Hess Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 25, 2023

There are 12 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to the 4th Quarter 2022 Hess Corporation Conference Call. My name is Kevin, and I'll be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded for replay purposes.

Operator

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

Speaker 1

Thank you, Kevin. Good morning, everyone, and thank you for participating in our Q4 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.

Speaker 1

These risks include those set forth in the Risk Factors section of Hess' 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. On the line with me today are John Hess, Chief Executive Officer Greg Hill, Chief Operating Officer and John Reilly, Chief Financial Officer. I'll now turn the call over to John Hess.

Speaker 2

Thank you, Jay. Good morning, and welcome to our Q4 conference call. Today, I will share some thoughts about the oil markets and then discuss our continued progress in executing our strategy. Greg Hill will then cover our operations and John Reilly will review our financial results. Oil and gas will be needed for decades to come and are fundamental to ensure an affordable, just and secure energy transition.

Speaker 2

The world faces a massive dual challenge. We will require approximately 20% more energy globally by 2,050. And over the same period, we need to reach net zero emissions. At the end of last year, the International Energy Agency or IEA published its latest World Energy Outlook that offers 3 scenarios and they are scenarios, not forecasts, for how to meet this dual challenge. In all three of the IEA scenarios, The world is facing a structural deficit in energy supply and significantly more investment is required both in oil and gas and also in Clean Energy's.

Speaker 2

According to the IEA, a reasonable estimate for the global oil and gas investment required To meet demand growth is approximately $500,000,000,000 each year for the next 10 years as compared with $300,000,000,000 to $400,000,000,000 invested annually in the last 5 years. In terms of clean energies, An annual investment of between $3,000,000,000,000 $4,000,000,000,000 is needed each year for the next 10 years, Significantly more than last year's investment of approximately $1,200,000,000,000 Business leaders and government officials Must have a sober understanding of this investment challenge, especially since capital is becoming more scarce and more expensive in the current financial environment. The energy transition is going to take a long time, cost a lot of money and require many technologies that do not exist today. To have an orderly energy transition, policymakers must have climate literacy, Energy Literacy and Economic Literacy. Our strategy is to grow our resource base, deliver a low cost of supply and generate industry leading cash flow growth, and at the same time, maintain our industry leadership in environmental, Social and governance performance and disclosure.

Speaker 2

Our successful execution of this strategy has uniquely positioned our company to deliver significant value to shareholders for years to come, both by growing intrinsic value and by growing cash returns. In terms of cash flow growth, we have an industry leading rate of change story and an industry leading duration story, providing a unique value proposition. Based upon a flat Brent oil price of $65 per barrel, Our cash flow is forecast to increase by approximately 25% annually between 20212026, more than twice as fast as our top line growth. And our balance sheet will also continue to strengthen with our debt to EBITDAX ratio currently under one time. As our portfolio becomes increasingly free cash flow positive, we are committed to returning up to 75% of our annual free cash flow to shareholders, with the remainder going to strengthen the balance sheet By increasing our cash position, our further reducing our debt to ensure that we can fund our high return investment opportunities through the cycle.

Speaker 2

Executing this strategy in 2022, we decreased our debt by $500,000,000 increased our regular quarterly dividend by 50% and completed a $650,000,000 stock repurchase program. Looking ahead, we plan As our free cash flow generation steadily increases in future years, share repurchases are expected to represent a growing proportion of our return of capital. By investing only in high return low cost opportunities, we have built a differentiated and balanced portfolio focused on Guyana, The Bakken, Deepwater Gulf of Mexico and Southeast Asia. Key to our strategy is Guyana, which is home to the Stabroek Block, One of the largest oil provinces discovered in the world over the last 20 years, where Hess has a 30% interest and ExxonMobil is the operator. Since 2015, we have had more than 30 discoveries on the block, including 9 last year, underpinning A gross discovered recoverable resource estimate of more than 11,000,000,000 barrels of oil equivalent with multibillion barrels of exploration potential remaining.

Speaker 2

We are pleased to announce today a significant new oil discovery at the Fang2 Southeast-one well located approximately 8 miles southeast of the original The Fangzhou Southeast-one well encountered approximately 200 feet of oil bearing sandstone reservoirs and was drilled to 5,397 feet of water. Fanctooth was our 1st standalone deep exploration prospect on the Stabroek Block and this area has the potential to underpin a future oil development. Our 4 sanctioned oil developments on the Stabroek Block Have a breakeven Brent oil price of between $25 $35 per barrel. We have line of sight to 6 $7,000,000,000 of which more than 80% will be allocated to Guyana and the Bakken. Our financial priorities are to continue to allocate capital to our high return, low cost investment opportunities, To keep a strong cash position and balance sheet and to grow our dividend and as market conditions and our return of capital framework In Guyana, the Liza Phase 1 and Liza Phase 2 developments are currently operating at their combined gross production capacity of more than 360,000 barrels of oil per day.

