Hess Q2 2022 Earnings Report

Hess EPS Results

• Actual EPS: $2.15
• Consensus EPS: $2.07
• Beat/Miss: Beat by +$0.08
• One Year Ago EPS: $0.24

Hess Revenue Results

• Actual Revenue: $2.99 billion
• Expected Revenue: $2.60 billion
• Beat/Miss: Beat by +$384.77 million
• YoY Revenue Growth: +87.00%

Hess Announcement Details

• Quarter: Q2 2022
• Date: 7/27/2022
• Time: Before Market Opens
• Conference Call Date: Tuesday, July 26, 2022
• Conference Call Time: 10:29PM 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 Q2 2022 Earnings Call Transcript

Key Takeaways

• Industry-leading cash flow growth: At a flat Brent price of $65/bbl, Hess forecasts ~25% annual increase in cash flow from 2021 to 2026, with debt-to-EBITDAX falling below 1x by 2024 and commitment to return up to 75% of free cash flow to shareholders via dividends and buybacks.
• Strong shareholder returns: Hess repurchased 1.8 million shares for $190 million in Q2 under its $650 million authorization and plans to use the remaining amount opportunistically by year-end alongside continued dividend increases.
• Robust Guyana growth trajectory: Liza Phase 2 ramped to 220 kb/d gross, Payara FPSO is on track for late-2023 first oil, and Yellowtail was sanctioned for 2025 startup, supporting >10% annual production growth through 2026 from a low-cost breakeven of $25–$35/bbl.
• Bakken operational headwinds and cost inflation: Severe weather and prolonged power outages caused production delays, and full-year drilling & completion costs were raised to $6.3 million per well amid 8.5% YoY inflationary pressures.
• Production growth guidance raised: Q3 net production is expected to increase ~10% from Q2 to 330–335 kb/d (ex-Libya), with full-year 2022 production now guided to ~320 kb/d, driven by Bakken well additions and Guyana ramp-up.

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to the second quarter 2022 Hess Corporation conference call. My name is Liz, and I'll be your operator for today. At this time, all participants are in 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]

Good morning, everyone, and thank you for participating in our second 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 sections 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. In case there are any audio issues, we also will be posting transcripts of each speaker's prepared remarks on www.hess.com following the presentation. I'll now turn the call over to John Hess.

[John Hess, CEO at Hess Corporation]

Thank you, Jay. Welcome to our second quarter conference call. Today, I will provide first some comments on the oil markets and then review our progress in executing our strategy. Greg Hill will then discuss our operations and John Rielly will review our financial results. In the last month, recessionary fears that have affected the financial markets have also been weighing on the oil markets. The price for Brent crude oil has gone from a peak of $120 per barrel to a low of $95 per barrel to approximately $105 per barrel today. However, the physical oil market remains tight. For example, to buy a physical Brent cargo, crude buyers today have to pay a cash premium of at least several dollars per barrel. We are in unprecedented times for the financial markets and for the oil markets.

[John Hess, CEO at Hess Corporation]

In both markets, we have experienced a demand shock and a supply shock. The global economy shut down in 2020 and it has taken approximately 2 years to recover. In terms of global oil demand, there's been a V-shaped recovery due to various government financial stimulus programs and accommodative monetary policies. Global oil demand has returned to pre-COVID levels of approximately 100 million barrels per day. On the other hand, global oil supply has seen more of a U-shaped recovery. Global oil supply has been struggling to keep up with demand, predominantly as a result of more than 5 years of industry underinvestment. As a consequence, we have seen 7 consecutive quarters of draws on global oil inventories, so much so that global oil inventories today are approximately 400 million barrels less than pre-COVID levels.

[John Hess, CEO at Hess Corporation]

As we look to the second half of the year, we expect global oil demand to increase by 1 million to 1.5 million barrels per day as a result of China's economy reopening after COVID lockdowns and increasing air travel. In terms of global oil supply, while shale producers have enabled the U.S. to grow oil production by approximately 1 million barrels per day in the last year, there is very little spare capacity left in the world. With demand growing, supply lagging, and the potential for further sanctions on Russian oil exports, we expect a tight global oil market to get even tighter over the balance of the year. In a world that needs reliable, low cost oil and gas resources now and for decades to come, Hess is in a very strong position, offering a highly differentiated value proposition for investors.

[John Hess, CEO at Hess Corporation]

Our strategy is to continue delivering high resource growth, a low cost of supply, and industry leading cash flow growth, while at the same time maintaining our industry leadership in environmental, social, and governance performance and disclosure. Our successful execution of this strategy has uniquely positioned our company to deliver value to shareholders now and for years to come, both by growing intrinsic value and by growing cash returns. By investing only in high return, low cost opportunities, the best rocks for the best returns, we have built a balanced portfolio focused on Guyana, the Bakken, Deepwater Gulf of Mexico, and Southeast Asia. With multiple phases of low cost oil developments coming online in Guyana and our robust inventory of high return drilling locations in the Bakken, we can deliver highly profitable production growth of more than 10% annually over the next five years.

[John Hess, CEO at Hess Corporation]

Through the continued development of our high quality resource base, we are steadily moving down the cost curve. Our four sanctioned oil developments in Guyana have a break-even Brent oil price of between $25 and $35 per barrel. In terms of cash flow growth, we have an industry leading rate of change and industry leading durability story. 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 in the coming years, with debt to EBITDAX expected to decline from less than 2x in 2022 to under 1x in 2024.

[John Hess, CEO at Hess Corporation]

As our portfolio becomes increasingly free cash flow positive in the coming years, 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. Given our strong cash flow growth, we commenced a share repurchase program during the second quarter, repurchasing approximately 1.8 million shares of common stock for $190 million under our existing $650 million board authorization, and we intend to opportunistically repurchase the remaining amount by year-end. 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.

[John Hess, CEO at Hess Corporation]

As our free cash flow generation steadily increases, share repurchases will represent a growing proportion of our return of capital. Key to our strategy is Guyana, the industry's largest oil province discovered in the last decade. On the Stabroek Block in Guyana, where Hess has a 30% interest and ExxonMobil is the operator, we continue to see the potential for at least 6 floating production storage and offloading vessels, or FPSOs, in 2027, with a gross production capacity of more than 1 million barrels of oil per day and up to 10 FPSOs to develop the discovered resources on the block. In terms of our sanctioned oil developments, production at the Liza Phase I development has reached its new production capacity of more than 140,000 gross barrels of oil per day in the second quarter, following production optimization work on the Liza Destiny FPSO.

[John Hess, CEO at Hess Corporation]

The Liza Phase II development, which achieved first oil in February, reached its gross production capacity of approximately 220,000 barrels of oil per day earlier this month. Our third development on the Stabroek Block at the Payara field, with a gross production capacity of approximately 220,000 barrels of oil per day, is on track for startup in late 2023. In early April, we announced sanction of Yellowtail, which will be the largest development to date on the Stabroek Block. The project will develop an estimated recoverable resource base of approximately 925 million barrels of oil and have a gross production capacity of approximately 250,000 barrels of oil per day, with first oil expected in 2025.

