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Hess Q1 2023 Earnings Call Transcript


Listen to Conference Call

Participants

Corporate Executives

  • Jay R. Wilson
    Vice President, Investor Relations
  • John B. Hess
    Chief Executive Officer
  • Gregory P. Hill
    President and Chief Operating Officer
  • John P. Rielly
    Executive Vice President and Chief Financial Officer

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter of 2023 Hess Corporation conference call. My name is Kevin and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes.

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

Jay R. Wilson
Vice President, Investor Relations at Hess

Thank you, Kevin. [Phonetic] Good morning, everyone, and thank you for participating in our first-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 that -- 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 Rielly, Chief Financial Officer. I'll now turn the call over to John Hess.

John B. Hess
Chief Executive Officer at Hess

Thank you, Jay. Good morning, and welcome to our first quarter conference call. Today, I will discuss our continued progress in executing our strategy. Greg Hill will then cover our operations, and John Rielly will review our financial results.

We believe that Hess offers a unique value proposition for investors. Our strategy is to deliver high-return resource growth, a low cost of supply, and industry-leading cash flow growth, and at the same time maintain our industry leadership in environmental, social and governance performance and disclosure. In terms of resource growth with multiple phases of Guyana developments coming online and our robust inventory of high-return drilling locations in the Bakken, we can deliver highly profitable production growth of more than 10% annually through 2027.

On the Stabroek Block in Guyana, we currently have line of sight to six Floating, Production, Storage and Offloading vessels or FPSOs in 2027, with a gross production capacity of more than 1.2 million barrels of oil per day. In terms of the low cost of supply, as our resource base continues to expand, we will steadily move down the cost curve. By 2027, we forecast that our cash unit costs will decline by 25% to approximately $10 per BOE, and that our portfolio will achieve a breakeven Brent oil price of approximately $50 per barrel.

Our four sanctioned oil developments on the Stabroek Block have a breakeven Brent oil price of between approximately $25 and $35 per barrel. In terms of cash flow growth, we have an industry-leading rate of change story and an industry-leading duration story, providing a highly differentiated value proposition. Based upon a flat Brent oil price of $70 per barrel -- $75 per barrel, our cash flow is forecast to increase by approximately 25% annually between 2022 and 2027, more than twice as fast as our top-line growth. And our balance sheet will also continue to strengthen with our most recent debt-to-EBITDAX ratio at approximately 1 time.

Successful execution of our 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. Our financial priorities are to allocate capital to our high-return, low-cost investment opportunities; to maintain a strong balance sheet and cash position to ensure that we can fund our world-class investment opportunities in Guyana and the Bakken, where we have allocated more than 80% of our 2023 capital budget. And also return up to 75% of our annual free cash flow to shareholders through dividend increases and share repurchases. In line with our return of capital framework, in March, we increased our annual dividend by 17% to $1.75 per share.

Looking ahead, we plan to continue increasing our regular dividend to a level that is attractive to income-oriented investors but sustainable in a low oil price environment as our free cash flow generation steadily increases in future years, share repurchases are expected to represent a growing proportion of our return of capital. To manage oil price volatility, we have hedged 130,000 barrels of oil per day in 2023. Of which, 80,000 barrels of oil per day have $70 per barrel WTI put options and 50,000 barrels of oil per day have $75 per barrel Brent put options, which positions our shareholders to be protected on the downside while fully benefiting on the upside.

Key to our strategy is Guyana, the industry's largest oil province discovered in the last decade, where Hess has a 30% interest and ExxonMobil is the operator. Since 2015, we have had more than 30 discoveries on the block, including two since the start of 2023, and Fangtooth Southeast-1 and Lancetfish-1, underpinning a gross discovered recoverable resource estimate of more than 11 billion barrels of oil equivalent with multi-billion barrels of exploration potential remaining.

We have the potential for up to 10 FPSOs to develop the discovered resources on the block. The Liza Phase 1 and Liza Phase 2 developments produced an average of approximately 375,000 gross barrels of oil per day in the first quarter. The FPSO for our third sanctioned development in Payara arrived on the Stabroek Block earlier this month, ahead of schedule, and is targeted to start up early in the fourth quarter with a gross production capacity of approximately 220,000 barrels of oil per day.

The fourth sanctioned development Yellowtail is expected to come online in 2025 with a gross production capacity of approximately 250,000 barrels of oil per day. Government and regulatory approvals are expected very soon, hopefully, this week for our fifth development at Uaru, which will have a gross production capacity of approximately 250,000 barrels of oil per day. A plan of Development for our sixth development, Whiptail, is expected to be submitted to government in -- for regulatory and government approvals later this year.

