Hess Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2022

There are 14 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2022 Hess Corporation Conference Call. My name is Liz, and I will 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.

Operator

I would now like to turn the conference over to Jay Wilson, Vice President of Investor Relations. Please proceed.

Speaker 1

Good morning, everyone, and thank you for participating in our 2nd 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' annual and quarterly reports filed with the SEC.

Speaker 1

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. On the line with me today are John Hess, Chief Executive Officer Greg Hill, Chief Operating Officer and John Reilly, 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.

Speaker 2

Thank you, Jay. Welcome to our Q2 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 Reilly 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.

Speaker 2

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. In both markets, We have experienced a demand shock and a supply shock.

Speaker 2

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 100,000,000 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 400,000,000 barrels less than pre COVID levels.

Speaker 2

As we look to the second half of the year, we expect Oil global oil demand to increase by 1,000,000 to 1,500,000 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 1,000,000 barrels per day over the year in the last year. There is very little spare capacity left in the world.

Speaker 2

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. 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 5 years, through the continued development of our high quality resource base, we are steadily moving down the cost curve.

Speaker 2

Our 4 sanctioned oil developments in Guyana have a breakeven Brent oil price of between $25 $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 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 2 times in 2022 to under 1 time in 2024. 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.

Speaker 2

Given our strong cash flow growth, we commenced a share repurchase program during the Q2, repurchasing 1,800,000 shares of common stock for $190,000,000 under our existing $650,000,000 board authorization. And we intend to opportunistically repurchase the remaining amount by year end. Looking ahead, we plan to We 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, 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.

Speaker 2

On the Stabroek Block in Guyana, where Hess has a 30% interest in ExxonMobil as the operator, we continue to see the potential for at least 6 floating production George and offloading vessels or FPSOs in 2027 with a gross production capacity of more than 1,000,000 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 1 development has reached its new production capacity of more than 140,000 gross barrels of oil per day In the Q2, following production optimization work on Liza Destiny FPSO, the Liza Phase 2 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 3rd development on the Stabroek Block at the Payara field with a gross production capacity of approximately 220,000 barrels of oil per day It's on track for startup in late 2023. In early April, we announced sanction of Yellowtail, 925,000,000 barrels of oil and have a gross production capacity of approximately 250,000 barrels of oil per day With first oil expected in 2025, front end engineering and design work for our 5th development in Waru Mako is underway With a plan of development expected to be submitted to the government by year end.

Speaker 2

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 2 new discoveries on the block at the CBOB-one and Kurokuro-one 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 11,000,000,000 barrels of oil equivalent. And we continue to see multibillion 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.

Speaker 2

Severe weather in April May caused widespread power outages lasting 4 to 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 4th 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. On Monday, we announced publication of our 25th Annual Sustainability Report, demonstrating our long standing commitment to sustainability and transparency.

Speaker 2

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 ISSESG 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 multiyear 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. 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 Q2 commenced a share repurchase program reflecting the financial strength of our business and our commitments to shareholders.

Speaker 2

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.

Speaker 3

Thanks, John. While in the Q2, we experienced continued weather impacts in the Bakken And a ramp up of Liza Phase 2 that was modestly slower than expected. Net production was up 10% from the Q1, 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 2 operates at nameplate capacity. In the Q2, company wide net production averaged 303,000 barrels of oil equivalent per day, excluding Libya. In the Q3, we expect Company wide net production to increase by approximately 10% from the 2nd quarter and to average between 330,003 35,000 barrels of oil equivalent per day excluding Libya.

Speaker 3

In the Q4, company wide net production is expected to further increase to between 365,370,000 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. 2nd 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 May.

Speaker 3

Production is now recovering And is expected to increase to between 155,000,160,000 barrels of oil equivalent per day in the 3rd quarter. For the Q4, 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 150,000,155,000 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.

Speaker 3

As a result, we have increased our full year average drilling and completion cost forecast By $100,000 per well to average $6,300,000 per well in 2022. I am proud of our team's effectiveness in mitigating the impacts of inflation tight supply chains largely through our distinctive lean culture. While we believe the industry is experiencing overall inflation of between 15% 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 Q3, we expect to drill approximately 25 wells and to bring approximately 20 new wells online.

