Hess Q4 2021 Earnings Report

Hess EPS Results

• Actual EPS: $0.85
• Consensus EPS: $0.76
• Beat/Miss: Beat by +$0.09
• One Year Ago EPS: -$0.58

Hess Revenue Results

• Actual Revenue: $2.26 billion
• Expected Revenue: $1.97 billion
• Beat/Miss: Beat by +$283.52 million
• YoY Revenue Growth: +59.10%

Hess Announcement Details

• Quarter: Q4 2021
• Date: 1/26/2022
• Time: Before Market Opens
• Conference Call Date: Wednesday, January 26, 2022
• Conference Call Time: 1:29PM ET

Hess (NYSE:HES), an exploration and production company, explores, develops, produces, purchases, transports, and sells crude oil, natural gas liquids (NGLs), and natural gas. The company operates in two segments, Exploration and Production, and Midstream. It conducts production operations primarily in the United States, Guyana, the Malaysia/Thailand Joint Development Area, and Malaysia; and exploration activities principally offshore Guyana, the U.S. Gulf of Mexico, and offshore Suriname and Canada. The company is also involved in gathering, compressing, and processing natural gas; fractionating NGLs; gathering, terminaling, loading, and transporting crude oil and NGL through rail car; and storing and terminaling propane, as well as providing water handling services primarily in the Bakken Shale plays in the Williston Basin area of North Dakota. The company was incorporated in 1920 and is headquartered in New York, New York.

Hess Q4 2021 Earnings Call Transcript

Key Takeaways

• 2022 is an inflection year as Hess shifts from investment mode to returning capital—once Liza Phase 2 starts up the remaining $500 million term loan will be repaid, the base dividend raised and share repurchases accelerated.
• Differentiated portfolio of Bakken, deepwater Gulf of Mexico, Southeast Asia and Guyana is forecast to be free-cash-flow generative in 2022, with Guyana’s Stabroek block now exceeding 10 billion boe and four FPSOs planned by 2027.
• Low cost of supply and cash-flow growth with cash costs set to decline ~25 percent to $9/boe by 2026, a portfolio breakeven of $45/Brent, and a 25 percent CAGR in cash flow through 2026 at $65 Brent.
• $2.6 billion 2022 capital program, allocating ~80 percent to Guyana and the Bakken, including a three-rig, ~90-well Bakken program and approximately 12 exploration/appraisal wells in Guyana.
• ESG leadership with a target to eliminate routine flaring by end-2025 and recognition on CDP’s Global Climate A List (13th year) and the Dow Jones Sustainability Index North America (12th year).

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to the fourth quarter 2021 Hess Corporation conference call. My name is Josh, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If at any time you require operator assistance, please press star followed by zero, and we will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Jay Wilson, Vice President of Investor Relations. Please proceed.

[Jay Wilson, VP of Investor Relations at Hess Corporation]

Thank you, Josh. Good morning, everyone, and thank you for participating in our fourth quarter earnings conference call. Our earnings release was issued this morning and appears on our website, www.hess.com. Today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include those set forth in the Risk Factors section of Hess's annual and quarterly reports filed with the SEC. Also, on today's conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website.

[Jay Wilson, VP of Investor Relations at Hess Corporation]

On the call with me today are John Hess, Chief Executive Officer, Greg Hill, Chief Operating Officer, and John Rielly, Chief Financial Officer. In case of any audio issues, we will be posting transcripts of each speaker's prepared remarks on www.hess.com following the presentation. I'll now turn the call over to John Hess.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Thank you, Jay. Good morning. Welcome to our fourth quarter conference call. I hope all of you and your families are well and staying healthy. Today, I will review our continued progress in executing our strategy and provide a look at the year ahead. Then Greg Hill will discuss our operations, and John Rielly will cover our financial results. 2022 marks an inflection point in the execution of our strategy as we go from investment mode to return of capital mode while still being able to invest to grow our business. Our strategy has been and continues to be to deliver high return resource growth, deliver a low cost of supply, and deliver industry-leading cash flow growth, while at the same time maintain our industry leadership in environmental, social, and governance performance and disclosure.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

In terms of resource growth, we have been disciplined in allocating capital to the best rocks for the best returns and have built a differentiated portfolio focused on the Bakken, Deepwater Gulf of Mexico, Southeast Asia, and Guyana with its multiple phases of low-cost oil developments. We expect all four of these assets to be free cash flow generative in 2022. In terms of the low cost of supply, because of the investments we are making, our cash costs by 2026 are forecast to decline approximately 25% to $9 per barrel of oil equivalent versus 2021. Our portfolio breakeven is positioned to be one of the lowest in the industry for 2026, decreasing to $45 per barrel of Brent. In terms of cash flow growth, we have an industry-leading rate of change and durability story.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