Turning to the Bakken, we plan to continue operating a four-rig program, which will enable us to grow net production to approximately 200,000 barrels of oil equivalent per day in 2025, lower our unit cash costs, fully optimize our infrastructure, and generate significant levels of free cash flow. Greg and his team continue to do an outstanding job of applying lean manufacturing principles to build a culture of innovation, improve efficiency and mitigate inflationary cost pressures. As we execute our company's strategy, we will continue to be guided by our long-standing commitment to sustainability and are proud to be an industry leader in this area.

Earlier this month, we announced a $50 million donation over the next five years to the Salk Institute's Harnessing Plants Initiative, which is a potential game-changer in tackling the global challenge of climate change by developing plants, crops, and wetlands' natural ability to capture and store potentially billions of tons of carbon per year from the atmosphere.

We are proud to once again have received a AAA rating in the latest MSCI Environmental, Social and Governance rating assessment. AAA, which is MSCI's ESG's highest rating designates our company as a leader in managing industry-specific ESG risks relative to peers. We received our first AAA rating in 2021 after earning AA ratings for 10 consecutive years. In February, Hess also earned a place on the 2023 Bloomberg Gender Equality Index for the fourth consecutive year.

In summary, we continue to successfully execute our strategy, which offers a unique value proposition for our industry, by growing both our intrinsic value and our cash returns, with multiple phases of low-cost oil developments coming online in Guyana, and our robust inventory of high-return drilling locations in the Bakken. Our portfolio is positioned to become increasingly free cash flow positive, and as it does, we will continue to prioritize the return of capital to our shareholders through further dividend increases and further share repurchases.

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

Gregory P. Hill
President and Chief Operating Officer at Hess

Thanks, John.

We demonstrated strong operational performance across our portfolio in the first quarter. Company-wide net production averaged 374,000 barrels of oil equivalent per day, above our guidance of approximately 345,000 to 355,000 barrels of oil equivalent per day. For the second quarter, we forecast the company-wide net production will average between 355,000 and 365,000 barrels of oil equivalent per day, reflecting planned maintenance activities at least in [Phonetic] Phase 2 in Guyana, several of our Gulf of Mexico fields, and at North Malay Basin in Southeast Asia. For the full-year 2023, we now expect company-wide net production to average between 365,000 and 375,000 barrels of oil equivalent per day, an increase from our previous guidance of 355,000 to 365,000 barrels of oil equivalent per day, due to strong performance in the first quarter of 2023.

In the Bakken, first-quarter net production of 163,000 barrels of oil equivalent per day was above our guidance of 155,000 to 160,000 barrels of oil equivalent per day, reflecting high uptime and strong recovery from challenging weather conditions this winter. In the first quarter, we drilled 25 wells and brought 24 new wells online. In the second quarter, we expect to drill and bring online approximately 27 new wells. For the full-year 2023, we expect to drill and bring online approximately 110 new wells. Individual well results in terms of EURs and IP 180s continued to meet or exceed expectations. For both the second quarter and full year 2023, we expect Bakken net production to average between 165,000 and 170,000 barrels of oil equivalent per day.

Moving to the offshore. In the Deepwater Gulf of Mexico, first-quarter net production averaged 33,000 barrels of oil equivalent per day, above our guidance of approximately 30,000 barrels of oil equivalent per day, primarily reflecting better uptime. In the second quarter, we expect net production to average approximately 25,000 barrels of oil equivalent per day, reflecting planned maintenance at several of our Gulf of Mexico fields. For the full-year 2023, we continue to forecast Gulf of Mexico net production to average approximately 30,000 barrels of oil equivalent per day. The Deepwater Gulf of Mexico remains an important cash engine for the company as well as a platform for growth. In May, we plan to spud the Pickral-1 well located in Mississippi Canyon Block 727. Pickral is an infrastructure-led exploration prospect which will be tied back to Tubular Bells. Following Pickral, we plan to drill another tieback well at Stampede and a hub class exploration well in the Green Canyon area.

In Southeast Asia, first-quarter net production averaged 66,000 barrels of oil equivalent per day. Second-quarter net production is forecast to average approximately 60,000 barrels of oil equivalent per day, reflecting planned maintenance at North Malay Basin. Full-year net production for Southeast Asia in 2023 is now forecast to average approximately 65,000 barrels of oil equivalent per day compared with our previous guidance of 60,000, to 65,000 barrels of oil equivalent per day.

In Guyana, where Hess has a 30% interest in the Stabroek Block, the operator ExxonMobil continues to deliver outstanding facility's reliability and project execution success. First-quarter net production averaged 112,000 barrels of oil per day, above our guidance of approximately 100,000 barrels of oil per day, primarily driven by strong facility uptime and well performance. For the second quarter, net production for both -- from Guyana is expected to average between 105,000 and 110,000 barrels of oil per day, reflecting reduced capacity at Liza Phase 2 for planned maintenance. We now expect full-year 2023 net production to average between 105,000 and 110,000 barrels of oil per day compared to our previous guidance of approximately 100,000 barrels of oil per day.

