hes-10q_20160331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2016

or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 1-1204

 

HESS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE

(State or Other Jurisdiction of Incorporation or Organization)

13-4921002

(I.R.S. Employer Identification Number)

1185 AVENUE OF THE AMERICAS, NEW YORK, N.Y.

(Address of Principal Executive Offices)

10036

(Zip Code)

(Registrant’s Telephone Number, Including Area Code is (212) 997-8500)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer 

 x

Accelerated Filer 

¨

Non-Accelerated Filer 

 ¨ 

Smaller Reporting Company 

¨

                                     (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At March 31, 2016, there were 316,719,379 shares of Common Stock outstanding.

 

 

 

 

 


HESS CORPORATION

Form 10-Q

TABLE OF CONTENTS

 

Item

No.

 

Page

Number

 

PART I FINANCIAL INFORMATION

 

1.

Financial Statements (Unaudited)

 

 

Consolidated Balance Sheet at March 31, 2016, and December 31, 2015

2

 

Statement of Consolidated Income for the Three  Months Ended March 31, 2016, and 2015

3

 

Statement of Consolidated Comprehensive Income for the Three Months Ended March 31, 2016, and 2015

4

 

Statement of Consolidated Cash Flows for the Three Months Ended March 31, 2016, and 2015

5

 

Statement of Consolidated Equity for the Three Months Ended March 31, 2016, and 2015

6

 

Notes to Consolidated Financial Statements

7

 

Basis of Presentation

7

 

Common and Preferred Stock Issuance

7

 

Inventories

8

 

Capitalized Exploratory Well Costs

8

 

Bakken Midstream Joint Venture

9

 

Retirement Plans

9

 

Weighted Average Common Shares

10

 

Guarantees and Contingencies

10

 

Segment Information

12

 

Financial Risk Management Activities

12

 

 

 

2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

3.

Quantitative and Qualitative Disclosures about Market Risk

27

4.

Controls and Procedures

27

 

 

 

 

PART II OTHER INFORMATION

 

1.

Legal Proceedings

28

2.

Share Repurchase Activities

28

6.

Exhibits and Reports on Form 8-K

29

 

Signatures

30

 

Certifications

 

 

 

 

 


PART I - FINANCIAL INFORMATION

 

Item 1.Financial Statements. 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(In millions,

 

 

 

except share amounts)

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,557

 

 

$

2,716

 

Accounts receivable

 

 

 

 

 

 

 

 

Trade

 

 

612

 

 

 

847

 

Other

 

 

240

 

 

 

312

 

Inventories

 

 

416

 

 

 

399

 

Other current assets

 

 

120

 

 

 

130

 

Total current assets

 

 

4,945

 

 

 

4,404

 

Property, plant and equipment:

 

 

 

 

 

 

 

 

Total — at cost

 

 

47,693

 

 

 

46,826

 

Less: Reserves for depreciation, depletion, amortization and lease impairment

 

 

21,452

 

 

 

20,474

 

Property, plant and equipment — net

 

 

26,241

 

 

 

26,352

 

Goodwill

 

 

375

 

 

 

375

 

Deferred income taxes

 

 

2,832

 

 

 

2,653

 

Other assets

 

 

415

 

 

 

373

 

Total Assets

 

$

34,808

 

 

$

34,157

 

Liabilities

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

346

 

 

$

457

 

Accrued liabilities

 

 

1,660

 

 

 

1,997

 

Taxes payable

 

 

93

 

 

 

88

 

Current maturities of long-term debt

 

 

94

 

 

 

86

 

Total current liabilities

 

 

2,193

 

 

 

2,628

 

Long-term debt

 

 

6,498

 

 

 

6,506

 

Deferred income taxes

 

 

1,320

 

 

 

1,334

 

Asset retirement obligations

 

 

2,175

 

 

 

2,158

 

Other liabilities and deferred credits

 

 

988

 

 

 

1,130

 

Total liabilities

 

 

13,174

 

 

 

13,756

 

Equity

 

 

 