Speaker 3

And for the full year 2022, we now expect to drill approximately 95 wells and to bring between 80 85 new wells online, Which is slightly lower than previous guidance due to the Q2 weather related delays in mobilizing equipment. Individual well results in terms of EURs and IP 180s continue to meet or exceed expectations. Earlier this month, we added a 4th drilling rig in the Bakken. Through our strategic partnerships with Nabors and Halliburton, we were able to secure a fully staffed, High spec PACE X class rig and a second depletion crew. Moving to a 4 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 Further reductions in our unit cash costs.

Speaker 3

Now moving to the offshore. In the deepwater Gulf of Mexico, 2nd 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 Q3, we forecast Gulf of Mexico net production to average between 25,035,000 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 Lano VI 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.

Speaker 3

In June, we completed drilling operations on the Huron prospect on Green Canyon Block 69 with encouraging results. Hess is the operator with a 40% working interest and Chevron and Shell each have 30%. The well encountered high quality oil bearing Miocene H Reservoirs and established the existence of a working petroleum system. Well results are still being evaluated and an appraisal sidetrack As planned. In Southeast Asia, net production in the second quarter was 67,000 barrels Oil equivalent per day compared to our guidance of approximately 65,000 barrels of oil equivalent per day.

Speaker 3

Phase 3 of the North Malay Basin development came online in June and is producing above expectations. And Phase 4 is on track to achieve 1st gas in early 2023. 3rd quarter net production is forecast to average 55,000 barrels of oil equivalent per day, reflecting planned maintenance at both JDA and North Malay Basin. Full year 2022 production is expected to average between 60,000 65,000 barrels of oil equivalent per day. Now turning to Guyana.

Speaker 3

In the Q2, net production averaged 67,000 barrels of oil per day, Reflecting a modest delay in the ramp up of Liza Phase 2. Overall, the startup has been very successful. In July, Liza Phase 2 reached its nameplate capacity of 220,000 barrels of oil per day We're about 56,000 barrels of oil per day net to Hess. For Liza Phase 1, 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. Earlier this month, SBM Offshore also completed the replacement of the flash gas compressor, which has resulted in high reliability And 0 routine flaring.

Speaker 3

3rd quarter net production from Guyana is forecast to increase to a range of 90,000 The 95,000 barrels of oil per day and average approximately 75,000 barrels of oil per day for the full year 2022. With regard to our 3rd 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. In April, we sanctioned a 4th development at the Yellowtail, Which will develop approximately 925,000,000 barrels of oil and have a breakeven 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.

Speaker 3

As for our 5th development at Wawuru Mako, the operator anticipates submitting the plan of development To the government of Guyana in the Q4, with first oil targeted for 2026, pending government approvals and project sanctioning. Turning to exploration. Yesterday, we announced 2 new discoveries on the Stabroek Block. The CEBAB-one well encountered 131 feet of high quality oil bearing Upper Campanian sandstone reservoirs. The well is located in the southeastern part of the block, Approximately 12 miles southeast of the Yellowtail field, the Kiro Kiro-one well has also thus FAR encountered 98 feet of high quality hydrocarbon bearing Upper Campanian sandstone reservoirs.

Speaker 3

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 Catapac 1 discovery, both discoveries will add to the gross discovered recoverable resource estimate for the block of approximately 11,000,000,000 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. The Banjo 1 well will also target Stacked Upper Campanian targets west of Barreleye and Upgip of Mako.

Speaker 3

The well is located 8 miles northwest Of the Baral I-one 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 Zander I-one exploration well. The Shell operated well is expected to spud in late August and will test both Upper Campanian and deeper play stack targets. Hess, Chevron and Shell each have a 1 third working interest.

Speaker 3

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 4th rig, we had positive drilling results in the Gulf of Mexico at both Llan06 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 Reilly.

Speaker 4

Thanks, Greg. In my remarks today, I will compare results from the Q2 of 2022 to the Q1 of 2022. We had net income of $667,000,000 in the 2nd quarter compared with $417,000,000 in the 1st quarter Or $404,000,000 on an adjusted basis. Turning to E and P. E and P had net income Of $723,000,000 in the 2nd quarter compared with $460,000,000 in the 1st quarter.