We are positioned to grow our cash flow at a compound rate of 25% per year out to 2026 based upon a Brent price of $65 per barrel. Any business that can grow its cash flow at twice the rate of its top line is a business you want to have in your investment portfolio. Our company has been in the investment mode for the last several years, building our portfolio to where it can deliver durable cash flow growth. The Liza Phase 2 project, which is on track for first oil this quarter, will add $1 billion of net operating cash flow annually at $65 Brent. Following project startup, we plan to repay the remaining $500 million term loan and to increase our base dividend.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

As our portfolio becomes increasingly free cash flow positive in the coming years, our top priority will be both to grow the base dividend and also accelerate our share repurchases. Key to our strategy is Guyana, the industry's largest new oil province discovered in the last decade, which is positioned to be one of the highest margin, lowest carbon intensity oil developments globally, according to a study by Wood Mackenzie. The world will need these low cost, high value resources to meet growing energy demand, particularly given under-investment by our industry in recent years. The International Energy Agency's latest World Energy Outlook provides multiple scenarios for addressing the dual challenge of growing global energy supply by about 20% over the next 20 years and reaching net zero emissions by 2050.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

In all of the IEA scenarios, oil and gas will be needed for decades to come, and significantly more investment will be required, much more in renewables and much more in oil and gas. A reasonable estimate for global oil and gas investment from these IEA scenarios is approximately $450 billion each year over the next 10 years. In 2020, that number was $300 billion. Last year's investment was $340 billion. While investors in oil and gas companies need to remain capital disciplined, we also need to invest more in oil and gas than we are currently to ensure an affordable, just, and secure energy transition. Turning to our plans for the year ahead.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Our 2022 capital and exploratory budget is $2.6 billion, of which approximately 80% will be allocated to Guyana and the Bakken. On the Stabroek Block in Guyana, where Hess has a 30% interest and ExxonMobil is the operator, we continue to see the potential for at least six floating production storage and offloading vessels, or FPSOs, in 2027, with a production capacity of more than 1 million gross barrels of oil per day and up to 10 FPSOs to develop the discovered resources on the block. Our three sanctioned oil developments on the block have a Brent breakeven oil price of between $25 and $35 per barrel.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

In terms of our Guyana oil developments, production capacity at the Liza Phase One development is expected to increase to more than 140,000 gross barrels of oil per day following production optimization work. The Liza Phase Two development is on track for startup this quarter with a gross production capacity of approximately 220,000 barrels of oil per day. Our third development on the Stabroek Block at the Payara field is on track for production startup in 2024, also with gross capacity of approximately 220,000 barrels of oil per day. The Yellowtail development has world-class economics and will be the largest to date on the Stabroek Block, developing nearly 1 billion barrels of oil with a gross production capacity of approximately 250,000 barrels of oil per day.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

The Yellowtail project continues to make progress, has the full support of the government of Guyana, which is finalizing its third-party review and remains on track for production startup in 2025. We will continue to invest in an active exploration and appraisal program in Guyana in 2022 with approximately 12 wells planned for the Stabroek Block. Earlier this month, we announced two more significant discoveries on the block at the Fangtooth and Lau Lau wells. With these discoveries, the gross discovered recoverable resource estimate for the block is more than 10 billion barrels of oil equivalent, and we continue to see multi-billion barrels of future exploration potential remaining. Positive results at Fangtooth, our first stand-alone deep exploration prospect, confirm the deeper exploration potential of the block. Both discoveries further underpin our queue of future low-cost oil development opportunities.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

In the Bakken, we plan to operate a three-rig program in 2022, which will enable us to generate significant free cash flow, lower our unit cash costs, and further optimize our infrastructure. Greg and our Bakken team continue to do an outstanding job of applying lean manufacturing principles to keep driving down costs and building a culture of innovation and efficiency. We will also continue to invest in our operated cash engines offshore. In the Gulf of Mexico, we will drill the Huron No. 1 exploration well and also a tieback well at the Llano field. In Southeast Asia, we will invest in drilling and facilities, some of which was previously deferred due to COVID and low commodity prices. We are proud of our workforce for living the Hess values by working safely and delivering strong operating results, especially during the pandemic.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