Speaker 2

Our 3rd development, Payara, remains on schedule for start up by the end of 2023 with a gross production capacity of approximately 220,000 barrels of oil Our 4th development, Yellowtail, is expected to come online in 2025 with a gross production capacity of approximately 250,000 A plan of development for our 5th development at Oaru with a gross production capacity of approximately 250,000 barrels of oil per day Was submitted to the Government of Guyana in November and final approval is expected by the end of the Q1. We also will continue an active exploration and appraisal program in Guyana with approximately 10 wells planned for the Stabroek Block in 2023. In the Bakken, we plan to continue operating a 4 rig program, which will enable us to generate significant free cash flow, lower our unit cash costs and further optimize our infrastructure. We have a robust inventory of high return drilling locations to enable us to grow net production to an average of 200,000 barrels of oil equivalent per day in 2025. Greg and his team continue to do an outstanding job of applying lean manufacturing principles to create a culture of innovation, improve efficiency and manage inflationary cost pressures.

Speaker 2

We will continue to invest in our operated cash engines offshore in 2023, where we also see attractive investment opportunities. In the Gulf of Mexico, we plan to drill 2 infrastructure tieback wells and 2 exploration wells. And in Southeast Asia, We will invest in drilling and production facilities at both the North Malay Basin and Joint Development Area assets. As we continue to execute our strategy, our commitment to sustainability will remain a top priority. In December, we announced one of the largest private sector forest preservation agreements in the world to purchase high quality, Independently verified RED plus carbon credits for a minimum of $750,000,000 between 2022 and 2,032 directly from the government of Guyana.

Speaker 2

Protecting the world's forests and the important role they play as natural carbon sinks It's foundational to the Paris Agreement's aim of limiting the global average temperature rise to well below 2 degrees Celsius. Avoiding global deforestation was one of the major commitments made at the COP26 Climate Summit, where more than 130 countries, including Guyana pledge to end deforestation by 2,030. The government of Guyana plans To invest the proceeds from our carbon credits purchase agreement in sustainable development to improve the lives of the people of Guyana with 15% of the proceeds directed to indigenous communities. This agreement adds to our company's ongoing and Successful emissions reduction efforts and is an important part of our commitment to achieve net 0 Scope 1 and Scope 2 greenhouse gas emissions on a net equity basis by 2,050. The agreement further strengthens our strategic partnership with Guyana and demonstrates our long term commitment to the country and its people, building upon the National Healthcare Initiative we announced earlier in 2022.

Speaker 2

We are proud to have been recognized throughout 2022 as an industry leader in our environmental, social and governance performance and disclosure. In November, Hess earned a place on the Dow Jones Sustainability Index for North America for the 13th consecutive year and for the first time was included in the Dow Jones Sustainability World Index. In December, we also achieved leadership status in CDP's Annual Global Climate Analysis for the 14th consecutive year. In summary, we continue to successfully execute our strategy, which offers a unique value proposition, both to grow our intrinsic value and to grow our cash returns by increasing our resource base, delivering a low cost of supply and generating industry leading cash flow growth. As our portfolio becomes increasingly free cash flow positive, We will continue to prioritize the return of capital to our shareholders through further dividend increases and share repurchases.

Speaker 2

I will now turn the call over to Greg Hill for an operational update.

Speaker 3

Thanks, John. 2022 was another year of strong strategic execution and operational performance for Hess. Proved reserves at the end of 2022 stood at approximately 1,260,000,000 barrels of oil equivalent. Net proved reserve additions of 184,000,000 barrels of oil equivalent were primarily the result of the yellow toll sanction in Guyana And the Bakken, excluding asset sales, we replaced 144% of 2022 production At a finding and development cost of approximately $14.80 per barrel of oil equivalent. Turning to production.

Speaker 3

In the Q4 of 2022, company wide net production averaged 376,000 barrels of oil equivalent per day excluding Libya, which was above our guidance of approximately 370,000 barrels of oil Strong performance across the portfolio more than offset the severe winter weather impacts experienced in the Bakken during the month of December. For the full year 2023, we forecast net production to average Between 355,000,365,000 barrels of oil equivalent per day, an increase of approximately 10% compared with 2022 production of 327,000 barrels of oil equivalent per day excluding Libya. For the Q1 of 2023, we forecast company wide net production to average between 345,000 and 355,000 barrels of oil equivalent per day. In the Bakken, 4th quarter net production of And of 158,000 barrels of oil equivalent per day was below our guidance of 165,000 to 170,000 barrels of oil per day, reflecting severe winter weather impacts in December, which limited our new wells online to only 15 in the quarter. For the full year 2022, net production averaged 154,000 barrels of oil equivalent per day.