Speaker 4

The changes in the after tax components of E and P earnings between the Q2 and Q1 of 2022 We're as follows. Higher realized selling prices increased earnings by $178,000,000 Higher sales volumes increased earnings by $170,000,000 Higher DD and A expense Decreased earnings by $39,000,000 Higher cash costs decreased earnings by $39,000,000 All other items decreased earnings by $7,000,000 for an overall increase in 2nd quarter earnings of $263,000,000 For the Q2, our E and P sales volumes were underlifted compared with production by approximately 500,000 barrels, Which decreased our after tax income by approximately $15,000,000 Turning to Midstream. The Midstream segment had net income of $65,000,000 in the Q2 of 2022 compared with $72,000,000 in the Q1. Midstream EBITDA before non controlling interest was $241,000,000 in both the Q2 and Q1 of 2022. Turning to our financial position.

Speaker 4

At quarter end, excluding Midstream, cash and cash equivalents were $2,160,000,000 And total liquidity was $5,730,000,000 including available committed credit facilities, While debt and finance lease obligations totaled $5,610,000,000 in April, We received total net proceeds of $346,000,000 from the public offering of approximately 5,100,000 Hess owned Class A Shares of Hess Midstream And the sale of approximately $6,800,000 Hess owned Class B units to Hess Midstream. In the Q2, we commenced common stock share repurchases with the purchase of approximately 1,800,000 shares for $190,000,000 Under our existing $650,000,000 board authorized stock repurchase program, we intend to utilize the remaining amount under the stock repurchase program by the end of this year. Total cash returned to shareholders in the 2nd quarter amounted to $306,000,000 including dividends. Net cash provided by operating activities before changes in working capital was $1,460,000,000 in the 2nd quarter Compared with $952,000,000 in the Q1, primarily due to higher realized selling prices and sales volumes. In the Q2, we sold 61,000,000 barrel cargoes of crude oil in Guyana, up from sales of 2,300,000 barrels of crude oil in the Q1.

Speaker 4

Changes in operating assets and liabilities during the Q2 of 2022 increased cash flow from operating activities by $46,000,000 E and P Capital and exploratory expenditures were $622,000,000 in the 2nd quarter $580,000,000 in the 1st quarter. In June, Moody's Investor Service upgraded the senior unsecured ratings of Hess Corporation to Baa3 from BA1. All 3 major credit agencies now rate Hess as investment grade. In July, we replaced our $3,500,000,000 revolving credit facility Expiring in May 2024 with a new $3,250,000,000 revolving credit facility expiring in July 2027. Now turning to guidance, first for E and P.

Speaker 4

Beginning in the Q3, we will use the remainder of the previously generated Guyana net operating loss carry As a result, we will start to incur a current income tax liability. Our 3rd quarter Guyana net production guidance of 90,000 to 95,000 barrels of oil per day includes approximately 7,000 barrels of oil per day of tax barrels. 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 1st or second quarters. In both the 3rd Q4 of this year, we expect to sell 81,000,000 barrel liftings from Guyana.

Speaker 4

Our E and P cash costs in the Q2 of 2022 were $13.90 per barrel of oil equivalent, including Libya, And $14.56 per barrel of oil equivalent, excluding Libya. We project E and P cash costs, excluding Libya, To be in the range of $14 to $14.50 per barrel of oil equivalent for the 3rd quarter and in the range of $13.50 To $14 per barrel of oil equivalent for the full year, which is unchanged from previous guidance. DD and 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. DD and A expense, excluding Libya, is forecast to be in the range of 13 The $13.50 per barrel of oil equivalent for the Q3 and $12.50 to $13 per barrel of oil equivalent for the full year, Which is updated from the prior guidance of $11.50 to $12.50 per barrel of oil equivalent. This results in projected total E and P unit operating costs, excluding Libya, to be in the range of $27 to $28 per barrel of oil equivalent The Q3 $26 to $27 per barrel of oil equivalent for the full year 2022.