Turning to Guyana developments, the Prosperity FPSO with a production capacity of approximately 220,000 gross barrels of oil per day arrived at the Stabroek Block on April 11. The vessel is undergoing hookup and commissioning and is targeted to achieve first oil from Payara, our third development, early in the fourth quarter. Yellowtail, our fourth development, is approximately 45% complete and it remains on track for first oil in 2025. The 250,000 barrel of oil per day One Guyana FPSO hull entered dry dock in Singapore on April 2. Topside fabrication and installation activities have commenced and development drilling is underway. Government and regulatory approvals are expected very soon for our fifth development at Uaru with a gross production capacity of approximately 250,000 barrels of oil per day. Finally, for our sixth development, Whiptail, the partnership is on track for final submission of the field development plan to the government of Guyana later this year.

Now turning to exploration. The Lancetfish-1 well located four miles southeast of the Fangtooth-1 discovery encountered 92 feet of oil-bearing sandstone reservoir. This discovery further underpins the potential oil development in the Greater Fangtooth area. Drill stem tests and core analysis are underway at Fangtooth-1 and further appraisal activity for Lancetfish and Fangtooth Southeast are planned for later in the year.

In the second half of the year, we plan to drill the Bacher-1 well, which is a deep prospect located approximately seven miles west of Fangtooth-1, and another deep exploration prospect called Lanternfish [Phonetic], located two miles Southwest of Fangtooth-1.

Moving to Offshore Canada. We expect to spud the BP-operated FSS-1 well in the Northern Orphan Basin in May. The well will target a very large submarine fan of tertiary age. BP has a 50% working interest, and Hess and Chevron each have 25% interest.

In closing, our execution continues to be strong. The Bakken is on a steady growth trajectory. Our Gulf of Mexico and Southeast Asia assets have active drilling programs and we continue to advance our major projects and further delineate the enormous upside in Guyana, all of which position us to deliver industry-leading performance and significant shareholder value for years to come.

I will now turn the call over to John Rielly.

John P. Rielly
Executive Vice President and Chief Financial Officer at Hess

Thanks, Greg.

In my remarks today, I will compare results from the first quarter of 2023 to the fourth quarter of 2022. We had net income of $346 million in the first quarter of 2023 compared with $497 million in the fourth quarter of 2022, or $522 million on an adjusted basis, which excluded items affecting comparability of earnings.

Turning to E&P. E&P net income was $405 million in the first quarter of 2023 compared with an adjusted net income of $565 million in the fourth quarter of 2022. The changes in the after-tax components of E&P earnings between the first quarter of 2023 and fourth quarter 2022 were as follows: lower sales volumes decreased earnings by $138 million; lower realized selling prices decreased earnings by $45 million; lower cash costs and Midstream tariffs increased earnings by $16 million; lower exploration expenses increased earnings by $7 million, for an overall decrease in first-quarter earnings of $160 million.

For the first quarter, our E&P oil sales volumes were under lifted compared with production by approximately 325,000 barrels, which decreased our after-tax income by approximately $15 million.

Now turning to Midstream. The Midstream segment had net income of $61 million in the first quarter of 2023 compared with $64 million in the fourth quarter of 2022. Midstream EBITDA before noncontrolling interests amounted to $238 million in the first quarter compared to $244 million in the previous quarter.

Turning to our financial position. At March 31, excluding the Midstream segment, cash and cash equivalents were $2.1 billion. Total liquidity was $5.4 billion including available committed credit facilities and debt and finance lease obligations totaled $5.6 billion. In March, we received net proceeds of $50 million from the sale of approximately $1.8 million Hess-owned Class B units to Hess Midstream. In the first quarter of 2023, net cash provided by operating activities before changes in working capital was $1 billion compared with $1.3 billion in the fourth quarter of 2022, primarily due to lower sales volumes and realized selling prices.

Changes in operating assets and liabilities during the first quarter decreased cash flow from operating activities by $394 million, which includes premiums paid for hedging contracts. E&P capital and exploratory expenditures were $765 million in the first quarter of 2023 compared to $818 million in the fourth quarter of 2022.