[John Hess, CEO at Hess Corporation]

Front-end engineering and design work for our fifth development in Uaru-Mako is underway, with a plan of development expected to be submitted to the government by year-end. In terms of exploration and appraisal in Guyana, we continue to invest in an active program with approximately 12 wells planned for the Stabroek Block in 2022. Yesterday, we announced two new discoveries on the block at the Seabob and Kiru-Kiru-1 wells, bringing our total this year to 7. These discoveries will add to the previously announced gross discovered recoverable resource estimate for the Stabroek Block of approximately 11 billion barrels of oil equivalent. We continue to see multi-billion barrels of future exploration potential remaining. Now turning to the Bakken, our largest operated asset. We have an industry-leading position with approximately 460,000 net acres in the core of the play.

[John Hess, CEO at Hess Corporation]

Severe weather in April and May caused widespread power outages lasting 4-6 weeks and production shut-ins throughout North Dakota. Production recovery efforts took longer than expected for our company and the industry. Our Bakken operations are now recovering, with approximately 50 new wells planned to be brought online in the second half of the year versus 32 in the first half. Given the strength of the oil market and the world's need for more oil supply, we added a fourth rig earlier this month, which will allow us to achieve net production of approximately 200,000 barrels of oil equivalent per day in 2024, a level which will maximize free cash flow generation, lower our unit cash costs, and optimize our infrastructure. As we continue to execute our strategy, we are dedicated to maintaining our industry leadership in environmental, social, and governance performance and disclosure.

[John Hess, CEO at Hess Corporation]

On Monday, we announced publication of our 25th annual sustainability report, demonstrating our long-standing commitment to sustainability and transparency. We continue to be recognized as an industry leader for the quality of our ESG performance and disclosure. In May, Hess was named to the 100 Best Corporate Citizens list for the 15th consecutive year based on an independent assessment by ISS ESG, and we were the only energy company to earn a place on the 2022 list. Social responsibility is a fundamental part of our sustainability commitment. Earlier this month, we announced a multi-year national healthcare initiative with the government of Guyana and the Mount Sinai Health System to provide access to affordable and high-quality healthcare, which is central to the government's vision for long-term shared prosperity for the people of Guyana.

[John Hess, CEO at Hess Corporation]

In summary, we continue to successfully execute our strategy to deliver industry-leading cash flow growth and financial returns to our shareholders while safely and responsibly producing oil and gas to help meet the world's growing energy needs. We increased our regular quarterly dividend by 50% in March, and during the second quarter commenced a share repurchase program reflecting the financial strength of our business and our commitments to shareholders. As our portfolio becomes increasingly free cash flow positive, we will continue both to invest to grow our company's intrinsic value and to increase 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 and President at Hess Corporation]

Thanks, John. Well, in the second quarter, we experienced continued weather impacts in the Bakken and a ramp-up of Liza Phase II that was modestly slower than expected. Net production was up 10% from the first quarter, and we anticipate company-wide net production to continue to build in the second half of the year as we bring more wells online in the Bakken and Liza Phase II operates at nameplate capacity. In the second quarter, company-wide net production averaged 303,000 barrels of oil equivalent per day, excluding Libya. In the third quarter, we expect company-wide net production to increase by approximately 10% from the second quarter and to average between 330,000 and 335,000 barrels of oil equivalent per day, excluding Libya.

[Greg Hill, COO and President at Hess Corporation]

In the fourth quarter, company-wide net production is expected to further increase to between 365,000 and 370,000 barrels of oil equivalent per day, excluding Libya. For the full year 2022, we now forecast net production to average approximately 320,000 barrels of oil equivalent per day, excluding Libya. Turning to the Bakken. Second quarter net production averaged 140,000 barrels of oil equivalent per day. This was in line with our guidance and reflected the impact of severe weather in April and May. Production is now recovering and is expected to increase to between 155,000 and 160,000 barrels of oil equivalent per day in the third quarter.

[Greg Hill, COO and President at Hess Corporation]

For the fourth quarter, we forecast net production to further increase to between 160,000 and 165,000 barrels of oil equivalent per day. For the full year 2022, we now forecast Bakken net production to average between 150,000 and 155,000 barrels of oil equivalent per day. This reflects a volume reduction of approximately 7,000 barrels of oil equivalent per day under our percentage of proceeds contracts as a result of higher NGL prices. Although NGL volume entitlements are lower, overall cash flow is substantially higher. In terms of drilling completion costs, we are continuing to see upward pressure across our supply chains, particularly in oil country tubular goods.

[Greg Hill, COO and President at Hess Corporation]

As a result, we have increased our full year average drilling and completion cost forecast by $100,000 per well to average $6.3 million per well in 2022. I am proud of our team's effectiveness in mitigating the impacts of inflation and tight supply chains, largely through our distinctive lean culture. While we believe the industry is experiencing overall inflation of between 15% and 20%, our full year drilling and completion costs are forecast to increase by only about 8.5% year-over-year. In the second quarter, we drilled 20 wells and brought 19 new wells online. In the third quarter, we expect to drill approximately 25 wells and to bring approximately 20 new wells online.

[Greg Hill, COO and President at Hess Corporation]

For the full year 2022, we now expect to drill approximately 95 wells and to bring between 80 and 85 new wells online, which is slightly lower than previous guidance due to the second quarter weather-related delays in mobilizing equipment. Individual well results in terms of EURs and IP 180s continued to meet or exceed expectations. Earlier this month, we added a fourth drilling rig in the Bakken. Through our strategic partnerships with neighbors in Halliburton, we were able to secure a fully staffed, high-spec Pace X class rig and a second completion crew. Moving to a four-rig program will allow us to grow net production to approximately 200,000 barrels of oil equivalent per day in 2024, which will optimize our in-basin infrastructure and drive further reductions in our unit cash costs. Now moving to the offshore.

[Greg Hill, COO and President at Hess Corporation]

In the Deepwater Gulf of Mexico, second quarter net production averaged 29,000 barrels of oil equivalent per day compared to our guidance of approximately 30,000 barrels of oil equivalent per day. In the third quarter, we forecast Gulf of Mexico net production to average between 25,000 and 35,000 barrels of oil equivalent per day, reflecting planned downtime at Tubular Bells and a Penn State well being shut in due to a mechanical issue. This downtime will be partially offset by the planned startup of the Llano-6 tieback in August, which logged 123 feet of high quality Miocene pay. For the full year 2022, our forecast for Gulf of Mexico net production is now approximately 30,000 barrels of oil equivalent per day. In June, we completed drilling operations on the Huron prospect on Green Canyon Block 69 with encouraging results.

[Greg Hill, COO and President at Hess Corporation]

Hess is the operator with a 40% working interest, and Chevron and Shell each have 30%. The well encountered high-quality oil-bearing Miocene-age reservoirs and established the existence of a working petroleum system. Well results are still being evaluated, and an appraisal sidetrack is planned. In Southeast Asia, net production in the second quarter was 67,000 barrels of oil equivalent per day compared to our guidance of approximately 65,000 barrels of oil equivalent per day. Phase III of the North Malay Basin development came online in June and is producing above expectations, and phase IV is on track to achieve first gas in early 2023. Third quarter net production is forecast to average approximately 55,000 barrels of oil equivalent per day, reflecting planned maintenance at both JDA and North Malay Basin.