Speaker 4

Exploration expenses, excluding dry hole costs, are expected to be in the range of $35,000,000 to $40,000,000 in the 3rd quarter And in the range of $160,000,000 to $170,000,000 for the full year, which is down from our previous guidance of 170 $180,000,000 The midstream tariff is projected to be in the range of $305,000,000 to $315,000,000 for the 3rd quarter And full year guidance of $1,190,000,000 to $1,215,000,000 remains unchanged. E and P income tax excluding Libya is expected to be in the range of $170,000,000 to $180,000,000 for the 3rd quarter And in the range of $540,000,000 to $550,000,000 for the full year, which is up from the previous guidance range of $460,000,000 to $470,000,000 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 $165,000,000 for both the 3rd and 4th quarters. Our E and P capital and exploratory expenditures are It's expected to be approximately $750,000,000 in the 3rd quarter and approximately $2,700,000,000 for the full year, Which is down from previous guidance of $2,800,000,000 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.

Speaker 4

For Midstream, we anticipate net income attributable to Hess from the Midstream segment To be in the range of $60,000,000 to $65,000,000 for the Q3. The full year guidance range of $265,000,000 to $275,000,000 remains For corporate, corporate expenses are estimated to be approximately $40,000,000 for the 3rd quarter And in the range of $135,000,000 to $145,000,000 for the full year, which is up from previous guidance of 120 To $130,000,000 due to higher legal and professional fees. Interest expense is estimated to be approximately $85,000,000 for the 3rd quarter And in the range of $345,000,000 to $350,000,000 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.

Speaker 4

I will now turn the call over to the operator.

Operator

Our first question comes from Arun Jayaram with JPMorgan. Your line is now open.

Speaker 5

Yes, good morning. John, I wanted to start with cash return. 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 $460,000,000 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?

Speaker 2

Yes. John Reilly?

Speaker 4

Yes. Thanks, Arun. So just to remind you, what are the capital return framework is, our framework is set up on an annual So 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. And that free cash flow is reduced for debt reductions, which we did have that $500,000,000 in the Q1.

Speaker 4

So as we said, with our 650,000,000 Authorized in the 190 done in the second quarter, you can expect the remainder to be done throughout the rest of this year. And 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 and look with Guyana ramping up and Bakken ramping up, our free cash flow is improving as you see from our second quarter So that we can give more than 75% this year with this favorable commodity price environment. And so then coming to 2023, you really should think about We just are starting this capital return program. This is just the beginning, and we plan to continue it. So as we move into 2023, We are committed to that 75% framework.

Speaker 4

Again, if commodity prices are favorable, we can do more than that next year. But You should begin to think this is going to be a continued program. And just remember now with Bakken, as we said, it's going to 200,000 barrels a day. Guyana is going to be bringing on an FPSO almost once a year here for the coming year. So we're going to have a growing free cash flow.

Speaker 4

So that 5% is going to be going on a bigger and bigger number as we move out. So I think that's the strategic framework you should be thinking about.

Speaker 5

Great. And maybe John Rollie, a follow-up for you. Dollars 2,700,000,000 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 E and D program in Guyana.

Speaker 2

Go ahead, John.

Speaker 4

Well, 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, but with the 4th 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 $150,000,000 plus from the Bakken and this is before inflation, which I'll talk about a little bit at the end. So the Bakken will be increasing with that 4th rig, some of the phasing as well. So you can think about that 150,000,000 In Guyana, as you know, we've got a lot of things going on. So I did say this in the Q1, there's clearly going to be about 700 Several 100,000,000 more in Guyana because we'd be developing Payara, right?

Speaker 4

We're bringing that on in late 2023. We've got to develop with Yellowtail. The 5th FPSO, which Greg mentioned, Waru and Mako. And we also have the gas to energy project going on in Guyana. So Again, several 100,000,000 more for Guyana, but we'll fine tune that as we go through the year.

Speaker 4

Also, as you heard Greg mention, We had success at Euron 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 a greenfield, so we'll be having some increase in Gulf of Mexico for 2023. And then I mentioned it, of course, we're monitoring the industry inflation. We are seeing Greg mentioned what's happening with our D and C costs in Bakken. We are seeing it in rig rates, labor, steel costs.

Speaker 4

So we'll continue to be looking at that, And we'll fine tune it as we get to the end of the year. But kind of soft, those are the kind of numbers you can be looking at, Arun.