Now turning to guidance, first for E&P. Our E&P cash costs were $12.96 per barrel of oil equivalent in the first quarter of 2023, which was lower than our guidance of $14 to $14.50 per barrel of oil equivalent, due to higher production and the deferral of workover spend to the second quarter. We project E&P cash costs to be in the range of $15.50 to $16 per barrel of oil equivalent for the second quarter, reflecting planned maintenance activities at the Liza Unity, North Malay Basin, and several facilities in the Gulf of Mexico, and higher workover spend in the Gulf of Mexico. Full-year cash cost guidance in the range of $13.50 to $14.50 per barrel of oil equivalent remains unchanged. DD&A expense was $13.16 per barrel of oil equivalent in the first quarter of 2023. DD&A expense is forecast to be in the range of $13 to $13.50 per barrel of oil equivalent for the second quarter, and full-year DD&A expense in the range of $13 to $14 per barrel of oil equivalent remains unchanged. This results in projected total E&P unit operating costs to be in the range of $28.50 to $29.50 per barrel of oil equivalent for the second quarter and $26.50 to $28.50 per barrel of oil equivalent for the full-year 2023.

Exploration expenses excluding dry hull costs are expected to be in the range of $40 million to $45 million in the second quarter, and full-year guidance of $160 million to $170 million remains unchanged. The Midstream tariff is projected to be in the range of $305 million to $315 million for the second quarter, and full-year guidance of $1,230 million to $1,250 million remains unchanged.

E&P income tax expense is expected to be in the range of $170 million to $180 million for the second quarter and $670 million to $680 million for the full year, which is up from previous guidance of $590 million to $600 million due to higher commodity prices. During the first quarter, we purchased WTI put options for 80,000 barrels of oil per day for 2023 with an average monthly floor price of $70 per barrel, and Brent put options for 50,000 barrels of oil per day for 2023 with an average monthly floor price of $75 per barrel. We expect non-cash option premium amortization, which will be reflected in our realized selling prices, will be approximately $50 million for the second quarter, and approximately $190 million for the full-year 2023.

Our E&P capital and exploratory expenditures are expected to be approximately $975 million in the second quarter and full-year guidance of approximately $3.7 billion remains unchanged. For Midstream, we anticipate net income attributable to Hess from the Midstream segment to be in the range of $55 million to $60 million for the second quarter and full-year guidance of $255 million to $265 million remains unchanged.

For Corporate, Corporate expenses are estimated to be approximately $30 million for the second quarter and full-year guidance of $120 million to $130 million remains unchanged. Interest expense is estimated to be in the range of $80 million to $85 million for the second quarter and full-year guidance of $305 million to $315 million remains unchanged.

This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.


Questions and Answers

Operator

Thank you, ladies and gentlemen. [Operator Instructions] Our first question comes from Ryan Todd with Piper Sandler. Your line is open.

Ryan Todd
Analyst at Piper Sandler Companies

Thanks. Sorry, was on mute there.

John B. Hess
Chief Executive Officer at Hess

No worries.

Ryan Todd
Analyst at Piper Sandler Companies

First off, I guess, congratulations on very strong production in Guyana this quarter. Can you talk about what you've seen on productive capacity in these first two developments, both on the reservoir side, what you're seeing sub -- subsurface there as well as post debottleneck surface facility-side? What should we expect these two facilities to sustainably produce going-forward?

Gregory P. Hill
President and Chief Operating Officer at Hess

Yeah, thanks, Ryan. So first of all, the wells have been performing extremely well, above expectations, so subsurface is going great. Continue to see -- further upside -- in the subsurface as we kind of produce the wells. And then as I mentioned in my opening remarks -- ExxonMobil's and the SBM are just doing an outstanding job of topsides reliability, and also, the debottlenecking side. Recall that Phase 1 was debottlenecked to the 140,000 barrels. It's actually producing between 140,000 barrels and 150,000 barrels, sort of in that range.

And then if you look at Phase 2, it has a nameplate of 220,000 barrels. It's on track to be debottlenecked towards 250,000 barrels by the end of the year. So, again, more upside coming on Phase 2. And it's been operating kind of 230,000 barrels or so on a regular basis, but we'll pick up that up towards 250,000 barrels by the year -- by the end of the year. So, upside-upside.

Ryan Todd
Analyst at Piper Sandler Companies

Awesome. Thanks, Greg. Then maybe just one on cost inflation and what you're seeing, it's -- it was very topical across the space right now. I mean, can you talk about what you're seeing in the Bakken onshore and offshore as well in terms of kind of leading-edge trends across various silos of what you're seeing on service cost?

Gregory P. Hill
President and Chief Operating Officer at Hess

Sure, yeah. So, in some areas such as oil country Tubular goods, we're expecting some moderation in inflation coming. Onshore rigs pretty much staying flat, but we're still seeing some pressure in certain areas, particularly labor. Now specifically, in the Bakken, we anticipated year-over-year inflation of between 10% to 15%, that's about where it's running. However, remember, we're mitigating about half of these impacts through the application of strategic contracting, lean manufacturing and technology. So our Bakken well guidance of 6.9 [Phonetic] per well for the year remains unchanged. So, if we look at the offshore, we're expecting year-over-year industry inflation there between 15% and 20%.