[Greg Hill, COO and President at Hess Corporation]

Full year 2022 production is expected to average between 60,000 and 65,000 barrels of oil equivalent per day. Now turning to Guyana. In the second quarter, net production averaged 67,000 barrels of oil per day, reflecting a modest delay in the ramp up of Liza Phase II. Overall, the startup has been very successful. In July, Liza Phase II reached its nameplate capacity of 220,000 barrels of oil per day, or about 56,000 barrels of oil per day net to Hess. For Liza Phase I, production optimization work was completed in the second quarter, and the FPSO is now operating at or above its new gross production capacity of 140,000 barrels of oil per day.

[Greg Hill, COO and President at Hess Corporation]

Earlier this month, SBM Offshore also completed the replacement of the flash gas compressor, which has resulted in high reliability and zero routine flaring. Third quarter net production from Guyana is forecast to increase to a range of 90,000-95,000 barrels of oil per day and average approximately 75,000 barrels of oil per day for the full year of 2022. With regard to our third development of Payara, topside fabrication and installation on the Prosperity FPSO is well underway in Singapore and development drilling in Guyana continues at pace. The project, which will have a gross production capacity of 220,000 barrels of oil per day, is now more than 80% complete and is well on track to achieve first oil in late 2023.

[Greg Hill, COO and President at Hess Corporation]

In April, we sanctioned a fourth development at Yellowtail, which will develop approximately 925 million barrels of oil and have a break-even Brent oil price of approximately $29 per barrel. The project will have a gross production capacity of 250,000 barrels of oil per day and is on track to achieve first oil in 2025. As for our fifth development at Uaru-Mako, the operator anticipates submitting the plan of development to the Government of Guyana in the fourth quarter, with first oil targeted for 2026, pending government approvals and project sanctioning. Turning to exploration. Yesterday, we announced two new discoveries on the Stabroek Block. The Seabob-1 well encountered 131 feet of high-quality oil-bearing Upper Campanian sandstone reservoirs.

[Greg Hill, COO and President at Hess Corporation]

The well is located in the southeastern part of the block, approximately 12 miles southeast of the Yellowtail field. The Kiru-Kiru-1 well has also thus far encountered 98 feet of high-quality hydrocarbon-bearing Upper Campanian sandstone reservoirs. The well is currently drilling ahead to test deeper intervals and is located in the southeastern part of the block, approximately 3 miles southeast of the Cataback-1 discovery. Both discoveries will add to the gross discovered recoverable resource estimate for the block of approximately 11 billion barrels of oil equivalent. In terms of future drilling activity on the Stabroek Block, next up in the queue are Yarrow and Banjo. The Yarrow-1 well will test stacked Upper Campanian targets updip of discoveries at Whiptail and Tilapia. The well is located 19 miles south of the Yellowtail-1 discovery well.

[Greg Hill, COO and President at Hess Corporation]

The Banjo-1 well will also target stacked Upper Campanian targets west of Barreleye and updip of Mako. The well is located eight miles northwest of the Barreleye-1 discovery well. These wells will appraise the development potential of the inboard oil play in the southeastern portion of the block. In addition, on Block 42 in Suriname, we will participate in the Zanderij-1 exploration well. The Shell-operated well is expected to spud in late August and will test both Upper Campanian and deeper play stacked targets. Hess, Chevron, and Shell each have a one-third working interest. In closing, our Bakken assets are now recovering from the severe weather impacts experienced in the first half of the year, and we expect to see steady production growth in the coming quarters, particularly with the addition of the fourth rig.

[Greg Hill, COO and President at Hess Corporation]

We had positive drilling results in the Gulf of Mexico at both Llano 6 and Huron, and have a robust inventory of both infrastructure-led tieback opportunities and exploration prospects. Malaysia continues to generate steady production and cash flow, and our extraordinary success in Guyana continues on all fronts. Our distinctive long-life portfolio. Uniquely positions us to deliver material and accelerating production and free cash flow growth and significant value to our shareholders. I will now turn the call over to John Rielly.

[John Rielly, CFO and EVP at Hess Corporation]

Thanks, Greg. In my remarks today, I will compare results from the second quarter of 2022 to the first quarter of 2022. We had net income of $667 million in the second quarter compared with $417 million in the first quarter, or $404 million on an adjusted basis. Turning to E&P. E&P had net income of $723 million in the second quarter compared with $460 million in the first quarter. The changes in the after-tax components of E&P earnings between the second quarter and first quarter of 2022 were as follows. Higher realized selling prices increased earnings by $178 million. Higher sales volumes increased earnings by $170 million. Higher DD&A expense decreased earnings by $39 million.

[John Rielly, CFO and EVP at Hess Corporation]

Higher cash costs decreased earnings by $39 million. All other items decreased earnings by $7 million. For an overall increase in second quarter earnings of $263 million. For the second quarter, our E&P sales volumes were underlifted compared with production by approximately 500,000 barrels, which decreased our after-tax income by approximately $15 million. Turning to Midstream. The Midstream segment had net income of $65 million in the second quarter of 2022, compared with $72 million in the first quarter. Midstream EBITDA before non-controlling interest was $241 million in both the second quarter and first quarter of 2022. Turning to our financial position.

[John Rielly, CFO and EVP at Hess Corporation]

At quarter end, excluding Midstream, cash and cash equivalents were $2.16 billion and total liquidity was $5.73 billion, including available committed credit facilities, while debt and finance lease obligations totaled $5.61 billion. In April, we received total net proceeds of $346 million from the public offering of approximately 5.1 million Hess-owned Class A shares of Hess Midstream and the sale of approximately 6.8 million Hess-owned Class B units to Hess Midstream. In the second quarter, we commenced common stock share repurchases with the purchase of approximately 1.8 million shares for $190 million under our existing $650 million board authorized stock repurchase program. We intend to utilize the remaining amount under the stock repurchase program by the end of this year.

[John Rielly, CFO and EVP at Hess Corporation]

Total cash returned to shareholders in the second quarter amounted to $306 million, including dividends. Net cash provided by operating activities before changes in working capital was $1.46 billion in the second quarter, compared with $952 million in the first quarter, primarily due to higher realized selling prices and sales volumes. In the second quarter, we sold 61 million barrel cargoes of crude oil in Guyana, up from sales of 2.3 million barrels of crude oil in the first quarter. Changes in operating assets and liabilities during the second quarter of 2022 increased cash flow from operating activities by $46 million. E&P capital and exploratory expenditures were $622 million in the second quarter and $580 million in the first quarter.

[John Rielly, CFO and EVP at Hess Corporation]

In June, Moody's Investors Service upgraded the senior unsecured ratings of Hess Corporation to Baa3 from Ba1. All three major credit rating agencies now rate Hess as investment grade. In July, we replaced our $3.5 billion revolving credit facility expiring in May 2024 with a new $3.25 billion revolving credit facility expiring in July 2027. Now turning to guidance. First for E&P. Beginning in the third quarter, we will use the remainder of the previously generated Guyana net operating loss carryforwards. As a result, we will start to incur a current income tax liability. Our third quarter Guyana net production guidance of 90,000-95,000 barrels of oil per day includes approximately 7,000 barrels of oil per day of tax barrels.