 

 

 

 

 

Hess Corporation stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, par value $1.00 , Authorized - 20,000,000 shares

 

 

 

 

 

 

 

 

Series A 8% Cumulative Mandatory Convertible; $1,000 per share liquidation preference;  Issued — 575,000 shares (2015: 0)

 

 

1

 

 

 

 

Common stock, par value $1.00; Authorized — 600,000,000 shares

 

 

 

 

 

 

 

 

Issued — 316,719,379 shares (2015: 286,045,586)

 

 

317

 

 

 

286

 

Capital in excess of par value

 

 

5,722

 

 

 

4,127

 

Retained earnings

 

 

16,042

 

 

 

16,637

 

Accumulated other comprehensive income (loss)

 

 

(1,484

)

 

 

(1,664

)

Total Hess Corporation stockholders’ equity

 

 

20,598

 

 

 

19,386

 

Noncontrolling interests

 

 

1,036

 

 

 

1,015

 

Total equity

 

 

21,634

 

 

 

20,401

 

Total Liabilities and Equity

 

$

34,808

 

 

$

34,157

 

See accompanying Notes to Consolidated Financial Statements.

 

 

2

 


PART I - FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

 

(In millions,

except per share amounts)

 

Revenues and Non-Operating Income

 

 

 

 

 

 

 

 

Sales and other operating revenues

 

$

973

 

 

$

1,538

 

Other, net

 

 

20

 

 

 

12

 

Total revenues and non-operating income

 

 

993

 

 

 

1,550

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

Cost of products sold (excluding items shown separately below)

 

 

189

 

 

 

278

 

Operating costs and expenses

 

 

436

 

 

 

506

 

Production and severance taxes

 

 

19

 

 

 

36

 

Exploration expenses, including dry holes and lease impairment

 

 

132

 

 

 

269

 

General and administrative expenses

 

 

98

 

 

 

147

 

Interest expense

 

 

85

 

 

 

85

 

Depreciation, depletion and amortization

 

 

868

 

 

 

956

 

Total costs and expenses

 

 

1,827

 

 

 

2,277

 

Income (Loss) from Continuing Operations Before Income Taxes

 

 

(834

)

 

 

(727

)

Provision (benefit) for income taxes

 

 

(346

)

 

 

(351

)

Income (Loss) from Continuing Operations

 

 

(488

)

 

 

(376

)

Income (Loss) from Discontinued Operations, Net of Income Taxes

 

 

 

 

 

(13

)

Net Income (Loss)

 

 

(488

)

 

 

(389

)

Less: Net income (loss) attributable to noncontrolling interests

 

 

21

 

 

 

 

Net Income (Loss) Attributable to Hess Corporation

 

 

(509

)

 

 

(389

)

Less: Preferred stock dividends

 

 

6

 

 

 

 

Net Income (Loss) Applicable to Hess Corporation Common Stockholders

 

$

(515

)

 

$

(389

)

 

 

 

 

 

 

 

 

 

Net Income (Loss) Attributable to Hess Corporation Per Common Share

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(1.72

)

 

$

(1.32

)

Discontinued operations

 

 

 

 

 

(0.05

)

Net Income (Loss) Per Common Share

 

$

(1.72

)

 

$

(1.37

)

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(1.72

)

 

$

(1.32

)

Discontinued operations

 

 

 

 

 

(0.05

)

Net Income (Loss) Per Common Share

 

$

(1.72

)

 

$

(1.37

)

 

 

 

 

 

 

 

 

 

Weighted Average Number of Common Shares Outstanding (Diluted)

 

 

299.8

 

 

 

283.5

 

Common Stock Dividends Per Share

 

$

0.25

 

 

$

0.25

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

3

 


PART I - FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

(488

)

 

$

(389

)

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedges

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges

 

 

 

 

 

20

 

Income taxes on change in fair value of cash flow hedges

 

 

 

 

 

(7

)

Net change in fair value of cash flow hedges

 

 

 

 

 

13

 