Speaker 3

In 2023, We plan to operate 4 rigs and expect to drill approximately 110 gross operated wells and bring online Approximately 110 new wells. In the Q1 of 2023, we plan to drill approximately 25 wells and bring 25 new wells online. In 2022, our drilling and completion cost Per Bakken well averaged $6,400,000 In 2023, we estimate industry inflation will average Between 10% 15%. However, we expect to mitigate this impact through the application of lean manufacturing and technology and forecast our D and C cost to average approximately $6,900,000 per well or about 8% above last year. For the full year 2023, we forecast Bakken net production will average between 165,000 and 170,000 barrels of oil equivalent per day.

Speaker 3

1st quarter net production is forecast to average between 155,000 and 160,000 barrels of oil equivalent per day, reflecting weather contingencies and the carryover effects from the severe winter weather in December. Net Bakken production is forecast to steadily grow over the course of 2023 2024 and average approximately 200,000 barrels of oil equivalent per day in 2025. We Expect to hold this level of production for nearly a decade. Moving to the offshore, in the deepwater Gulf of Mexico, Net production averaged 35,000 barrels of oil equivalent per day in the 4th quarter and 31,000 barrels of oil equivalent Per day for the full year 2022. For the Q1 and full year 2023, we forecast net production in the Gulf of Mexico We'll average approximately 30,000 barrels of oil equivalent per day, reflecting normal field declines and planned maintenance.

Speaker 3

The Deepwater Gulf of Mexico remains an important cash engine for the company as well as a platform for growth. In 2023, we plan to participate in 4 wells, 1 infrastructure led exploration well, 1 hub class exploration well and 2 tieback wells. The infrastructure led exploration well will be the Hess operated Pickerel prospect Located in Mississippi Canyon Block 727, which is expected to spud in April and will be brought online through existing The well will target the same Miocene interval that was successfully drilled at ESOX and tied back to Tubular Bells in 2020. The Hub Class exploration well will be spud in the second half of the year and will be a Hess operated opportunity in the Northern Green Canyon area in the Gulf of Mexico, targeting high quality subsalt Miocene sands In areas where the application of the latest seismic imaging technology has improved the sub salt image, The 2 tieback wells will be spud in the 4th quarter. One well will be at Stampede and the second well will be at the Shell operated Lano Field.

Speaker 3

First oil from both wells is expected in 2024. In Southeast Asia, net production from the joint development area in North Malay Basin, WareHouse has a 50% interest, averaged 67,000 barrels of oil equivalent per day in the 4th quarter and 64,000 barrels of oil equivalent Today for the full year 2022. For the Q1 and full year 2023, we forecast net production in Southeast Asia We average between 60,000,65,000 barrels of oil equivalent per day. Turning to Guyana, Warehas has a 30% interest in the Stabroek Block and ExxonMobil is the operator. The partnership delivered exceptional facilities reliability, Project delivery and exploration success in 2022.

Speaker 3

Net production from Guyana averaged 116,000 barrels of oil per day in the Q4 of 2022 and 78,000 barrels of oil per day for the full year 2022, both above our guidance. For the Q1 and the full year 2023, We forecast net production in Guyana to average approximately 100,000 barrels of oil per day. Turning to developments. Liza Phase 1 was successfully debottlenecked in 2022 and has been operating at or above its revised nameplate capacity of 140,000 barrels of oil per day. Liza Phase 2, utilizing Liza Unity FPSO, Achieved 1st oil in February of last year and production ramp up from startup to nameplate capacity was achieved in about 5 months, which is world class performance in the deepwater.

Speaker 3

Valize Uniti is currently operating at or above its Nameplate capacity of 220,000 barrels of oil per day. Production optimization opportunities are currently being considered for late 2023. The 3rd development, Payara, is approximately 93% complete. The Prosperity FPSO is expected to depart from Singapore in late Q1 and commence hookup and commissioning activities Following arrival in Guyana, the project remains ahead of schedule and is anticipated to achieve first oil by the end of 2023. Yellowtail, our 4th development, is approximately 40% complete and remains on track for 1st oil in 2025.

Speaker 3

The One Guyana FPSO hull is completed and is expected to enter dry dock in Singapore in April. Topside fabrication activities have commenced at module fabrication sites in Singapore and China and development drilling is underway. The final development plan for our 5th development, Waru, was submitted in November, and we are currently awaiting approval by the government of Guyana, which we anticipate by the end of the Q1. Pending government approvals, our 6th development with tail Turning to exploration. The Fang 2 Southeast 1 well, Located approximately 8 miles southeast of the original Fangtooth-one discovery well resulted in a significant new oil discovery And this area could form the basis for a future oil development on the Stabroek Block.

