thanks, John.

[Operator]

One moment for our next question. Our next question comes from Noel Parks with Tuohy Brothers. Your line is open.

[Noel Parks, Managing Director of CleanTech and E&P at Tuohy Brothers]

Hi. Good morning.

[Greg Hill, COO at Hess Corporation]

Morning.

[Noel Parks, Managing Director of CleanTech and E&P at Tuohy Brothers]

I just wanted to touch base on something that was mentioned earlier on. You were just talking about experiencing exceptional facilities reliability in Guyana. I was wondering if you could talk a little bit about maybe how that contributed to results. I was just curious if you had modeled some, you know, maintenance or slowdown in there that you wound up not having to do.

[Greg Hill, COO at Hess Corporation]

No. What my earlier comment was, you know, if you look at Q4, in Guyana, there was little maintenance at all in Guyana. As we look forward, you know, for a whole year, you have to build some of that in. You'll have some pigging runs and some facility maintenance. We had to build that into, you know, the downtime as we kinda look forward for a full year of Guyana production. Q4 was exceptional. Very high reliability.

[Noel Parks, Managing Director of CleanTech and E&P at Tuohy Brothers]

Okay. Great. Apologies if you touched on this. I dropped off for a minute. The offshore Canada prospect that you mentioned, I just wondered if you could talk a little bit about the geology of that and how it was identified.

[Greg Hill, COO at Hess Corporation]

Yeah, sure. We identified this prospect with a number of partners, really about the same time that we identified the Guyana opportunity. This is a very large stratigraphic trap. There's only a one well commitment. As we mentioned in our opening remarks, the rig will show up in the second quarter. The prospect is very shallow. You know, it's about 15,000 feet or so, and it's only in 4,000 feet of water, total depth. Total depth 15,000. You know, this is gonna be a kind of a one well wonder, and we'll see where it goes. But it's very large.

[Noel Parks, Managing Director of CleanTech and E&P at Tuohy Brothers]

Okay.

[Greg Hill, COO at Hess Corporation]

Mm-hmm.

[Noel Parks, Managing Director of CleanTech and E&P at Tuohy Brothers]

Okay, great. Good to hear. Thanks.

[Greg Hill, COO at Hess Corporation]

Thanks.

[Noel Parks, Managing Director of CleanTech and E&P at Tuohy Brothers]

Thank you.

[Operator]

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

Participants

Executives

• Greg Hill, COO
• Jay Wilson, VP of Investor Relations
• John Hess, CEO
• John Rielly, CFO

Analysts

• Arun Jayaram, Research Analyst at JPMorgan
• Doug Leggate, Managing Director and Head of Global Oil & Gas Equity Research at Bank of America
• Jeanine Wai, Senior Analyst at Barclays
• Neil Mehta, Managing Director and Head of North American Natural Resources Equity Research at Goldman Sachs
• Noel Parks, Managing Director of CleanTech and E&P at Tuohy Brothers
• Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank
• Ryan Todd, Managing Director and Senior Research Analyst at Piper Sandler