[John Rielly, CFO and EVP at Hess Corporation]

Our full year 2022 Guyana net production guidance of approximately 75,000 barrels of oil per day includes approximately 6,000 barrels of oil per day of tax barrels. There were no tax barrels in the first or second quarters. In both the third and fourth quarter of this year, we expect to sell 81 million barrel liftings from Guyana. Our E&P cash costs in the second quarter of 2022 were $13.90 per barrel of oil equivalent, including Libya, and $14.56 per barrel of oil equivalent excluding Libya.

[John Rielly, CFO and EVP at Hess Corporation]

We project E&P cash costs excluding Libya to be in the range of $14-$14.50 per barrel of oil equivalent for the third quarter and in the range of $13.50-$14 per barrel of oil equivalent for the full year, which is unchanged from previous guidance. DD&A expense was $11.79 per barrel of oil equivalent, including Libya, and $12.34 per barrel of oil equivalent excluding Libya in the second quarter.

[John Rielly, CFO and EVP at Hess Corporation]

DD&A expense excluding Libya is forecast to be in the range of $13-$13.50 per barrel of oil equivalent for the third quarter, and $12.50-$13 per barrel of oil equivalent for the full year, which is updated from the prior guidance of $11.50-$12.50 per barrel of oil equivalent. This results in projected total E&P unit operating costs, excluding Libya, to be in the range of $27-$28 per barrel of oil equivalent for the third quarter, and $26-$27 per barrel of oil equivalent for the full year of 2022.

[John Rielly, CFO and EVP at Hess Corporation]

Exploration expenses, excluding dry hole costs, are expected to be in the range of $35 million-$40 million in the third quarter and in the range of $160 million-$170 million for the full year, which is down from our previous guidance of $170 million-$180 million. The midstream tariff is projected to be in the range of $305 million-$315 million for the third quarter, and full year guidance of $1.19 billion-$1.215 billion remains unchanged.

[John Rielly, CFO and EVP at Hess Corporation]

E&P income tax, excluding Libya, is expected to be in the range of $170 million-$180 million for the third quarter and in the range of $540 million-$550 million for the full year, which is up from the previous guidance range of $460 million-$470 million, primarily due to higher commodity prices. We expect non-cash option premium amortization, which will be reflected in our realized selling prices, will be approximately $165 million for both the third and fourth quarters.

[John Rielly, CFO and EVP at Hess Corporation]

Our E&P capital and exploratory expenditures are expected to be approximately $750 million in the third quarter and approximately $2.7 billion for the full year, which is down from previous guidance of $2.8 billion that I referenced in our last conference call. The reduction is due to the phasing of activities in the Bakken and efficiencies across the portfolio. For midstream, we anticipate net income attributable to Hess from the midstream segment to be in the range of $60-$65 million for the third quarter. The full year guidance range of $265-$275 million remains unchanged.

[John Rielly, CFO and EVP at Hess Corporation]

Corporate expenses are estimated to be approximately $40 million for the third quarter and in the range of $135 million-$145 million for the full year, which is up from previous guidance of $120 million-$130 million due to higher legal and professional fees. Interest expense is estimated to be approximately $85 million for the third quarter and in the range of $345 million-$350 million for the full year, which is in the lower end of our previous guidance range. 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 followed by one on your phone.

[Operator]

Questions will be taken in the order received. Please press star one to begin. Our first question comes from Arun Jayaram with JPMorgan. Your line is now open.

[Arun Jayaram, Research Analyst at JPMorgan]

Yeah, good morning. John, I wanted to start with cash return. You know, this quarter, you returned about 20% of your CFO, including dividends, and the buyback, and you acknowledge your plan to go ahead and complete the remaining authorization, which would point to about $460 million of buybacks, plus the dividend. I'm wondering as we think about your capital return framework, which includes the return of up to 75% of your free cash flow, how should we think about the pace of buybacks as we approach 2023?

[John Hess, CEO at Hess Corporation]

Yeah. John Rielly?

[John Rielly, CFO and EVP at Hess Corporation]

Yeah. Thanks, Arun. Just to remind you where our capital return framework is. Our framework is set up on an annual basis. We look at our annual free cash flow, and we are planning to return it. We are committed to return up to 75% of that free cash flow. That free cash flow is reduced for debt reductions, which we did have that $500 million in the first quarter. As we said, with our $650 authorized and the $190 done in the second quarter, you can expect the remainder to be done throughout the rest of this year. It's actually going to be above the 75% framework because of where commodity prices are, our discussions with the board, our favorable balance sheet position.

[John Rielly, CFO and EVP at Hess Corporation]

Look, with Guyana ramping up and Bakken ramping up, our free cash flow is improving, as you see from our second quarter results, so that we can give more than 75% this year with this favorable commodity price environment. Coming to 2023, you really should think about, look, we just are starting this capital return program. This is just the beginning and we plan to continue it. As we move into 2023, we are committed to that 75% framework. Again, if commodity prices are favorable, we can do more than that next year. You should begin to think this is gonna be a continued program. Just remember now with Bakken, as we said, that's going to 200,000 barrels a day.

[John Rielly, CFO and EVP at Hess Corporation]

Guyana is gonna be bringing on an FPSO almost once a year here for the coming years. We're gonna have a growing free cash flow. That 75% is gonna be going on a bigger and bigger number as we move out. I think that's the strategic framework you should be thinking about.

[Arun Jayaram, Research Analyst at JPMorgan]

Great. Maybe John Rielly, a follow-up for you. $2.7 billion in CapEx update, a little bit lower than you told us last quarter. I was wondering if you could just provide us maybe some soft commentary around 2023 CapEx if you sustain 4 rigs in the Bakken and continue your IND program in Guyana.

[John Hess, CEO at Hess Corporation]

Go ahead, John.

[John Rielly, CFO and EVP at Hess Corporation]

Thank you for this. Thank you for the soft guidance then, Arun, because that's what we'll do. As usual, we'll provide the full guidance in January because we do have some moving parts, like you said. With the fourth rig in the Bakken, and look, we did have some phasing of activities that are moving into 2023. You can at least expect an additional $150 million, you know, plus from the Bakken. This is before inflation, which I'll talk about a little bit at the end. The Bakken will be increasing with that fourth rig, some of the phasing, as well. You can think about that $150 million. In Guyana, you know we've got a lot of things going on. I did say this in the first quarter.

[John Rielly, CFO and EVP at Hess Corporation]

There's clearly going to be about several hundred million more in Guyana because we'd be developing Payara, right? We're bringing that on in late 2023. We've got to develop with Yellowtail, the fifth FPSO, which Greg mentioned, Uaru and Mako. We also have the Gas to Energy project going on in Guyana. Again, several hundred million more for Guyana, but we'll fine-tune that as we go through the year. Also, as you heard Greg mention, we had success at the Huron well in the Gulf of Mexico. We'll be looking at what we're doing from an appraisal standpoint and what our Gulf of Mexico program, which typically, as we had mentioned, we'd like to get some of these infrastructure-led tiebacks done as well as greenfield. We'll be having some increase in Gulf of Mexico for 2023.