Speaker 3

The Fang II Southeast 1 well encountered approximately 200 feet of oil bearing sandstone reservoirs and further appraisal activities are underway. We continue to see multibillion barrels of additional exploration potential on the Stabroek Block. And in 2023, we plan to drill approximately 10 exploration and appraisal wells that will target a variety of prospects and play types. These will include lower risk wells near existing discoveries and several penetrations that will test deeper intervals. With regard to upcoming wells, operations are continuing at the Tarpon Fish 1 well In the northwest corner of the Stabroek Block, approximately 43 miles northwest of the Liza 1 well.

Speaker 3

The well is in the first test of cretaceous age plastic reservoirs in Northwest Stabroek. The well will also test a deeper Jurassic age Carbonate prospect. Lancet Fish 1 is a deep play exploration well located approximately 2.5 miles northeast At the Fang 2 Southeast 1 well that underlies a portion of Alisa field. Drilling operations are underway on the Noble Don Taylor drillship. Beyond that, there is a well called Basher, which will target a deep prospect in the Fangtooth area Any well called Blackfin, which will penetrate an up dip Upper Campanian prospect east of Barreleye.

Speaker 3

Moving to Offshore Canada. We plan to participate in the BP operated Ephesus 1 well In the Northern Orphan Basin, the well will target a very large submarine fan of tertiary age. The Stena Ice Max rig is expected to arrive on location in the Q2 despite the well, which is located in approximately 4,000 feet of water. BP has a 50% working interest and Hess and Chevron each have 25%. In summary, Our execution in 2022 was again strong and 2023 will be an exciting year.

Speaker 3

With the Bakken returning to a steady growth trajectory, With an active drilling program in the Gulf of Mexico and with the advancement of our major projects and further delineation of the Significant upside in Guyana, all of which position us to deliver industry leading performance and significant shareholder value for many years to come. I will now turn the call over to John Reilly.

Speaker 4

Thanks, Greg. In my remarks today, I will compare results from the Q4 of 2022 to the Q3 of 2022. We had net income of $624,000,000 in the Q4 of 2022 compared $515,000,000 in the Q3 of 2022. On an adjusted basis, which excludes items affecting comparability of earnings, We had net income of $548,000,000 in the Q4 of 2022 compared with $583,000,000 in the previous quarter. Turning to E and P.

Speaker 4

E and P adjusted net income was $591,000,000 in the 4th quarter compared with $626,000,000 in the 3rd quarter. The changes in the after tax components of E and P earnings Between the 4th Q3 of 2022 were as follows. Higher sales volumes increased earnings by $246,000,000 Lower realized selling prices decreased earnings by $288,000,000 Higher DD and A expense decreased earnings by $29,000,000 lower cash costs and midstream tariffs increased earnings by $19,000,000 Lower exploration expenses increased earnings by $13,000,000 while other items increased earnings by $4,000,000 for an overall decrease in 4th quarter earnings of $35,000,000 For the Q4, our E and P sales volumes were over lifted Compared with production by approximately 1,300,000 barrels, which increased our after tax income by approximately $60,000,000 Turning to Midstream. The Midstream segment had net income of $64,000,000 in the Q4 of 2022, compared with $68,000,000 in the 3rd quarter. Midstream EBITDA before non controlling interest amounted to $244,000,000 in Q4 of 2022 compared to $252,000,000 in the previous quarter.

Speaker 4

Turning to our financial position. At December 31, excluding the Midstream segment, cash and cash equivalents were $2,480,000,000 Total liquidity was $5,730,000,000 including available committed credit facilities and debt and finance lease obligations Total $5,600,000,000 During the Q4, we completed the sale of our 8% interest in the Waha concession in Libya For net proceeds of $150,000,000 and we purchased $5,000,000 RED Plus Carbon Credits from the Government of Guyana for $75,000,000 Total cash returned to shareholders in the Q4 through share repurchases and dividends amounted to $405,000,000 We repurchased approximately 2,300,000 shares of common stock for $310,000,000 in the 4th quarter, bringing total share repurchases in 2022 to $650,000,000 at an average price of approximately $120 per share. Net cash provided by operating activities before changes in working capital was $1,400,000,000 in both the 4th and third quarter. In the Q4, net cash provided by operating activities after changes in operating assets and liabilities was $1,250,000,000 compared with $1,340,000,000 in the 3rd quarter. E and P Capital and exploratory expenditures were $818,000,000 in the 4th quarter compared to $701,000,000 in the 3rd quarter.