Change in derivatives designated as cash flow hedges, after taxes

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

 

Pension and other postretirement plans

 

 

 

 

 

 

 

 

Amortization of net actuarial losses

 

 

16

 

 

 

19

 

Income taxes on amortization of net actuarial losses

 

 

(5

)

 

 

(6

)

Net effect of amortization of net actuarial losses

 

 

11

 

 

 

13

 

Change in pension and other postretirement plans, after taxes

 

 

11

 

 

 

13

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

169

 

 

 

(120

)

Change in foreign currency translation adjustment

 

 

169

 

 

 

(120

)

 

 

 

 

 

 

 

 

 

Total Other Comprehensive Income (Loss)

 

 

180

 

 

 

(94

)

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss)

 

 

(308

)

 

 

(483

)

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

 

21

 

 

 

 

Comprehensive Income (Loss) Attributable to Hess Corporation

 

$

(329

)

 

$

(483

)

See accompanying Notes to Consolidated Financial Statements.

 

 

 

4

 


PART I - FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

 

(In millions)

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(488

)

 

$

(389

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

868

 

 

 

956

 

Exploratory dry hole costs

 

 

85

 

 

 

169

 

Exploration lease impairment

 

 

9

 

 

 

54

 

Stock compensation expense

 

 

25

 

 

 

26

 

Provision (benefit) for deferred income taxes and other tax accruals

 

 

(351

)

 

 

(347

)

(Income) loss from discontinued operations, net of income taxes

 

 

 

 

 

13

 

Change in operating assets and liabilities

 

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable

 

 

317

 

 

 

319

 

(Increase) decrease in inventories

 

 

(13

)

 

 

(27

)

Increase (decrease) in accounts payable and accrued liabilities

 

 

(360

)

 

 

(222

)

Increase (decrease) in taxes payable

 

 

(15

)

 

 

(14

)

Change in other operating assets and liabilities

 

 

(137

)

 

 

(91

)

Cash provided by (used in) operating activities - continuing operations

 

 

(60

)

 

 

447

 

Cash provided by (used in) operating activities - discontinued operations

 

 

 

 

 

(11

)

Net cash provided by (used in) operating activities

 

 

(60

)

 

 

436

 

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment - E&P

 

 

(568

)

 

 

(1,251

)

Additions to property, plant and equipment - Bakken Midstream

 

 

(52

)

 

 

(60

)

Other, net

 

 

7

 

 

 

(10

)

Cash provided by (used in) investing activities - continuing operations

 

 

(613

)

 

 

(1,321

)

Cash provided by (used in) investing activities - discontinued operations

 

 

 

 

 

95

 

Net cash provided by (used in) investing activities

 

 

(613

)

 

 

(1,226

)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Debt with maturities of greater than 90 days

 

 

 

 

 

 

 

 

Borrowings

 

 

5

 

 

 

 

Repayments

 

 

(17

)

 

 

(17

)

Proceeds from issuance of preferred stock

 

 

557

 

 

 

 

Proceeds from issuance of common stock

 

 

1,087

 

 

 

 

Common stock acquired and retired

 

 

 

 

 

(67

)

Cash dividends paid

 

 

(80

)

 

 

(72

)

Other, net

 

 

(38

)

 

 

8

 

Cash provided by (used in) financing activities - continuing operations

 

 

1,514

 

 

 

(148

)

Cash provided by (used in) financing activities - discontinued operations

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

1,514

 

 

 

(148

)

 

 

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

841

 

 

 

(938

)

Cash and Cash Equivalents at Beginning of Year

 

 

2,716

 

 

 

2,444

 

Cash and Cash Equivalents at End of Period

 

$

3,557

 

 

$

1,506

 

See accompanying Notes to Consolidated Financial Statements.