Now, remember in Guyana, the first four FPSOs are contracted, so they'll have limited exposure going forward. And then, in addition, ExxonMobil is just doing a fantastic job of mitigating kind of inflation effects through their outstanding execution and performance, using that design One build maybe strategy, which is sort of like lean manufacturing in the offshore.

And then finally, in our Gulf of Mexico operations, we contracted our services in 2022 so we missed some of the recent uptick. So because of that, our overall capital guidance of $3.7 billion remains unchanged this year.

Ryan Todd
Analyst at Piper Sandler Companies

Great. Thanks, Greg.

Operator

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

Doug Leggate
Analyst at Bank of America

Well, thanks. Good morning, everybody. Thanks for getting me on.

Gregory P. Hill
President and Chief Operating Officer at Hess

Good morning.

Doug Leggate
Analyst at Bank of America

Gents, so, I wonder if I could kick off with one on the somewhat rare event nowadays of a dry hull in Guyana. I know that's a little bit -- a little bit flippant, but I'm curious as to where you think you are on the cleaning curve at this point. This was obviously a step out of carbonate, you haven't really talked about it. How many more of those do you think you're going to be pursuing, I guess? So, and if I could just do a quick add-on to that, when you talk about the 11 billion barrels, what are we actually talking about is actually included in that versus the, I guess, north of 30 discoveries you have so far?

Gregory P. Hill
President and Chief Operating Officer at Hess

Yeah. Thanks, Doug.

So, let me take Kiru-Kiru [Phonetic] first. Recall that was a higher-risk carbonate play that was located 37 miles from Liza-1. And it didn't encounter commercial hydrocarbons but it did provide a lot of valuable data -- that further improves our understanding of the sub-surface. Going forward, Doug, we still continue to see multibillion barrels of upside, that hasn't changed. And finally, in reference to your question, the 11 billion barrels, the majority of that is in the Upper Campanian.

And obviously, with our exploration program this year, we're really starting to understand the Deep and what potential that holds. But across the block, this multi-billion barrels of additional upside remains unchanged. Yes, we'll have a few dry hulls as we test different things along the way, but there's still a lot more to play with.

Doug Leggate
Analyst at Bank of America

So, are we talking like two-thirds of the wells are the 11 billion barrels or the discoveries rather? If not 31 is my point, what's the -- what's not included?

Gregory P. Hill
President and Chief Operating Officer at Hess

What's not included in the 11 billion? So the recent discoveries that we've had are obviously not included in that. Again, Doug, it's mainly Upper Campanian, right? So as we get results of the Lower Campanian, yeah obviously, that will be incorporated. But the multi-billion barrels of additional upside encompasses the Upper and the Lower, it's not just the lower. It's -- there's still a lot of Upper Campanian to play for as well.

Doug Leggate
Analyst at Bank of America

All right. Thank you for that. I'll take the rest offline. My follow-up is just a housekeeping question, maybe for John Rielly. John, you walked through the working capital moves. I guess my question is, when I look at the accretion mass on Guyana -- the NPV accretion with the potential buybacks, it seems kind of obvious that the value that your-- in your share price today, a lot of it is obviously not being reflected.

So, I'm curious on what the strategy is for the buyback program, meaning, is it a -- after working capital cash flow number that you're looking at, or is that -- that's obviously going to move around quarter-to-quarter? Just how are you thinking about it because we were anticipating you might have a little quicker buyback pace this quarter.

John P. Rielly
Executive Vice President and Chief Financial Officer at Hess

Sure, Doug. So let me just back up and talk about our financial priorities that we have. So, the first priority is obviously to invest in these high-return opportunities, obviously driven by Guyana and the Bakken because that's going to drive our free cash flow growth. And as John said earlier in his comments, that we can grow intrinsic value and cash returns and it's Guyana and Bakken that will allow us to do that. Our second priority is to maintain a strong balance sheet. Again, we're in a good position with that. We want to also have a strong cash position and we do have $2.1 billion of cash on the balance sheet. So, we're in a good place with that to fund our high-return projects.

So for us, we have this capital return framework, and we're going to follow that, that we put out. And so what we do is return up to 75% of our free cash flow on an annual basis. So, that is after working capital, that is after capital expenditures, and even after debt maturities, which we don't have any this year -- the -- we do have $300 million in 2024. And so the first thing that we'll do in that return of capital framework is focus on the dividend. As John mentioned in his opening remarks, we want to increase that dividend each year, and we did do that in March. So, we had that 17% increase, the $0.25 per share increase. And so that is going to be the first thing. So, we did increase our returns to shareholders here in the first quarter with that dividend increase. Then the remainder of that free cash flow, that 75% will be done in share repurchases.