Speaker 4

Now turning to guidance. First for E and P. We project E and P cash costs to be in the range of $14 to $14.50 per barrel of oil equivalent for the Q1, which includes a planned workover at the Penn State Field in the Gulf of Mexico. For the full year 2023, E and P cash costs are expected to be in the range of $13.50 to $14.50 per barrel of oil equivalent. DD and A expense is forecast to be in the range of $13 to $13.50 per barrel of oil equivalent for the Q1 and $13 to $14 per barrel of oil equivalent for the full year 2023.

Speaker 4

This results in projected total E and P unit operating costs to be in the range of $27 to $28 per barrel of oil equivalent for the Q1 $26.50 to $28.50 per barrel of oil equivalent for the full year 2023. Exploration expenses, excluding dry hole costs, are expected to be in the range of $35,000,000 to $40,000,000 in the Q1 $160,000,000 to $170,000,000 for the full year 2023. The midstream tariff is projected to be in the range of $290,000,000 to $300,000,000 for the 1st quarter And $1,230,000,000 to $1,250,100,000 for the full year of 2023. E and P income tax expense is expected to be in the range of $160,000,000 to $170,000,000 for the Q1 and $590,000,000 to $600,000,000 for the full year 2023. As of January 24, 2023, We have purchased WTI put options for 75,000 barrels of oil per day for 2023 with an average monthly floor price of $70 per barrel.

Speaker 4

We plan to increase our hedge position to a similar level as 2022 depending on market conditions. Based on our current position, we expect non cash option premium amortization, which will be reflected in our realized selling prices to reduce our earnings by approximately $25,000,000 in the first quarter and by approximately $120,000,000 for the full year 2023. Our E and P capital and exploratory expenditures are expected to $850,000,000 in the Q1 and approximately $3,700,000,000 for the full year of 2023. For Midstream, We anticipate net income attributable to Hess from the Midstream segment to be in the range of $55,000,000 to $60,000,000 for the Q1 and $255,000,000 to $265,000,000 for the full year 2023. For corporate, Corporate expenses are estimated to be approximately $35,000,000 for the Q1 $120,000,000 to $130,000,000 for the full year 2023.

Speaker 4

Interest expense is estimated to be in the range of $80,000,000 to $85,000,000 for the Q1 $305,000,000 to $315,000,000 for the full year This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

Operator

Your questions will be taken in the order received. Our first question comes from Arun Jayaram with JPMorgan. Your line is open.

Speaker 5

Yes, good morning. Good morning. Craig, I was wondering if you could give us a bit of a teach in On these deeper sand channels that you're exploring and have had success at Sang Tooth, I know you're drilling lengths of fish, but give us a sense of Are you still in the campaigning, but a little bit of a teach in on what you're exploring for?

Speaker 3

Well, thanks for the question, Arun. Again, as we've said before, if you look at the deeper interval, it's only 3,000 feet below the Upper campaign in which is majority of our discoveries. And if you look at that interval, it really underlies a lot of this paper block. And over the past couple of years, we've had a number of penetrations in that tails of existing wells. But I think importantly, The Fangtooth discovery was our 1st standalone deep prospect and the Fangtooth-one well, the first well had 164 feet of pay And the Fangzhou Southeast well, which is located 8.5 miles Southeast of that original discovery well, it had 200 feet of oil bearing pay.

Speaker 3

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

Speaker 5

Got it. Just a follow-up. I know, Greg, you mentioned you'll do a DST later this year. But what is it about Fangtubes that's kind of moving it up The development queue perhaps maybe after Whiptail to be the 7th boat on the Stabroek Block?

Speaker 3

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

Speaker 5

Great. Thanks a lot.

Operator

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

Speaker 6

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

Speaker 2

Good morning, Jeanine.

Speaker 6

Good morning. Maybe just going to cash returns real quick here. You're committed to returning up to 75% of annual adjusted free cash flow through dividends and buybacks. Can you talk about what determines where you fall within that range for 2023, whether it's related To oil prices, the balance sheet or maybe anything else, I mean, we note that you have a really healthy cash balance right now and Your debt maturities in 202427 are pretty manageable.

Speaker 2

Yes. No, excellent question, Janine. As I said earlier, with this capital budget of $3,700,000,000 our first priority is to continue to allocate capital to our high To keep a very strong cash position and balance sheet, you heard John saying we bought some puts to provide downside protection, Still have unlimited upside appreciation for our shareholders, but want to protect the downside where it's a volatile market and and we want to make sure the downside is protected. And then in terms of return on capital, yes, over the year, 75% of that free cash flow will be returned to our shareholders as we did last year. The first priority within that, Janine, is to grow our dividend.

Speaker 2

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

Speaker 6

Okay, great. Thank you. Thank you. And then maybe turning back to Guyana here. The Uro development project, I believe, is anticipated To be around $12,700,000,000 would you be able to comment on the moving pieces versus the Yellowtail cost estimate?