[John Rielly, CFO and EVP at Hess Corporation]

I mentioned it, of course, we're monitoring the industry inflation. We are seeing it. Greg mentioned what's happening with our D&C costs in Bakken. We are seeing it in rig rates, labor, steel costs. We'll continue to be looking at that and we'll fine-tune it as we get to the end of the year. Kind of soft, those are the kind of numbers you can be looking at, Arun.

[Arun Jayaram, Research Analyst at JPMorgan]

What about the FPSO? Have you all made a determination with Exxon on buying those on your buy option?

[John Rielly, CFO and EVP at Hess Corporation]

No, that has not been finally determined yet, Arun. The timing. The guidance I would give you right now is not to expect a purchase in 2023. If you're putting in your models, don't put one in 2023. I would expect one in early 2024, but again, it's still early days. We do not have that finalized yet.

[Arun Jayaram, Research Analyst at JPMorgan]

Great. Thanks, John.

[John Hess, CEO at Hess Corporation]

Thank you.

[John Rielly, CFO and EVP at Hess Corporation]

You're welcome.

[Operator]

Thank you. Our next question comes from Doug Leggate with Bank of America. Your line is now open.

[Doug Leggate, Managing Director, Head of US Oil and Gas at Bank of America]

Thanks. Good morning, everyone. I guess could I go first to the Bakken? Obviously, you've given a very fairly thorough explanation as to what's been going on there with weather and power outages and so on. But I wanna ask about any thoughts on the trajectory to 200,000 barrels a day. Is there any reason why we should, you know, be rethinking the timeline of that? Are you still confident in that? What is your updated thoughts on the trajectory to get there?

[John Hess, CEO at Hess Corporation]

Yeah, Greg.

[Greg Hill, COO and President at Hess Corporation]

No, Doug, I think I think we're back on track in the Bakken. We're back on that trajectory. You know, as I mentioned in my opening remarks, we expect the third quarter to be up 10%, the fourth quarter to be up 10% from that, and then you really see the fourth rig start to kick in because you'll start completing wells from that fourth rig in 2023. That's why we're saying we'll have this steady increase trajectory to 200,000 barrels a day, which we expect to hit in 2024. It should be a smooth ramp from here.

[Doug Leggate, Managing Director, Head of US Oil and Gas at Bank of America]

Okay. Thanks, Greg. I just wanted to kind of address that right up front.

[Greg Hill, COO and President at Hess Corporation]

Mm-hmm. Yep.

[Doug Leggate, Managing Director, Head of US Oil and Gas at Bank of America]

My follow-up, I'll leave everyone else to ask on Guyana today. Greg, I wanna ask you about Huron. This is, you know, perhaps a little bit more material news than perhaps your short comments might suggest. Can you give us a little bit more color on pre-drill scale? You know, if you're sidetracking, one assumes that you're pretty encouraged with what you're seeing. What was the pre-drill target here and what is this? You know, you've talked about one potential hub development exploration well per year going forward. Does this qualify as a potential hub development?

[John Hess, CEO at Hess Corporation]

Yeah, Greg.

[Greg Hill, COO and President at Hess Corporation]

Well, let me talk about the well first. It was drilled on Green Canyon block 69 to a depth of 28,900 feet, and the rig was released on June 14, 2022. As I mentioned in my opening remarks, the prospect targeted a new Miocene subsalt fairway in northern Green Canyon. The reason we're really encouraged by the results is that we discovered, you know, good high quality oil and good quality Miocene sands. As I did mention, we're also planning an appraisal sidetrack updip on that well. I think the second thing that's really exciting about it is, as a result of what we're seeing at Huron, we see additional prospectivity in that northern Green Canyon area, and we have a very competitive leasehold position there.

[Greg Hill, COO and President at Hess Corporation]

Two positive outcomes from Huron. You know, Doug, we don't release pre-drill estimates, and the well is still under evaluation, so, you know, further information coming as we appraise that asset.

[John Hess, CEO at Hess Corporation]

I would just add to that. I mean, we're encouraged by the prospecting activity in this area, the fact that there's a working petroleum system. There's gonna be further drilling and appraisal ahead of us, and we're encouraged by it.

[Doug Leggate, Managing Director, Head of US Oil and Gas at Bank of America]

If I may very quickly, Greg, you say you're gonna do an updip appraisal. Did you have an oil-water contact?

[Greg Hill, COO and President at Hess Corporation]

Well, still under evaluation, Doug.

[Doug Leggate, Managing Director, Head of US Oil and Gas at Bank of America]

Okay, thanks.

[John Hess, CEO at Hess Corporation]

Thank you.

[Operator]

Thank you. Our next question comes from Paul Cheng with Scotiabank. Your line is now open.

[Paul Cheng, Analyst at Scotiabank]

Thank you. Good morning.

[John Hess, CEO at Hess Corporation]

Good morning.

[Paul Cheng, Analyst at Scotiabank]

I think the first one is for John Rielly. John, with the rising fear of recession, how does it at all impact on the thinking or in your decision process on the budget?

[John Hess, CEO at Hess Corporation]

John?

[John Rielly, CFO and EVP at Hess Corporation]

Sure. That's one of the things I mentioned why, you know, as Arun said, soft guidance and what our budget would be for next year. We are looking at that. Obviously, it's. There's no change to our base program in the Bakken. We're gonna have the four rigs. We're doing that. We wanna optimize our infrastructure up there, lower our cash costs, and it's the best return way to develop the Bakken. There won't be any change there. We'll continue to monitor the costs and update everyone on where the budget ends up with that. On a go-forward basis then Guyana, again, the plans there, unchanged. You know, obviously just a phenomenal province for us for oil development.

[John Rielly, CFO and EVP at Hess Corporation]

The returns there are excellent, and we will be trying to bring forward as much as we can to get this oil for the country of Guyana on as early as possible. Again, you know, Payara, Yellowtail, getting the fifth ship in for FID, try to get the development plan into the government. No change there. Again, you know, Exxon has been doing an excellent job managing the cost there. You know, we are susceptible to that cost inflation that everybody else is seeing. We'll update again where that number comes. As I said, we have about $1 billion this year in our plan, in our original budget, and we're not changing that in Guyana. Again, Exxon's done a really good job this year managing that inflation.

[John Rielly, CFO and EVP at Hess Corporation]

As I said, it will be $several hundred million more. But again, we'll see where the inflation ends up. Then the, you know, kind of the new thing, 'cause we were just talking about Gulf of Mexico in our program, we are looking at the rig rates and being able to get slots. That's something, again, that we will be looking at, managing. We do want to, you know, do this appraisal that we talked about, and we'd like to do some of our infrastructure-led tiebacks. Again, those are extremely good returns, even if the cost inflation's a little bit higher. I think you can take that again as our soft guidance on what we're doing.

[John Rielly, CFO and EVP at Hess Corporation]

You know, we keep practicing our lean culture and trying to get it as much as possible, working with our strategic relations. Exxon’s done a really good job this year managing that inflation. As I said, it will be $ several hundred million more. Again, we'll see where the inflation ends up. You know, kind of the new thing, 'cause we were just talking about Gulf of Mexico in our program, we are looking at the rig rates and being able to get slots. That's something again that we will be looking at.