And you're right, we agree with you about the NAV accretion that we'll be having with these FPSOs. And just to remind everybody, with each FPSO comes on, like obviously, we have Payara here coming early this year, that generates net to us, $1 billion of cash flow. So again -- then Payara, and then Yellowtail, Uaru. So, we're getting that $1 billion kind of a year adding to our portfolio. And so as we go forward more and more of our capital returns will be share repurchases. And so, buying our shares, basically in advance of those as we get -- as Payara comes on and generates $1 billion and gets in front of Yellowtail and Uaru, obviously will be -- I think would be able to deliver significant value to shareholders just following this framework that we have.

Doug Leggate
Analyst at Bank of America

That's very clear. Thanks, fellows.

Operator

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

Neil Mehta
Analyst at The Goldman Sachs Group

Yeah, good morning, team. And congrats on a super quarter. John --

Gregory P. Hill
President and Chief Operating Officer at Hess

Thanks, Neil.

Neil Mehta
Analyst at The Goldman Sachs Group

-- the first question's for you about building downside resiliency in the business model. Obviously, there's a lot of reasons to be constructive long-term. Near-term's more uncertain from an economic perspective. And so, just curious on how having gone through the last 10 years with a lot of volatility, have you built-in defenses within the Hess business model? I think you talked about one, which is the hedging strategy. And then also, improving the balance sheet. But -- just any thoughts around that as we think about creating defensive attributes?

John B. Hess
Chief Executive Officer at Hess

No. Look, we obviously focused -- and thank you for the question. We focused our portfolio on high-return, low-cost of supply opportunities. Obviously, we think we have built a highly differentiated value proposition, and part of that is the low-cost model. The fact that over the next five years, we can get our breakeven at $50 Brent. Also, the cash costs going down 25% as well. I think that makes our portfolio very resilient in a low-price environment.

John Rielly talked about capital discipline and also the priority on keeping a strong balance sheet and cash position. Our cash position at the end of the quarter was over $2 billion, and we will continue to hedge by buying puts to protect the downside and still give our shareholders the upside. So, I think relative to a lot of our competitors that are having cost pressures going up, our costs are going down and we're going to keep a strong balance sheet to stay resilient through the cycle.

Neil Mehta
Analyst at The Goldman Sachs Group

Yeah, that's very clear. Then a follow-up just on the Bakken, can you talk about the trajectory that you anticipate over the course of the year? And then, what do you think we get to plateau, and at what level?

Gregory P. Hill
President and Chief Operating Officer at Hess

Yeah, so we exited Q1 in line with our forecast, a little bit ahead of guidance, but it was in line with our forecast. And we expect to see a build through the end of the year as we continue to steadily bring wells online.

Now, we'll provide guidance for the Bakken as usual in our second-quarter conference call for the rest of the year. But I think, Neil, just expect sort of a steady increase with a four-rig program, across '23 and '24, we'll get to 200,000 barrels a day in 2025, and then be able to hold that flat for almost a decade with the inventory that we have. So, steady increase to 200,000 barrels per day to hold it flat for a decade. I want to remind people that when Bakken reaches that 200,000 barrels per day plateau, it will generate about $1 billion of free cash flow. So, steady cash-flow generator for the company.

Neil Mehta
Analyst at The Goldman Sachs Group

Thanks, guys.

Operator

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

Paul Cheng
Analyst at Scotiabank

Hey, guys. Good morning.

John B. Hess
Chief Executive Officer at Hess

Hi.

Gregory P. Hill
President and Chief Operating Officer at Hess

Good morning.

Paul Cheng
Analyst at Scotiabank

Two questions. Just curious that, I mean, John, how important is Hess Midstream for the longer-term of the company? I mean, do we need to have the ownership over there, especially then, I mean, once you get Bakken too, say at 200,000 barrel per day. Do we still need to have the operator ship or even the ownership? That's the first question.

John P. Rielly
Executive Vice President and Chief Financial Officer at Hess

Sure, Paul. I mean, we remain committed to maximizing the long-term value of Hess Midstream. It's been a key strategic partner for us. It adds differentiated value to our E&P assets up there in the Bakken with us maintaining that operational and marketing control so we get -- provides takeaway optionality to high-value markets. Also, it's key to our gas capture and driving down flaring in our GHG emissions intensity.

So I would say think about Hess Midstream more of the same. They've been doing -- they've been executing brilliantly really for us on the ESG and also they're just getting the E&P production to markets. And then when you think about Hess Midstream, it has a very strong credit position and it continues to generate free cash flow growth. So, the Hess Midstream, they did outline that they have about $1 billion of financial flexibility through 2025 for capital allocation, which includes then the potential for incremental returns of capital, like the recent $100 million transaction that they just did.