5

 


PART I - FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED EQUITY (UNAUDITED)

 

 

 

Mandatory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

Other

 

 

Total Hess

 

 

 

 

 

 

 

 

 

 

 

Preferred

 

 

Common

 

 

Excess of

 

 

Retained

 

 

Comprehensive

 

 

Stockholders’

 

 

Noncontrolling

 

 

Total

 

 

 

Stock

 

 

Stock

 

 

Par

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

 

Interests

 

 

Equity

 

 

 

(In millions)

 

Balance at January 1, 2016

 

$

 

 

$

286

 

 

$

4,127

 

 

$

16,637

 

 

$

(1,664

)

 

$

19,386

 

 

$

1,015

 

 

$

20,401

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

(509

)

 

 

 

 

 

(509

)

 

 

21

 

 

 

(488

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

180

 

 

 

180

 

 

 

 

 

 

180

 

Stock issuance

 

 

1

 

 

 

29

 

 

 

1,577

 

 

 

 

 

 

 

 

 

1,607

 

 

 

 

 

 

1,607

 

Activity related to restricted common stock awards, net

 

 

 

 

 

2

 

 

 

10

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

12

 

Employee stock options, including income tax benefits

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Performance share units

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

6

 

Dividends on preferred stock

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

(6

)

 

 

 

 

 

(6

)

Dividends on common stock

 

 

 

 

 

 

 

 

 

 

 

(80

)

 

 

 

 

 

(80

)

 

 

 

 

 

(80

)

Balance at March 31, 2016

 

$

1

 

 

$

317

 

 

$

5,722

 

 

$

16,042

 

 

$

(1,484

)

 

$

20,598

 

 

$

1,036

 

 

$

21,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2015

 

$

 

 

$

286

 

 

$

3,277

 

 

$

20,052

 

 

$

(1,410

)

 

$

22,205

 

 

$

115

 

 

$

22,320

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

(389

)

 

 

 

 

 

(389

)

 

 

 

 

 

(389

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(94

)

 

 

(94

)

 

 

 

 

 

(94

)

Activity related to restricted common stock awards, net

 

 

 

 

 

1

 

 

 

18

 

 

 

 

 

 

 

 

 

19

 

 

 

 

 

 

19

 

Employee stock options, including income tax benefits

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

9

 

Performance share units

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

5

 

Dividends on common stock

 

 

 

 

 

 

 

 

 

 

 

(72

)

 

 

 

 

 

(72

)

 

 

 

 

 

(72

)

Common stock acquired and retired

 

 

 

 

 

 

 

 

(3

)

 

 

(13

)

 

 

 

 

 

(16

)

 

 

 

 

 

(16

)

Noncontrolling interests, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(115

)

 

 

(115

)

Balance at March 31, 2015

 

$

 

 

$

287

 

 

$

3,306

 

 

$

19,578

 

 

$

(1,504

)

 

$

21,667

 

 

$

 

 

$

21,667

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

6

 


PART I - FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  Basis of Presentation

The financial statements included in this report reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of our consolidated financial position at March 31, 2016 and December 31, 2015, the consolidated results of operations for the three months ended March 31, 2016 and 2015, and consolidated cash flows for the three months ended March 31, 2016 and 2015.  The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.

The financial statements were prepared in accordance with the requirements of the Securities and Exchange Commission (SEC) for interim reporting.  As permitted under those rules, certain notes or other financial information that are normally required by generally accepted accounting principles (GAAP) in the United States have been condensed or omitted from these interim financial statements.  These statements, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015.

In the second quarter of 2015, we established the Bakken Midstream operating segment.  See Note 5, Bakken Midstream Joint Venture and Note 9, Segment Information. Certain prior period information has been reclassified to conform to the current period presentation reflecting our two operating segments, Exploration and Production and Bakken Midstream.

In the first quarter of 2016, we adopted Accounting Standard Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct reduction to the associated debt liability.  The Consolidated Balance Sheet at December 31, 2015 has been recast to reduce Other assets and Long-term debt by $38 million.

In the first quarter of 2016, we adopted ASU 2015-02, Amendments to the Consolidation Analysis, which makes changes to both the variable interest model and the voting interest model, which is applicable to all reporting entities involved with limited partnerships or similar entities.  The adoption of this standard did not have an impact on our consolidated financial statements.