[John Hess, CEO at Hess Corporation]

Yeah. One other point, Paul, so you know, and it's a good, great question. I think all oil companies are dealing with this recession risk, even though there's an economic slowdown now. We certainly see the market getting tighter for the reasons that I mentioned between now and the end of the year. Having said that, you know, our board will definitely stress test our budget for next year. Definitely there'll be a recession scenario in that. We'll definitely be prepared should there be a recession to stay ahead of it to keep the balance sheet strong, so we can still invest in our high return opportunity in Guyana.

[John Hess, CEO at Hess Corporation]

We'll also take steps as we normally do as we get to the end of the year to make sure we have some price protection on in terms of puts on the downside. We'll be prepared in case a recession occurs. It's certainly gonna be one of the scenarios that the board has with our senior leadership to, you know, make sure we're financially disciplined going into next year.

[Paul Cheng, Analyst at Scotiabank]

Sure. Great. Going back to John Rielly, that you mentioned some activity has been pushed from this year to next year. Can you quantify, roughly, how much?

[John Rielly, CFO and EVP at Hess Corporation]

Sure. As Greg mentioned, you know, right now with wells online, we're a little bit down. I would say wells online, we're only in 5 range of wells online that are gonna be moving to next year. Some of the wells drilled. As Greg mentioned, there were 95 wells. That's actually up from our original guidance of 90, but that didn't include the fourth rig. The fourth we should have gotten an additional 14-15 wells drilled, and we're only getting 5. We've got additional wells that are moving that way. You're looking 9 or 10 wells to be drilled that are moving to next year, 5-ish kinda wells online moving to next year, and just some other small infrastructure type things.

[John Rielly, CFO and EVP at Hess Corporation]

Altogether, you know, you're probably looking in that $40 million type range that got moved to next year.

[Paul Cheng, Analyst at Scotiabank]

Thank you.

[Operator]

Thank you. Our next question comes from Jeanine Wai with Barclays. Your line is now open.

[Jeanine Wai, Research Analyst of US Integrated Oil, Exploration and Production at Barclays]

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

[John Hess, CEO at Hess Corporation]

Morning, Jeanine.

[Jeanine Wai, Research Analyst of US Integrated Oil, Exploration and Production at Barclays]

Good morning. We'd like to follow up on the Gulf of Mexico from Doug's questions. There's been some headlines that some of your partners there are looking to monetize their interest in one of your fields, and it sounds like you're very positive on the Gulf in the near term. I know you just mentioned increasing activity in 2023 and you're sidetracking a well. Can you generally discuss what your medium-term plan is in terms of activity in the Gulf? Our follow-up is, you know, what's your appetite to grow your position there? Thank you.

[John Hess, CEO at Hess Corporation]

Yeah. Greg, we'd appreciate it if you just go over our strategy, the role of the Gulf in our portfolio, the exploration acreage that we have. I can comment on the M&A side, Jeanine. You know, in the normal course of business, we always look to optimize our portfolio, but we have not seen anything in the market, be it in the Gulf or elsewhere that makes sense for us to do an acquisition. We have better opportunities to invest in our portfolio of high return and low-cost investments. You know, we're much more focused on getting return from the inventory of investment opportunities that we have than looking to the outside. We don't need M&A to grow the returns of our business.

[John Hess, CEO at Hess Corporation]

Quite frankly, most of the stuff that we've seen would erode returns, and we're not gonna do that. We're gonna stay financially disciplined. Greg, please talk about the role of the Gulf in our portfolio.

[Greg Hill, COO and President at Hess Corporation]

Sure. Thanks, Jeanine. You know, the Gulf of Mexico for us remains a very important part of the portfolio. It's an important cash engine, and it's a platform for growth for us. Our objective in the Gulf is to, at a minimum, sustain production cash flow through tieback opportunities and also selected selectively pursuing, you know, hub class exploration opportunities. You know, if we can grow it, we want to. As you recall, we've been selectively rebuilding our portfolio in the last five or six years such that, you know, we acquired 60 new lease blocks in the Gulf. We've got over 80 now in our portfolio, and that's really a balance of high return tiebacks and also hub class new exploration prospects.

[Greg Hill, COO and President at Hess Corporation]

Assuming those opportunities compete for capital, you know, a good planning assumption for us going forward is that we would drill roughly 2 wells per year for the next several years. That, again, is focused on both those tiebacks and new hub class opportunities, with Huron being the first out of the gate, again, very encouraging results in Huron, particularly for that Northern Green Canyon basin, where we have a very competitive leasehold there. We're pretty excited about that.

[Jeanine Wai, Research Analyst of US Integrated Oil, Exploration and Production at Barclays]

Great. Thank you.

[John Hess, CEO at Hess Corporation]

Thank you.

[Operator]

Thank you. Our next question comes from Ryan Todd with Piper Sandler. Your line is now open.

[Ryan Todd, Managing Director and Senior Research Analyst of Integrated Oils, Refines, and Biofuels at Piper Sandler]

Great. Maybe just a couple of quick follow-ups on earlier questions. On the Gulf of Mexico, as you were talking about medium-term strategy, I know this varies on a lot of things, but if you were to, you know, do that plan a couple of wells a year, is the general outlook that you'd probably hold production flat there over the medium term in the Gulf of Mexico, that you could drive modest growth? Or how do you think about, you know, as you look out over the next few years, the trajectory of production there in the Gulf of Mexico?

[John Hess, CEO at Hess Corporation]

Yeah. Greg?

[Greg Hill, COO and President at Hess Corporation]

Sure. Sure. I think for the next couple years, you could assume our objective is really to hold it flat, and we'll do that through these, you know, infills and ILX, infrastructure-led exploration wells that are quick tiebacks. You know, beyond that, we're also going to be doing some, you know, hub class exploration prospects. Obviously, those wouldn't come in as growth until later, you know, in that period. Short term, hold it flat as a minimum. Longer term, grow it, assuming success from some of these hub class exploration prospects.

[Ryan Todd, Managing Director and Senior Research Analyst of Integrated Oils, Refines, and Biofuels at Piper Sandler]

Perfect. Thanks, Greg. Maybe a follow-up on an earlier comment. You talked a little bit about the dividend, the desire to grow it, to a position of competitiveness. How would you define? I mean, you've obviously increased it materially earlier this year, but how would you define a competitive dividend? You know, what peer group are you looking at? Any thoughts on kind of the timetable of over which you'd like to grow that dividend to, you know, kind of a sustainable level where you'd like it to be?

[John Hess, CEO at Hess Corporation]

Yeah. I'm gonna have John answer it, but I think the way to think about it is a sustainable and meaningful premium to the S&P dividend yield. That's what we're really looking at. We wanna compete for the generalist investor, not just the oil and gas investor, but we want it to be something that also holds up under low oil prices. John, why don't you elaborate a little bit what our plans are?