And so that $100 million is a small part of that $1 billion of financial flexibility. So Hess Midstream has the potential to execute multiple buybacks, basically each year, through 2025. So, I think you can think about it just more of the same that way, Paul, and we are happy with the investment.

Paul Cheng
Analyst at Scotiabank

Okay. Second question, I think this is for Greg. Greg, I think that I've been saying that -- the Yellowtail is going to be 2025 versus oil. Any kind of maybe a little bit narrower window? Is it going to be in the first half, second half, or any kind of color you can provide? And also, how many exploration wells, not appraisal well, but exploration wells the consortium [Phonetic] plan to drill between now and the expiration of the exploration basis?

Gregory P. Hill
President and Chief Operating Officer at Hess

Let me answer the exploration part first. So Paul, remember, we've got multi-billion barrels of upside. The license expires in October of 2026. We will take the next four to five years to fully understand that potential, get it locked down. So I think you should think about three wells -- three exploration rigs a year, pretty much going through 2026. And we can drill usually about 10 or so exploration and appraisal wells a year. So think of that sort of a level of exploration prospectivity going forward. Again, going after that multi-billion barrels of upside that we continue to see.

Your question on Yellowtail. [Speech Overlap] Look, Yellowtail --

Paul Cheng
Analyst at Scotiabank

Sorry, I'm sorry [Speech Overlap] that for the 10 well per year, do you have a split roughly that the -- between exploration and appraisal?

Gregory P. Hill
President and Chief Operating Officer at Hess

No, we don't. Obviously, that's going to depend upon success, right? So when we have an exploration success, we tend to then want to appraise that success, just like we're doing at Fangtooth. Remember, Fangtooth-1 was 160 feet. Fangtooth Southeast was 200 feet. Now, we have Lancetfish with 92 feet of pay, probably going to be a development. So we're going to want to appraise around that greater Fangtooth area. So, it's really going to depend upon success as we go forward as to what the split is.

Yeah. Now regarding Yellowtail, look, it's too early. I mean Yellowtail is running ahead of schedule right now. Looking good, but these are major projects. So I think, just right now, in 2025 is the right way to think about it. And obviously, as we get further down, we'll narrow the window on those dates.

Paul Cheng
Analyst at Scotiabank

All right. Thank you.

Operator

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

Noel Parks
Analyst at Tuohy Brothers

Hi, good morning.

Gregory P. Hill
President and Chief Operating Officer at Hess

Good morning.

Noel Parks
Analyst at Tuohy Brothers

I wondered if I could get you to talk a little bit about your thinking on hedging policy. You laid in the put options, so that's certainly interesting. And you have, of course, big production ramp-ups ahead with new development coming online from Guyana. So, I guess, just as you look ahead and over the years, we certainly have had periods of backwardation in the curve. I just wonder if you -- maybe just as you're looking ahead, say to 2024, what's on your radar screen? How -- what's your balance of thinking about downside protection versus realizing upside and so on?

John P. Rielly
Executive Vice President and Chief Financial Officer at Hess

Sure. So, our philosophy on the hedging is we believe it is strategic importance, just like you said, from the downside protection. We view it as an insurance. And so what we do ensure, we buy the insurance, and we use puts. Our strategy is to use puts to protect the full downside, but leave the upside for investors. So again, that's what we did this year.

And you see we have 130,000 barrels a day this year, we're very comfortable with that level. We had 150,000 barrels a day last year. So, I think you can think about that, let's just say, approximately, 150,000 barrel a day level as we go forward. And for your question, like for 2024, you can assume we'll put on insurance or hedges at that type of level as we move into 2024. And with the put options, the way we do that is we'll look more to do that in the latter part of this year, right, because of the cost, the time value of the money on the put option.

So you typically would see us putting it on either towards the end of 2023 or early in 2024, like we did this year. And again, so we're trying to get, obviously, within our putting the insurance on trying to be as opportunistic as possible, but we will eventually get that hedge on because we want that downside protection, really just as John Hess mentioned earlier.

Noel Parks
Analyst at Tuohy Brothers

Great. Thanks. And I wanted to turn to -- on the regulatory side. You mentioned that a lot of you are expecting government approvals this year. I'm just wondering, as you have -- keep teeing up each next development, is the approval process is it becoming pretty cut and dry at this point from -- or even easier from one development to the next? Or I was wondering, out there, have you seen any shifts over time in terms of what the Guyana officials are scrutinizing, sort of what their basis for approval is for each project?