Speaker 6

For example, how much is related to additional scope versus inflation? And are there other things that aren't included in that $12,700,000,000 And Should we consider that as the baseline for future projects, which look to be the similar size or maybe even bigger? Thank you.

Speaker 2

Yes. So the $12,700,000,000

Speaker 3

is consistent with the estimate that the operator submitted as part of their EIA to To the government of Guyana, and that number is going to be finalized as the project progresses. And once we sanction it, we'll give the final details. But in any case, the final cost to Wahoo reflects a couple of things. It reflects current market conditions and then also additional scope. One example is the SURF is twice as big as Yellowtail, for example, because it connects a number of further away kind of reservoir systems.

Speaker 3

But we'll give you a final color on that once the project is finally sanctioned.

Speaker 2

And I think, Janine, what's also important is, Waru still offers some of the best returns in the industry. So even though there is cost inflation with the resource we're developing, the fact that it's low cost, low carbon, It still offers some of the best returns in the industry.

Speaker 6

Great. Thank you, gentlemen.

Operator

And one moment for our next question. Our next question comes from Doug Legg with Bank of America. Your line is open.

Speaker 7

Well, hi. Good morning, everyone.

Speaker 8

Good morning, Pete.

Speaker 7

Guys, I wonder if I could ask a kind of a longer term question. So Exxon had signaled a couple of years ago that if the deeper horizon worked, John, I think you've talked about this a number of times. We could be looking at double the resource potential. At the time, they were talking 10,000,000,000, so that would be 20,000,000,000 barrels. It seems Crazy to think that.

Speaker 7

But my question is, are you going to have enough time? Because the exploration Phases, I understand, that runs out in 2026 and this thing continues to get bigger. We're already in 2023. What needs to happen For you guys to retain everything that you ultimately could find over the next several years and what does that mean for Development timelines and I guess relinquishment of block acreage and so on.

Speaker 2

Yes. Doug, excellent Jim, we still see multi 1,000,000,000 barrels of exploration potential remaining. Greg made some great context remarks on The deeper horizon at 18,000 feet versus where most of our development efforts and exploration efforts have happened at 15,000 feet. We're still in the early innings of defining the deeper potential, definitely multibillion barrels potential remaining. And to get after that, that's why ExxonMobil is doing an excellent job developing this block, Has a 6 rig program, 3 of them are for development activities and 3 really are for exploration and appraisal.

Speaker 2

So we're going to continue to have a very Active exploration appraisal program this year and in future years to make sure we capture all the high value resources that we think are on the block.

Speaker 7

So just to be clear, John, you think you're going to have enough time in terms of securing the development approvals before 2026? Or do you have an extension on that to secure the development of the program?

Speaker 2

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

Speaker 7

Thank you. I appreciate that, John. My follow-up, whoever wants to take this is, it's kind of a 2 parter, if you don't mind, because I think you did Mention Waru's EIS, but you've also given guidance on Guyana for this year, which has got a lot of kind of cryptic comments perhaps So around downtime for debottlenecking, Liza and so on. So there's a lot of things going on in terms of that 3, 4 year visibility. So my question is this.

Speaker 7

First of all, can you give us some kind of a guide as to what the downtime and ultimate capacity would look like For Liza 2, as we go through this year, some sort of trajectory, I guess. And then my kind of Part B is, a lot of people are freaking out over $12,700,000,000 number that Exxon put in there. Yes, yes. Now we know that the absolute cost recovery is not that big of a deal, But you guys typically have come in lower than that because of contingency. Can you tell us what Hess' number is relative to that 12,700,000,000 Thanks.

Speaker 3

Yes. Thanks, Doug. So let me take your first question. So As I mentioned in my opening remarks, we're looking at a potential debottlenecking sometime in the latter half of twenty twenty three for Phase 2. Now, as we've spoken before, each one of these is going to be bespoke depending on the vessel.

Speaker 3

You typically want a year of dynamic data before you engineer the project to understand where the pinch points are on the vessel. As I've said in the past, I think you can expect kind of a 10% -ish uplift in any kind of debottlenecking. I think that's in the range of possibilities here as well. Again, we're just in the early stages of engineering that. So that would maybe come on in the Q4.

Speaker 3

So we've included some downtime for that In the guidance for Guyana, I think that the quarter 4 of 2022 Basically had no downtime. And as we project forward to 2023, really trying to include pigging and The normal maintenance downtime, some debottlenecking downtime in those production estimates for next year and also The tax barrels are a little bit different, what John can talk about. And John can also talk about the CapEx for Wauwau Russo. John Reilly?