Speaker 5

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

Speaker 4

No, that has not been finally determined yet, Arun, on the timing. The guidance I would give you right now is not to expect Just in 2023, so if you're putting in your models, don't put 1 in 2023. I would expect 1 in early 2024. But again, It's still early days. We do not have that finalized yet.

Speaker 2

Great. Thanks, John. Thank you. You're welcome.

Operator

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

Speaker 6

Thanks. Good morning, everyone.

Speaker 2

Good morning.

Speaker 6

I guess, could I go first to the Bakken on Obviously, you've given a fairly thorough explanation as to what's been going on there with weather and power So on, but I want to ask about any thoughts on the trajectory to 200,000 barrels a day. Is there any reason why we should You'll be rethinking the timeline of that. Are you still confident in that? And what is your updated thoughts on the trajectory together?

Speaker 7

Yes, Greg.

Speaker 3

No, Doug. I think we're back on track in the Bakken. We're back on that trajectory. As I mentioned in my opening remarks, We expect the Q3 to be up 10%, the Q4 to be up 10% from that. And then you really see the 4th rig Start to kick in because you'll start completing wells from that 4th rig in 2023.

Speaker 3

So that's why we're saying we'll have this steady increase Trajectory, 200,000 barrels a day, which we expect to hit in 2024. So it should be a smooth ramp from here.

Speaker 6

Okay. Thanks, Greg. I just wanted to kind of address that upfront. My follow-up, I'll leave everyone else to Ask on Guyana today. Greg, I want to ask you about Huron.

Speaker 6

This is 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? And if you're side tracking, one assumes that you're pretty encouraged with what you're seeing. So what was the predrill target here and what is this as You've talked about one potential hub development exploration well per year going forward. Does this qualify as a potential hub development?

Speaker 2

Hey, Greg.

Speaker 3

Well, let me talk about the well first. So it was drilled on Green Canyon Block 69 to a depth of 28,900 feet, and the rig was released on June 14, 2022. So as I mentioned in my opening remarks, the prospect Targeted a new Miocene sub salt fairway in Northern Green Canyon. The reason we're really Encouraged by the results that we discovered good high quality oil and good quality Miocene sands. And we as I did mention, we're also planning an appraisal sidetrack updip on that well.

Speaker 3

I think the second thing that's really exciting about it 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. So 2 positive outcomes from here Doug, we don't release pre drill estimates and the well is still under evaluation. So further information coming As we appraise that asset.

Speaker 2

Yes. And I would just add to that. I mean, we're encouraged by the prospectorativity In this area, the fact that there's a working petroleum system, so there's going to be further drilling and appraisal ahead of us, and we're encouraged by it.

Speaker 6

If I may very quickly, Greg, you say you're going to do an UPDIP appraisal. Did you have an oil water contract?

Speaker 3

Well, still under evaluation, Doug.

Speaker 6

Okay. Thanks.

Speaker 2

Thank you.

Operator

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

Speaker 8

Thank you. Good morning. Good morning. I think The first one is for John Marley. John, with the rising fear on recession, How does it or does it have all impact on the thinking or in your decision process, And you guys decision process on the budget?

Speaker 8

John.

Speaker 4

Sure. So that's one of the things I mentioned, why, 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 going to have the 4 rigs. We're doing that.

Speaker 4

We want to optimize our infrastructure They're up there, lower our cash costs, and it's the best return way to develop the Bakken. So there won't be any change there. And so we'll continue to monitor the costs and update everyone on where the budget ends up with that. So on a go forward basis then Guyana, again, the plans there unchanged. Obviously, just a phenomenal province for us For oil developments, the returns there are excellent, and we will be trying to bring forward as much We can to get this oil for the country of Guyana on as early as possible.

Speaker 4

So again, Payara, Yellowtail getting the 5th ship And for FID, try to get the development plan into the government. So no change there. Again, with Exxon has been doing an excellent job Managing the cost there, but we are susceptible to that cost inflation that everybody else is seeing. So We'll update again where that number comes. But as I said, we have about $1,000,000,000 this year in our Plan in our original budget, and we're not changing that in Guyana.