[John Rielly, CFO and EVP at Hess Corporation]

Sure. I mean, John did give a good explanation on that, but that's clearly what we're looking to do, continual increases here. John did mention it, that we'd like to get our dividend to a level that is attractive to the income-oriented investor. I think, you know, yield is an output, but you can think about the yield that the income-oriented investors are looking at.

[John Rielly, CFO and EVP at Hess Corporation]

With our ability here, again, as I mentioned, Bakken growing at 200,000 barrels a day, and then Guyana, you know, Payara coming in late 2023, and then, you know, almost an FPSO a year here as we move into the next couple of years, we're going to have a significant free cash flow that we're able to continue to increase the dividend, and we can kind of move that dividend as our cash flow grows. Actually the bigger part of our return will be share repurchases because that growing free cash flow, when you put that 75% against it as we will grow that dividend. We want to make it sustainable in a low oil price environment, but the bigger portion ultimately will be share repurchases.

[Ryan Todd, Managing Director and Senior Research Analyst of Integrated Oils, Refines, and Biofuels at Piper Sandler]

All right. Thanks, John.

[Operator]

Thank you. Our next question comes from Neil Mehta with Goldman Sachs. Your line is now open.

[Neil Mehta, Senior Equity Research Analyst of Natural Resources at Goldman Sachs]

Good morning, team. Had a couple questions on the macro, and the first is around price realizations. They were good in the quarter. John, you had made the comment that, you know, what we see in the financial market, it might be lower than what you're realizing in the physical market. But can you just talk about that divergence and whether you're able to realize something higher than the front price?

[John Hess, CEO at Hess Corporation]

Yeah. I mean, you know, obviously this changes, as you know, Neil, it's a great question every day. But you know, what we've been seeing really for the last two months is, you know, buyers for physical Brent or physical Brent equivalents is several dollars a barrel premium over the screen or the futures market. You know, there's strong buying that's out there, obviously, not just because the world is short inventory and needs the current barrels, but obviously what's going on in Russia and Europe has tightened the market even more, which you're seeing more in the Brent price than you are in the WTI price on the screen. Several dollars a barrel, I think is a good planning assumption for now.

[John Hess, CEO at Hess Corporation]

You know, we'll just have to see how the market evolves between now and the end of the year. One of the concerns we have is obviously if more barrels are taken out of Russia. I think Russia's down in terms of their exports about 1 million barrels a day. If that number grows and the EU is talking about, you know, sanctioning more of those barrels, I think that physical premium will go up.

[Neil Mehta, Senior Equity Research Analyst of Natural Resources at Goldman Sachs]

Thanks, John. The follow-up is on natural gas. Would just love your perspective on how you're thinking about U.S. natural gas in particular, and if anything structurally changed in your view of mid-cycle. As it relates to your hedging position, remind us how open you are over the next couple of years, and can you participate in the strengthening commodity curve? Thank you.

[John Hess, CEO at Hess Corporation]

Yeah. I'll have John handle the hedging. And, you know, natural gas obviously is being impacted specifically in Europe and the LNG trading business because, you know, Europe buys about 40% of their supply from Russia. Obviously, that continues to be interrupted. Very concerns about, you know, its availability going into the winter. You're also starting to see the EU and European countries start to ration gas, and that's having an impact on the European price, the Asian price because of the LNG factor. I think the US has been relatively insulated from that because of shale gas and domestic production as well as the Freeport terminal having had its problems and, you know, when that recovers.

[John Hess, CEO at Hess Corporation]

You know, I think the numbers for natural gas in Europe are somewhere between $50-$60 in MCF, where in the US it's closer to $9. The US is still up, but it's much slower than the rest of the world, in part because we're energy independent, we're a net exporter. You know, I think as you think about natural gas going into the winter, that's gonna stay very tight, both in the US and even more so in Europe and Asia. When you look past that, I think a lot of that is a function of when does the Russia-Ukraine conflict get resolved, God willing, sooner than later, where lives are saved on both sides for that matter.

[John Hess, CEO at Hess Corporation]

you know, I think the natural gas business will start to normalize. There's plenty of natural gas out there. It has to be flowing for inventories to rebuild so that you get more back to equilibrium prices. We see the natural gas market both in the U.S. and the rest of the world staying tight, certainly through this coming winter. John, you wanna hit the hedging question?

[John Rielly, CFO and EVP at Hess Corporation]

Sure. For hedges for next year, we do not have any hedges on in 2023 or beyond at this point. Now, you know our strategy, and you should assume that we'll continue with that strategy, is to put a floor price on. As we get to the end of the year, we'll use puts obviously with where volatility is at from everything that John has been discussing on this call, and also just the time of the put options. We'll be putting them on closer to the end of the year or early into next year. That's typically the timeframe that we do that. We do want to put a floor on.

[John Rielly, CFO and EVP at Hess Corporation]

You can expect us to do that again next year and years after to just again to provide that insurance should prices, you know, should there be a change, should there be a recession or something happen that drops those prices. We'll do that towards the end of the year.

[Neil Mehta, Senior Equity Research Analyst of Natural Resources at Goldman Sachs]

Thanks, team.

[John Hess, CEO at Hess Corporation]

Thank you.

[Operator]

Thank you. Our next question comes from Roger Read with Wells Fargo. Your line is now open.

[Roger Read, Senior Research Analyst of Energy at Wells Fargo]

Yeah. Thank you. Good morning.

[John Hess, CEO at Hess Corporation]

Morning.

[Roger Read, Senior Research Analyst of Energy at Wells Fargo]

Maybe just a follow-up on some of the last discoveries here in Guyana and some of the stuff before. Where are you in terms of, you know, drill stem tests, flow rate tests, things like that, as we try to think about, you know, some of the things that will eventually raise or more than likely raise the 11 billion barrel resource target that's out there?

[John Hess, CEO at Hess Corporation]

Yeah, Greg.

[Greg Hill, COO and President at Hess Corporation]

Yeah, you know, as we said, these two discoveries, you know, Seabob and Kiru-Kiru, which are still underway. Those will be additive to the already announced 11 billion barrels gross recoverable hydrocarbons. I think the significant part about these discoveries is why they're so encouraging, is that if you look at Seabob, you know, that is leading to a potential inboard oil play in the southeastern part of this Stabroek Block. In fact, as we look forward, the next two wells, Yarrow and Banjo, will help further delineate that inboard oil opportunity. There could be another FPSO centered on that inboard oil play.

[Greg Hill, COO and President at Hess Corporation]

You know, as you mentioned, you know, after we get these wells done, we'll do some DSTs, et cetera, on them, really trying to, you know, prove up really that inboard oil play. Very, very exciting.

[Roger Read, Senior Research Analyst of Energy at Wells Fargo]

Yeah. Guyana's been that way, for several years now. It's good to see it keep going.

[Greg Hill, COO and President at Hess Corporation]

Yeah.

[Roger Read, Senior Research Analyst of Energy at Wells Fargo]

The other question, if I could, just kind of going back to the inflation question. As you're starting to look and understand, you know, all the things that are out there, recession, et cetera. Let's assume-

[Greg Hill, COO and President at Hess Corporation]

Mm-hmm.