Speaker 4

Yes. On the 12.7, Doug, right now, look, we're going to wait for the final sanction when we come out with our estimates. But You are correct. There is always a contingency in at the beginning of these projects and rightfully so, several years of construction. What we can say is that ExxonMobil has done a fantastic job on every single project, meeting or beating their estimates So, John Hess said it earlier, This project will have world class breakeven, will be world class returns there in Waru.

Speaker 4

We're excited about that. Final details once the government has approved it, we can provide.

Speaker 7

And it's not lost on us. It's 30% bigger. Thanks so much, Sean. Appreciate it.

Operator

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

Speaker 8

Hey, guys. Good morning. Couple of questions. I think the first, yes, 2 part is for John Ravi, just to clarify. When you say $75,000 for $70 is that brand or WTI?

Speaker 8

And also that when you're talking about In the Q4, the $75,000,000 carbon credit purchase, where does it show where did it Show up in the income statement and the cash flow for the Q4?

Speaker 4

Sure. So let me do your first question was on the Hedges that we put on, we have WTI put options on right now. So that's 75,000. And like I said, we do intend to get to a similar level as last year and combined between WTI and Brent, we had about 150,000 barrels a day hedged last So again, you should be looking for us to add to this position, but currently that $75 is for WTI put options at $70 And

Speaker 8

John, for the $120,000,000 on the payment for the full year, is that just for this not in anticipation of The increase in the put option you're going to put?

Speaker 4

That is correct. That is just for the 75,000 we have. Simple math, if you want to double it to get to 150, you could double it, but we will give you updates on that as we increase our hedge position. Then your second question on carbon credits. So what we have that 75,000 75,000,000 purchase on the carbon credits, you'll see it on our balance sheet and other long term assets.

Speaker 4

And when you look at, there's nothing on the income statement because that is an asset being held. And on the cash flow statement, it is in working capital.

Speaker 8

Okay. And my final question is for Greg Bakken. Can you tell us what is the winter storm impact in the Q4? And also, I understand the Q1, you've been conservative Contingency on the weather, but for the full year production, seems like it's a tad low compared to what we Have expected even after taking into consideration of the Q1, is the number of wells that you plan for this year end up It's going to be lighter than previously or is there anything that you can share? Yes, that seems to be low comparing to what I think Pimodny has been discussing.

Speaker 3

No. So I think let me talk first about the snowfall. So The severe snowfall coupled with really low wind chill significantly impacted our ability to Mobilize resources, you just can't put people to work at minus 30, minus 40 wind chill. And so what that did was it Significantly increased our backlog of down wells. And then importantly, it delayed bringing new wells online.

Speaker 3

We projected 25 new wells online coming on in the Q4, that number was 15. So we lost 10 wells. And if you assume those things come on at 1100 barrels a day, you can see that's a fairly significant impact. I think we're in recovery mode. We expect to recover in the quarter from that.

Speaker 3

It just takes time to build and dig out of that literally. But importantly, Paul, I think the Bakken now is on this Steady build. This steady cadence is steady build to get to that 200,000 barrel a day average in 2025. So there will be this regular cadence. We'll probably touch 200,000 towards the end of 2024, but I think importantly, We will average 200,000 barrels a day in 2025.

Speaker 3

So we're on a solid trajectory from here to 2025 and not Welles are performing as expected. You're coming in with these IP 180s of 120, EUR is 1.2, that's in spite of going into a little bit less quality acreage. So the reservoir Performing exactly as expected. These are just weather aberrations as you kind of go through the year. That's all it is.

Speaker 8

I see. Great. Do you have an estimate, what is the exit rate for this year in Bakken?

Speaker 3

No, not yet. And we will guide that as we go through the year, Paul. And as I I'm always kind of hesitant because Q4 is always a little odd on weather. So we wait until we're closer and kind of look forward at Weather forecast before we like to project that far out.

Speaker 8

Okay. Thank you.

Operator

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

Speaker 9

Hey, thanks guys. I just want to follow-up on Janine's question around Capital returns in the Q4, you bought $310,000,000 worth of stock and I think you did $650,000,000 last year. The share prices have done really well, so congrats on that. Has the appreciation in the share price Change your how aggressive you want to be around buying back stock? And as we think about this year, Recognizing the prioritizing the dividend, should we think that there'll be a ratable buyback as well?

Speaker 4

Thanks, Neil. Just going back to what John has said a little early, you reiterated our priorities, Invest in those high return opportunities, Guyana and Bakken, maintain that strong balance sheet. So the first thing, as John had mentioned, we'll be looking at the dividend, because that will give strong consideration first to that dividend increase. And then in line, we're going to Return cash up to the 75% through further share repurchases then. So as we look at, as you said, with the stock Appreciation, we are committed to that return framework and we will return up to that 75% through both the dividends and share repurchases.