Speaker 4

So again, Exxon has done a really good job this year managing that inflation. And as I said, it will be several $100,000,000 more. But again, we'll see where the inflation ends up. And then kind of the new thing because we were just talking about Gulf of Mexico and our program, we are looking at the rig rates and being able to get slots. So that's something again that we will be looking at managing, but we do want to do this appraisal So we talked about and we'd like to do some of our infrastructure led tiebacks.

Speaker 4

So again, those are extremely good returns even if the cost inflation is a little bit higher. So I think you can take that again as our soft guidance on what we're doing. And we keep practicing our lean culture and trying As much as possible working with our strategic well, again, Exxon has done a really good job this year managing that inflation. And as I said, it will be several $100,000,000 more. But again, we'll see where the inflation ends up.

Speaker 4

And then kind of the new thing because we were just talking about Gulf of Mexico and our program, we are looking at the rig rates and being able to get slots. So that's something again that we will be looking at.

Speaker 2

Yes. And one other point, Paul, so you know, and it's a good, great question. I think all 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, our Board will definitely stress test our budget For next year, definitely there'll be a recession scenario in that.

Speaker 2

And 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 And 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 In terms of puts on the downside, so we'll be prepared in case a recession occurs. It's certainly going to be one of the scenarios that the Board Has with our senior leadership to make sure we're financially disciplined going into next year.

Speaker 8

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

Speaker 4

Sure. So as Greg mentioned, right now with Wells Online, we're a little bit down. I would say wells online, we're only in like, say, 5 range of wells online that are going to be moving to next year. Some of the wells drilled, so as Greg mentioned, there were 95 wells. That's actually up from our original guidance at 90, but that didn't include the 4th rig.

Speaker 4

So the 4th We should have gotten an additional say 14 to 15 wells drilled and so we're only getting 5. So we've got additional wells That are moving that way. So you're looking 9 or 10 wells to be drilled that are moving to next year, 5 ish kind of wells online Moving to next year, and just some other small infrastructure type things. So altogether, you're probably looking In that $40,000,000 type range that got moved to next year?

Speaker 8

Thank you.

Operator

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

Speaker 9

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

Speaker 2

Good morning, Janine.

Speaker 9

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 well.

Speaker 9

Can you generally discuss what your medium term plan is In terms of activity in the Gulf? And then our follow-up is, what's your appetite to grow your position there? Thank you.

Speaker 2

Yes. Greg, well, I would appreciate it if you just go over our strategy, the role of the Gulf in our portfolio, the And I can comment on the M and A side, Janine. In the normal 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. We're much more focused on getting return from the inventory of investment opportunities we have than looking to the outside.

Speaker 2

We don't need M and A to Grow the returns of our business and quite frankly most of the stuff that we've seen would erode returns. We're not going to do that. We're going to stay financially disciplined. Greg, please talk about the role of the Gulf in our portfolio.

Speaker 3

Sure. Thanks, Janine. So the Gulf of Mexico for us remains a very important part of the portfolio. It's an important It's an important cash engine and it's a platform for growth for us. So our objective in the Gulf is To add a minimum sustained production cash flow through tieback opportunities and also selectively pursuing Hub class exploration opportunities, if we can grow it, we want to.

Speaker 3

And as you recall, we've been selectively rebuilding our portfolio in the last 5 or 6 years such that 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. So assuming those opportunities compete for capital, 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. And Huron, particularly for that Northern Green Canyon Basin where we have a very competitive leasehold there. So we're pretty excited about that.

Speaker 9

Great. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 7

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, if you were to I know this varies on a lot of things, but if you were 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. How do you think about as you look at over the next few years, the trajectory of production there in the Gulf of Mexico?

Speaker 2

Yes, Greg.

Speaker 3

Sure. I think for the next couple of years, you could assume our objective is really to hold it flat. And we'll do that through these infills and ILX, infrastructure led exploration wells that are quick tiebacks. Beyond that, we're also going to be doing some hub class Exploration prospects, obviously, those wouldn't feature those wouldn't come in as growth until later in that period. So short term, hold it flat as a minimum, longer term, grow it, assuming success from some of these sub glass exploration prospects.

Speaker 7

Perfect. Thanks, Greg. And then 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 Find a competitive dividend, what peer group are you looking at? And any thoughts on kind of the timetable of Over which you'd like to grow that dividend to kind of a sustainable level where you'd like it to be?