New Accounting Pronouncements:  In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers, as a new Accounting Standards Codification (ASC) Topic, ASC 606.  This ASU is effective for us beginning in the first quarter of 2018, with early adoption permitted from the first quarter of 2017.  We are currently assessing the impact of the ASU on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, as a new ASC Topic, ASC 842.  The new standard will require the recognition of assets and liabilities for all leases with lease terms greater than one year, including leases currently treated as operating leases under the existing standard.  This ASU is effective for us beginning in the first quarter of 2019, with early adoption permitted.  We are currently assessing the impact of the ASU on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  This ASU makes changes to various provisions associated with share-based accounting, including provisions affecting the accounting for income taxes, the accounting for forfeitures, and the consideration of net settlement provisions on the balance sheet classification of the share-based award.  This ASU is effective for us beginning in the first quarter of 2017, with early adoption permitted.  We are currently assessing the impact of the ASU on our consolidated financial statements.

 

 

2.  Common and Preferred Stock Issuance

In February 2016, we issued 28,750,000 shares of common stock and depositary shares representing 575,000 shares of 8% Series A Mandatory Convertible Preferred Stock (Convertible Preferred Stock), par value $1 per share, with a liquidation preference of $1,000 per share, for total net proceeds of approximately $1.6 billion after deducting underwriting discounts, commissions, and offering expenses.  The dividends on the Convertible Preferred Stock will be payable on a cumulative basis.  Unless converted earlier, each share of Convertible Preferred Stock will automatically convert into between 21.822 shares and 25.642 shares of our common stock based on the average share price over a period of twenty consecutive trading days ending prior to February 1, 2019 (the “Final Average Price”), subject to anti-dilution adjustments.

We also entered into capped call transactions that are expected generally to reduce the potential dilution to our common

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PART I - FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

stock upon conversion of the Convertible Preferred Stock if the Final Average Price exceeds $45.83 per share, subject to anti-dilution adjustments. The number of common shares to be delivered by the counterparties to us will be the value of the capped call transactions at conversion divided by the Final Average Price. The value of the capped call transactions will be zero if the Final Average Price is $45.83 or less and can be up to the capped value of approximately $98 million if the Final Average Price is $53.625 or higher.  For any Final Average Price between $45.83 and $53.625, the value of the capped call transactions will be 12.55 million covered shares multiplied by the difference between the Final Average Price and $45.83.   The premium paid for the capped call transactions was $37 million, which was recorded against Capital in excess of par in the Statement of Consolidated Equity.

 

 

3.  Inventories

Inventories consisted of the following:

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(In millions)

 

Crude oil and natural gas liquids

 

$

144

 

 

$

144

 

Materials and supplies

 

 

272

 

 

 

255

 

Total inventories

 

$

416

 

 

$

399

 

 

 

4.  Capitalized Exploratory Well Costs

The following table discloses the net changes in capitalized exploratory well costs pending determination of proved reserves during the three months ended March 31, 2016 (in millions):

Balance at January 1, 2016

 

$

1,415

 

Additions to capitalized exploratory well costs pending the determination of proved reserves

 

 

60

 

Capitalized exploratory well costs charged to expense

 

 

(25

)

Balance at March 31, 2016

 

$

1,450

 

Capitalized exploratory wells costs charged to expense in the preceding table primarily relate to the non-operated Melmar exploration well in the Gulf of Mexico, where noncommercial quantities of hydrocarbons were encountered.  In addition, we expensed $60 million of exploratory well costs incurred during 2016 related to the Melmar exploration well that are not reflected in the preceding table.  