Speaker 4

And The way we look at it right now is we currently only have 2 FPSOs on producing in Guyana. We have Payara starting in this year and remember every time And FPSO comes on and once it's fully ramped, Payara is going to be about 55,000,000, 60,000 barrels a day to us and $1,000,000,000 in cash flow. So then you have Yellowtail similarly in 2025, a little bit bigger, so 65,000 barrels a day approximately, When that's fully up and running, a little bit more cash flow than that $1,000,000,000 and we've got Waru in $26,000,000 and we got up to 10 FPSOs to develop all the resources we have found. So we believe in buying our shares in advance of that significant cash flow growth and NAV accretion that each of these FPSO generates. So We believe that will deliver significant value to shareholders by continuing the share repurchases.

Speaker 9

Thank you, John. And the follow-up is just around post-twenty 23 CapEx, recognizing again that there's a cost recovery element here And we just try to calibrate our models post-twenty 23. Any moving pieces that you would point us to, to help us think about where we should set those numbers?

Speaker 4

So obviously, this is really early, Neil. So thanks for that question. But as you move into next year, just think Bakken, Steady 4 rig program, shouldn't be much changes there. Gulf of Mexico, we'll see what happens. As you know, Greg had talked about the wells we're drilling this year and we'll see what any follow ons as it relates to that.

Speaker 4

So it's a little early. Southeast Asia maybe slowly coming down. You saw it came down a bit in 'twenty three from last year. And then Guyana, obviously, the big spend. So we'll continue to have 3 FPSOs kind of coming in line.

Speaker 4

So Payara will be on, but we'll still have 3 FPSOs that are in the development phase. So with those, I mean, you see with current market, So the current market is a bit up, so you can kind of take up those 3 FPSOs a bit as compared to what we have This year and then the one other piece to add is the FPSO purchases, which we expect to have our first FPSO Purchase in early 2024.

Speaker 9

Yes. Thanks, John. Very helpful.

Operator

One moment for

Speaker 3

our next question.

Operator

Our next question comes from Ryan Todd with Piper Sale. Your line is open.

Speaker 10

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

Speaker 3

Well, I think, as you mentioned, I mean, certainly rigs are going up, Kind of the mid to high 3s, approaching 400, I think, for offshore rigs, Not unreasonable. Now remember, we're largely insulated from that because Certainly, the first three developments in Guyana are actually already locked in for actually with Yellowtail. So those costs are locked in. Some of the rig rates flowed a little bit and obviously Oil Country Tubular Goods are up, but I will say that ExxonMobil Has done an outstanding job of delivering improvements to offset both rig This is and Oil Country Tubular Good Increases. So we're fairly insulated because of the projects we have going on.

Speaker 3

And as we mentioned, The costs in Huarou will reflect that market inflation and we'll get into details all that once it's finally sanctioned. But those are sort of the levels we're seeing. But again, we're largely insulated from that in our portfolio Because of the nature of Guyana.

Speaker 10

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

Speaker 4

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

Speaker 10

Thanks, John.

Operator

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

Speaker 9

Hi, good morning.

Speaker 8

Good morning.

Speaker 11

I just wanted to touch base on something that As mentioned earlier on, you're just talking about experiencing exceptional facilities reliability in Guyana.

Speaker 7

I was wondering if

Speaker 11

you could talk a little bit about maybe how that contributed to results. I was just curious if you had modeled some maintenance or Slow down in there that you wound up not having to do?

Speaker 3

No. What my earlier comment was, If you look at Q4 in Guyana, there was little maintenance at all in Guyana. And then as we look forward, For a whole year, you have to build some of that in. You'll have some pigging runs and some facility maintenance. So we had to build that into The downtime as we kind of look forward for a full year of Guyana production, but Q4 was exceptional, very high reliability.

Speaker 11

Okay, great. And apologies if you touched on this, I dropped off for a minute. But the offshore Canada prospect that you mentioned, I

Speaker 9

I just wondered if you could talk a

Speaker 11

little bit about the geology of that and how it was identified?

Speaker 3

Yes, sure. So we identified this prospect With the number of partners, really about the same time that we identified the Guyana opportunity. And this is a very large stratigraphic trap. There is only a one well commitment. As we mentioned in our opening remarks, the rig will show up in the Q2.

Speaker 3

The prospect is very shallow. It's about 15,000 feet or so, and it's only in 4,000 feet of water. Total depth, 15,000. So This is going to be a kind of a one well wonder and we'll see where it goes, but it's very large.

Speaker 9

Okay, great. Good to hear. Thanks.

Speaker 3

Thanks. Thank you.

Operator

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

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Earnings Conference Call
Hess Q4 2022
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