[Roger Read, Senior Research Analyst of Energy at Wells Fargo]

You know, the crude strip is right. We're gonna, you know, continue to see activity and probably some inflation next year. Where are you at this point in terms of getting a good handle on what 2023 underlying inflation might be, in terms of, you know, you talked about Guyana already, but Lower 48 and Gulf of Mexico?

[John Hess, CEO at Hess Corporation]

Yeah, John, you wanna answer the that part?

[John Rielly, CFO and EVP at Hess Corporation]

Sure. I mean, we are seeing, Roger, that, you know, just like our competitors, we're seeing upward pressure onshore and offshore, with steel prices, labor costs, and rig rates. There's no question we are seeing that. We, as you mentioned, we talked about Guyana. Onshore, you heard Greg mention that the D&C costs did go from $6.2-$6.3 this year. We are seeing inflation, coming from 2023, these things continuing. I can't give the number. That's why we'll wait till the end of the year. You know, you should expect that $6.3 to be higher in 2023, when we get the full numbers in. Again, we're working hard to mitigate, you know, the effects through efficiency gains, you know, working with our suppliers, contracts and all our relationships there.

[John Rielly, CFO and EVP at Hess Corporation]

You know, with the strength of the oil prices, like you mentioned, I still think, you know, with that tightness going into 2023, we will continue to see that. Of course, with the higher oil prices, you know, obviously we're getting much higher returns in cash flow. I can't be exactly specific. That's what I said earlier. You know, we'll continue to work the contracts through the end of the year, and I'll update everyone on our January call.

[John Hess, CEO at Hess Corporation]

Yeah. I think, Roger, the other thing is, you know, Greg and his team moved expeditiously to secure, you know, excellent equipment with Nabors and also with crews with Halliburton as well. You know, some of our competitors, I don't think are as well positioned as we are to have high quality equipment and people. I think that will endure to our benefit as we go into next year to mitigate the cost pressures, plus the fact that, you know, Greg and his team are leaders of lean manufacturing and, you know, have a proven track record of mitigating cost increases.

[John Hess, CEO at Hess Corporation]

The exact number, as John said, we'll give you at the end of the year, but I think we're staying ahead of it and taking steps to mitigate whatever that impact is.

[Roger Read, Senior Research Analyst of Energy at Wells Fargo]

I appreciate it. Thank you.

[Operator]

Thank you. Our next question comes from Vin Lovaglio with Mizuho. Your line is now open.

[Vin Lovaglio, Equity Research Analyst at Mizuho]

Hey, thanks for getting me on. This first question was just on debottlenecking work at Liza Phase I. I was just wondering if you could remind me about the investment required to get those 20,000 barrels extra online, and then probably more importantly, your ability to carry over similar debottlenecking work to future projects. Thanks.

[John Hess, CEO at Hess Corporation]

Greg.

[Greg Hill, COO and President at Hess Corporation]

Yeah, sure. The investment level to get to that new nameplate or that new capacity of 140,000 barrels a day from the 120 on phase I. Very minimal. I mean, this was some piping changes, et cetera. You shouldn't think about that as a major investment, you know, on phase I. As we look forward to future phases, certainly in phase II and also Payara, I think we could see the potential for additional debottlenecking for those two vessels. Beyond that, as your vessels get bigger, say, the 250 class, we'll have to wait and see. I think the important thing to remember about these debottlenecking efforts is it's gonna be bespoke for each vessel.

[Greg Hill, COO and President at Hess Corporation]

It's gonna depend on the individual dynamics of, you know, that vessel operating as to how much additional capacity you can eke out of it. Hopefully, that answers your question.

[Vin Lovaglio, Equity Research Analyst at Mizuho]

No, great, thanks. The second one was just back to cash return and the regular dividend. I mean, obviously, the investment profile and the capital intensity of Guyana development is quite a bit different from U.S. unconventional. Just wondering how this affects your thinking on regular dividends and if you think that the regular or the base dividend is one way that you can ultimately differentiate from your peer group in the E&Ps. Thanks.

[John Hess, CEO at Hess Corporation]

Yeah. We certainly intend to increase the dividend each year and, you know, at a moderate pace, but one that builds value over time, that will be sustainable but also meaningful.

[Vin Lovaglio, Equity Research Analyst at Mizuho]

Appreciate it. Thanks, guys.

[John Hess, CEO at Hess Corporation]

Thank you.

[Operator]

Thank you. Our next question comes from David Deckelbaum with Cowen. Your line is now open.

[David Deckelbaum, Managing Director, Equity Research Analyst of Sustainability and Energy Transition at TD Cowen]

Thanks, guys, for fitting me in. I really only had, I think one additional follow-up to some of the other questions that were answered already. As we think about you've thrown out the 200,000 a day target in the Bakken, as a most optimal level of performance for the asset. Just given some of the inflation that we're seeing there, and some of the inflation that we're seeing both on the unit cost size, is 200 still the right number? You know, is that still a steady state for rig program or, you know, just given the move in higher pricing, if we were to believe in the long-term price that's higher given some of the inflation, do all of these numbers move slightly higher?

[John Hess, CEO at Hess Corporation]

Yeah. Greg?

[Greg Hill, COO and President at Hess Corporation]

No, look, I think, you know, if you look at our portfolio, we've got 2,100 or more drilling locations that generate great returns at a $60 WTI. You know, obviously, at current prices, those returns are fantastic, right? Certainly the movement in the oil price from a return standpoint is outstripping any inflationary effects. The 200,000-barrel-a-day kind of plateau rate, if you will, for the Bakken, you know, is absolutely the optimum place to be because it really fills up all the infrastructure that we have in place in the Bakken. You need to think about, you know, future wells is almost like a tieback in the Gulf of Mexico.

[Greg Hill, COO and President at Hess Corporation]

The infrastructure's already there, so the incremental returns are very high, you know, for those Bakken wells. We'll hold that with the portfolio we have. We'll hold that four rigs, and be able to hold that plateau, at about 200,000 barrels a day for almost a decade. All the while, the Bakken generating significant amounts of free cash flow, during that, period. At $60, it generates over $1 billion of free cash flow. Obviously, at current price is much higher. It becomes this massive cash annuity, you know, for the portfolio at that 200,000 barrels a day.

[David Deckelbaum, Managing Director, Equity Research Analyst of Sustainability and Energy Transition at TD Cowen]

Appreciate the response, Greg. Thank you, guys.

[John Hess, CEO at Hess Corporation]

Thank you.

[Operator]

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

Participants

Executives

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

Analysts

• Arun Jayaram, Research Analyst at JPMorgan
• David Deckelbaum, Managing Director, Equity Research Analyst of Sustainability and Energy Transition at TD Cowen
• Doug Leggate, Managing Director, Head of US Oil and Gas at Bank of America
• Jeanine Wai, Research Analyst of US Integrated Oil, Exploration and Production at Barclays
• Neil Mehta, Senior Equity Research Analyst of Natural Resources at Goldman Sachs
• Paul Cheng, Analyst at Scotiabank
• Roger Read, Senior Research Analyst of Energy at Wells Fargo
• Ryan Todd, Managing Director and Senior Research Analyst of Integrated Oils, Refines, and Biofuels at Piper Sandler
• Vin Lovaglio, Equity Research Analyst at Mizuho