John B. Hess
Chief Executive Officer at Hess

No. The Guyana government is very rigorous and overseeing the government and regulatory approvals. I think there's a very good working relationship with ExxonMobil as the operator and the government itself. I think the approval process is appropriate for both sides. And the fact of the matter is, hopefully, this week, we'll be getting approval on Uaru, and I think that speaks volumes about the approval process.

So -- it's going appropriately in timing and also in depth of analysis by the government. The government obviously has their own priorities, and the ExxonMobil as operator addresses those. So I'd say the approval process continues to be one that's diligent and thoughtful -- [Technical Issues]

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Good morning, John. Greg, I was wondering if you can give us kind of the path to first oil at Payara? I know the vessel landed in Guyana on April 11. And just give us a sense of the activities you kind of require to hit that early 4Q start-up, and maybe a sense of what you've risked in terms of the guidance for Payara barrels in your updated guidance for volumes?

Gregory P. Hill
President and Chief Operating Officer at Hess

Sorry, I had to [Phonetic] turn. Yeah. Thanks, Arun. So first oil from Payara, remember, now has been brought forward. So we were saying end of the fourth quarter to early fourth quarter now. So we've already pulled it forward a few months.

In terms of what has to be done, remember, Payara is more extensive than Phase 2. So it's got 30% more wells, it's got 80% more surf than Liza Phase 2. And so, it's expected to take a bit longer to hook up and commission in Phase 2. But things are well on track. I think we've adequately risked things as well as the operator, ExxonMobil, to confidently say at this point, early first quarter or early fourth quarter of this year, yeah.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

And what have you all included in terms of the updated guide for Payara?

Gregory P. Hill
President and Chief Operating Officer at Hess

We haven't included anything yet. So at the midyear, obviously, as we get closer to that first oil date, we'll be updating our guidance.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Okay. Great. And maybe just a follow-up also in Guyana. You've announced discoveries at Fangtooth, Fangtooth Southeast, and Lancetfish. Greg, have you all done a DST yet at Fangtooth? And do you think there's enough resource between those three discoveries to underwrite a seventh boat, or will you need some success at Bacher, and you mentioned, I think, Lancetfish on today's call?

Gregory P. Hill
President and Chief Operating Officer at Hess

No, I think -- think about the Fangtooth area as a big hub. And as you mentioned, we do have both drill stem tests and core analysis for Fangtooth-1 and Fangtooth Southeast. Fangtooth-1 is underway, Fangtooth Southeast is planned for later in the year in terms of the DST. And then we also are planning an appraisal well at Lancetfish. So, as you intimated, when you add Bacher in and the other wells that we're going to drill, Lanternfish, obviously, there's potential for a hub there, but we really need that DST data to figure out what the field development plan will be.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Great. Thanks a lot.

Operator

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

Paul Cheng
Analyst at Scotiabank

Hey, thanks. This is for John Rielly, just a quick follow-up. Related to Guyana, it looks like you guys have been booking some deferred tax on there. Can you give us a trajectory that -- how that is going to shape up over the next several quarters or over the next several years? I assume that at some point, you will catch up maybe by 2026, '27 and whether that will be on the ballpark correct? Thank you.

John P. Rielly
Executive Vice President and Chief Financial Officer at Hess

So, you're right, we are booking deferred tax in Guyana there. Guyana has a 25% statutory rate. So we will be recording at 25% effective rate, and it's just similar, let me just say, to like the US, where the tax rules for depreciation, you can amortize the fixed assets quicker for the tax basis, so you get a higher deduction for tax purposes versus book. And so as a result of that, your current cash tax rate is lower than the $25 million, and therefore, we book deferred taxes. I would, Paul, just for guidance purposes, let's just say, for the rest of this year, it can change obviously as we continue to bring on more and more boats, but use a similar deferred tax level that you see in the first quarter for Guyana.

Paul Cheng
Analyst at Scotiabank

John, how about for the next several years?

John P. Rielly
Executive Vice President and Chief Financial Officer at Hess

I don't want to go in the next several years because every year when we add the capital and it changes the depreciable base, and you're going over five years, so you get higher depreciation. So it's difficult to provide that to you for the next couple of years. So we'll try to guide you year-by-year as the boats come on.

Paul Cheng
Analyst at Scotiabank

Can we assume in this way that as you're still yet ramping up more projects and from, say, maybe two projects at the same time, go to three projects, and so your capex is rising. So as a result, we're going to see the deferred tax continue to be a passive until that you sort of stabilizing your investment?

John P. Rielly
Executive Vice President and Chief Financial Officer at Hess

Yes, yes, you can assume that.

Paul Cheng
Analyst at Scotiabank

Okay. Very good. Thank you.

Operator

[Operator Closing Remarks]

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