Speaker 2

Yes, I'm going to have John answer it, but I think the way to think about it is a sustainable and meaningful premium to the S and P Dividend yield, that's what we're really looking at. We want to 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. But John, why don't you elaborate a little bit what our plans are?

Speaker 4

Sure. So I mean, John did give a good explanation on that, but that's clearly what we're looking to do, continual increases here. And John did mention it that we'd like to get our dividend to a level that is attractive to the income oriented investors. So I think yield is an output, but you can think about the yield that the income oriented investors are looking at. So with our ability here, again, as I mentioned, Bakken growing at 200,000 barrels a day and then Guyana, Payara coming in late 2023 and then almost an FPSO a year here as we move out 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, but actually the bigger part of our return will be share repurchases because that growing free cash flow when you put that 75 We will grow that dividend.

Speaker 4

We want to make it sustainable in a low oil price environment, but the bigger portion ultimately will be share repurchases.

Speaker 7

Thanks,

Operator

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

Speaker 10

Good morning, team. I had a

Speaker 11

couple of questions on the macro. And the first is around price realizations. They were good in the quarter. And John, you had made the comment that what we see in the financial market, it might be lower than what you're realizing In the physical markets, can you just talk about that divergence and whether you're able to realize something higher than Yes.

Speaker 2

I mean, obviously, this changes, as you know, Neil, it's a great question, every day. But What we've been seeing really for the last 2 months is buyers for physical Brent or physical Brent equivalents Several dollars a barrel premium over the screen or the futures market. 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. But Several dollars a barrel, I think is a good planning assumption for now. And we'll just have to see how the market evolves between now and the end of the year.

Speaker 2

One of the concerns we have is obviously if more barrels are taken out of Russia, I think Russia is down in terms of their exports about 1,000,000 barrels a day. If that number grows and the EU is talking about sanctioning more of those barrels, I think that physical premium will go up.

Speaker 11

Thanks, John. And the follow-up is on natural gas. And so we'd 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?

Speaker 11

And then 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. Yes.

Speaker 2

I'll have John handle the hedging. And natural gas, obviously, is being impacted specifically in Europe And the LNG trading business because Europe buys about 40% of their supply from Russia, obviously, that continues to be interrupted. Very Trees start to ration gas, and that's having an impact on the European price, the Asian price because of the LNG factor. And I think the U. S.

Speaker 2

Has been relatively insulated from that because of shale gas and domestic production as well as the Freeport Terminal, having had its problems and when that recovers. So, I think the numbers for Natural gas in Europe are somewhere between $50 $60 in Mcf, where in the U. S, it's closer to $9 So The U. S. 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.

Speaker 2

I think as you think about natural gas going into the winter, that's going to stay very tight both in the U. S. 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 Russian Ukraine conflict get resolved, God willing, sooner than later, Where lives are saved on both sides for that matter. And then I think the natural gas business start to normalize.

Speaker 2

There's plenty of natural gas out there, but it has to be flowing for inventories to rebuild so that You get more back to equilibrium prices, but 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 want to hit the hedging question?

Speaker 4

Sure. So 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. So 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 aspect of the put options. We'll be putting them on closer to the end of the year or early into next That's typically the time frame that we do that.

Speaker 4

But we do want to put a floor on. You can expect us to do that again Next year and years after, to just again to provide that insurance, Should there be a change, should there be a recession or something happening that drops those prices, but we'll do that towards the end of the year.

Speaker 2

Thanks, team. Thank you.

Operator

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

Speaker 10

Yes. Thank you. Good morning.

Speaker 8

Good morning. Maybe just follow-up on some of the

Speaker 10

last discoveries here in Kiana and some of the stuff For where are you in terms of drill stem tests, flow rate tests, things like that as we try to think about Some of the things that will eventually raise or more than likely raise the 11,000,000,000 barrel resource target that's out there.

Speaker 7

Yes, Greg.

Speaker 3

Yes. So as we said, these two discoveries, CEBAB and Kiryu, which are still underway. So those will be additive to the already announced 11,000,000,000 barrels gross recoverable hydrocarbons. I think the significant part about these discoveries is why they're so encouraging is that if you look at CBOB, That is leading to a potential inboard oil play in the southeastern part of the Stabroek Block. And in fact, as we look forward, The next two wells, Yarrow and Banjo, will help further delineate that inboard oil opportunity.