Capitalized exploratory well costs capitalized for greater than one year following completion of drilling were $1,055 million at March 31, 2016 and primarily related to:

Australia:  Approximately 75% of the capitalized well costs in excess of one year relates to our Equus project on license WA-390-P, offshore Western Australia, where development planning and commercial activities for our natural gas discoveries are ongoing.  In December 2014, we executed a non-binding letter of intent with the North West Shelf (NWS), a third-party joint venture with existing natural gas processing and liquefaction facilities.  In the first quarter of 2016, we continued a joint front-end engineering study with NWS and also continued discussions with potential long-term purchasers of liquefied natural gas.  Successful execution of binding agreements with NWS is necessary before we can execute a gas sales agreement and sanction development of the project.  In addition, in March 2016, we were awarded a retention lease through 2021 covering certain areas within the WA-390-P License which include our Equus discoveries.  At our adjacent WA-474-P license which could become part of the Equus project, we commenced drilling of an exploration commitment well in 2016.

Ghana:  Approximately 25% of the capitalized well costs in excess of one year relates to offshore Ghana.  Since 2014, we have completed three appraisal wells and continue to progress subsurface evaluation, and development planning.  The government of Côte d’Ivoire has challenged the maritime border between it and the country of Ghana, which includes a portion of our Deepwater Tano/Cape Three Points license.  We are unable to proceed with development of this license until there is a resolution of this matter, which may also impact our ability to develop the license.  The International Tribunal for Law of the Sea is expected to render a final ruling on the maritime border dispute in 2017.  Under terms of our license and

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PART I - FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

subject to resolution of the border dispute, we have declared commerciality for three discoveries, including the Pecan Field in March 2016, which would be the primary development hub for the block.  The deadline to submit a plan of development for the Pecan Field is in September 2016.  We have requested an extension for this deadline and will continue to work with the government on how best to progress work on the block given the maritime border dispute.

 

 

5.  Bakken Midstream Joint Venture

On July 1, 2015, we sold a 50% interest in Hess Infrastructure Partners LP (HIP) to Global Infrastructure Partners (GIP) for net cash consideration of approximately $2.6 billion.  HIP and its affiliates primarily comprise our Bakken Midstream operating segment which provides fee-based services including crude oil and natural gas gathering, processing of natural gas and the fractionation of natural gas liquids, terminaling and loading crude oil and natural gas liquids, transportation of crude oil by rail car and the storage and terminaling of propane, primarily located in the Bakken shale play of North Dakota.

We consolidate the activities of HIP, which qualifies as a variable interest entity under U.S. generally accepted accounting principles.  At March 31, 2016, HIP liabilities totaling $788 million (December 31, 2015: $824 million) are on a nonrecourse basis to Hess Corporation, which includes total long-term debt of $709 million (December 31, 2015: $704 million).  HIP assets available to settle its obligations include Cash and cash equivalents totaling $2 million (December 31, 2015: $3 million) and Property, plant and equipment with a net book carrying value of $2,388 million (December 31, 2015: $2,358 million).

 

 

6.  Retirement Plans

Components of net periodic pension cost consisted of the following:

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

 

(In millions)

 

Service cost

 

$

16

 

 

$

17

 

Interest cost

 

 

28

 

 

 

26

 

Expected return on plan assets

 

 

(42

)

 

 

(42

)

Amortization of unrecognized net actuarial losses

 

 

16

 

 

 

19

 

Pension expense

 

$

18

 

 

$

20

 

In 2016, we expect to contribute $27 million to our funded pension plans.  Through March 31, 2016, we contributed $6 million of this amount.

 

 

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PART I - FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

7.  Weighted Average Common Shares

The Net income (loss) and weighted average number of common shares used in the basic and diluted earnings per share computations were as follows:  

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

 

(In millions,

 

 

 

except per share amounts)

 

Net income (loss) attributable to Hess Corporation Common Stockholders:

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of income taxes

 

$

(488

)

 

$

(376

)

Less: Net income (loss) attributable to noncontrolling interests

 

 

21

 

 

 

 

Net income (loss) from continuing operations attributable to Hess Corporation

 

 

(509

)

 

 

(376

)

Less: Preferred stock dividends

 

 

6

 

 

 

 

Net income (loss) from continuing operations attributable to Hess Corporation Common Stockholders

 

 

(515

)

 

 

(376

)