Speaker 3

So there could be another The oil FPSO centered on that inboard oil play. So as you mentioned, After we get these wells done, we'll do some DSTs, etcetera, on them, really trying to prove up really that inboard oil play. So Very, very exciting.

Speaker 10

Yes. So, Guyana has been that way for several years now. It's good to see it keep going. The other question, if I could, just kind of going back to the inflation question, as you're starting to look and understand all the things that are out there, recession, etcetera. But let's assume The crude strip is right.

Speaker 10

We're going to 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 talked about Nana already, but Lower 48 in Gulf of Mexico.

Speaker 2

Yes. John, you want to answer that part?

Speaker 4

Sure. So I mean, we are seeing, Roger, that just like our competitors, we're seeing upward pressure Onshore and offshore, with steel prices, labor costs and rig rates. So there's no question we are seeing that. So as you mentioned, we talked about Guyana. So onshore, you heard Greg mentioned that the D and C cost did go from 6.2 to 6.3 This year, we are seeing inflation coming from 2023, these things continuing.

Speaker 4

So I can't give the number. That's why we'll wait till the end of the year, but 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 the effects through efficiency gains, Working with our suppliers, contracts and all our relationships there. And with the strength of the oil prices like you mentioned, I still think with that tightness going into 2023, we will continue to see that. But of course, with the higher oil prices, Obviously, we're getting much higher returns in cash flow. So I can't be exactly specific.

Speaker 4

That's what I said earlier, but We'll continue to work the contracts through the end of the year and I'll update everyone on our January call.

Speaker 2

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

Speaker 10

I appreciate it. Thank you.

Operator

Thank you. Our next question comes from Ben Livaglia with Mizuho. Your line is now open.

Speaker 12

Hey, thanks for getting me on. The first question was just on debottlenecking work at Liza Phase 1. 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.

Speaker 13

Greg?

Speaker 3

Yes, sure. So the investment level to get to that new nameplate of that new capacity of 140 1,000 barrels a day from the 120 on Phase 1, very minimal. I mean, this was some piping changes, etcetera. You shouldn't think about that as a major investment on Phase 1. As we look forward to future phases, certainly In Phase 2 and also Payara, I think we could see the potential for additional debottlenecking for those two vessels.

Speaker 3

Beyond that as your vessels get bigger, say the 250 class, we'll have to wait and see. And I think the important thing to remember about these debottlenecking efforts Yes, it's going to be bespoke for each vessel. So it's going to depend on the individual dynamics That vessel operating as to how much additional capacity you can eke out of it. So, hopefully that answers your question.

Speaker 12

Great. Thanks. And 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.

Speaker 12

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 and the E and Ps. Thanks.

Speaker 2

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

Speaker 12

Appreciate it. Thanks guys.

Speaker 2

Thank you.

Operator

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

Speaker 13

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. But 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, some of the inflation that we're seeing both on Cost size, is $200 still the right number? And is there is that still a steady state 4 rig program or 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?

Speaker 2

Yes. Greg?

Speaker 3

No. Look, I think, if you look at our portfolio, we've got 2,100 Or more drilling locations that generate great returns at a $60 WTI. Obviously at current prices, those returns are fantastic, right? And so certainly the movement in the oil price From a return standpoint is outstripping any inflationary effects and the 200,000 barrel a day Kind of plateau rate, if you will, for the Bakken is absolutely the optimum place to be because it really fills up all the infrastructure That we have in place in the Bakken. So you need to think about future wells is almost like a tieback in the Gulf of Mexico.

Speaker 3

The infrastructure is already there. So the incremental returns are very high for those Bakken wells. So we'll hold that with the portfolio we have, we'll hold that 4 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. So at $60 it generates over a dollars of free cash flow.

Speaker 3

Obviously, current price is much higher. So it becomes this massive cash annuity You know for the portfolio at that 200,000 barrels a day.

Speaker 13

Appreciate the response, Greg. Thank you guys.

Speaker 2

Thank you.

Operator

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

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Earnings Conference Call
Hess Q2 2022
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