As we continue to execute our strategy, our commitment to sustainability will remain a top priority. Our board and senior leadership have set aggressive five-year targets for greenhouse gas emissions reduction for 2025. Most recently, we endorsed the World Bank's Zero Routine Flaring by 2030 initiative and have set a target to eliminate routine flaring from our operations by the end of 2025. We are honored to have been recognized throughout 2021 as an industry leader in our environmental, social, and governance performance and disclosure. In December, we achieved leadership status in CDP's annual global climate analysis for the 13th consecutive year, and in November, earned a place on the Dow Jones Sustainability Index for North America for the 12th consecutive year. In summary, 2022 marks an inflection point in the execution of our strategy.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

We have built a differentiated portfolio offering a unique value proposition, delivering durable cash flow growth that enables us to continue to invest in some of the highest return projects in the industry and also to start growing our cash returns to our shareholders. I will now turn the call over to Greg for an operational update.

[Greg Hill, Non Executive Director at Harbour Energy]

Thanks, John. 2021 was another year of strong operating performance and strategic execution for Hess. Starting with reserves. Proved reserves at the end of 2021 stood at 1.3 billion barrels of oil equivalent. Net proved reserve additions in 2021 totaled 348 million barrels of oil equivalent, including positive net price revisions of 107 million barrels of oil equivalent, resulting in an overall 2021 production replacement ratio of 295% and a finding and development cost of approximately $5.25 per barrel of oil equivalent. Now, turning to production. In the fourth quarter and full year 2021, company-wide net production averaged 295,000 barrels of oil equivalent per day, excluding Libya, in line with our guidance.

[Greg Hill, Non Executive Director at Harbour Energy]

For the full year 2022, we forecast net production to increase by 12%-15%, an average between 330,000 and 340,000 barrels of oil equivalent per day, excluding Libya. For the first quarter of 2022, we forecast net production to average between 275,000 and 285,000 barrels of oil equivalent per day, excluding Libya. This forecast reflects the impact of severe weather in the Bakken, remedial maintenance work at the Baldpate and Penn State fields in the Gulf of Mexico, and planned downtime on the Liza Destiny FPSO for production optimization work.

[Greg Hill, Non Executive Director at Harbour Energy]

Company-wide net production is forecast to significantly increase over the course of the year, driven both by Guyana and the Bakken, with the fourth quarter expected to average between 360,000 and 370,000 barrels of oil equivalent per day. In the Bakken, both fourth quarter and full year 2021 net production were in line with our guidance, averaging 159,000 and 156,000 barrels of oil equivalent per day, respectively. We have a robust inventory of approximately 2,100 drilling locations in the Bakken that can generate attractive returns at $60 WTI, representing approximately 70 rig years of activity. In 2022, we plan to operate three rigs and expect to drill approximately 90 gross operated wells and bring approximately 85 new wells online.

[Greg Hill, Non Executive Director at Harbour Energy]

In the first quarter of 2022, we plan to drill approximately 22 wells and bring 10 new wells online. For the balance of the year, we expect to bring online an average of 25 wells per quarter. In 2021, our drilling and completion costs per Bakken well averaged $5.8 million, which was $400,000 or 6% lower than 2020. In 2022, we expect to fully offset anticipated inflation through lean manufacturing and technology-driven efficiency gains, and therefore D&C costs are expected to be flat with last year at approximately $5.8 million per well. For the full year 2022, we forecast Bakken net production to average between 165,000 and 170,000 barrels of oil equivalent per day, a 6%-9% increase over 2021.

[Greg Hill, Non Executive Director at Harbour Energy]

First quarter net production is forecast to average between 155,000 and 160,000 barrels of oil equivalent per day. Beginning in the second quarter, we expect to benefit from the addition of the third rig, which we added last September, and improving weather conditions. Net production, net Bakken production is forecast to steadily ramp over the course of 2022 and to average between 175,000 and 180,000 barrels of oil equivalent per day in the fourth quarter. Moving to the offshore. In the Deepwater Gulf of Mexico, net production averaged 39,000 barrels of oil equivalent per day in the fourth quarter and 45,000 barrels of oil equivalent per day for the full year 2021, in line with our guidance.

[Greg Hill, Non Executive Director at Harbour Energy]

The Deepwater Gulf of Mexico remains an important cash engine for the company as well as a platform for growth. In 2022, we will resume drilling operations after a two-year hiatus, with one tieback well planned at the Shell-operated Llano field and one exploration well planned at the Hess-operated Huron prospect on Green Canyon Block 69. Over the last five years, we have focused our efforts on getting best-in-class imaging across our acreage position in Northern Green Canyon, where we believe there is high potential for multiple high-return hub-class Miocene opportunities. Huron is the first of these opportunities, which attracted interest from multiple parties during the farm-out process. We expect to spud Huron in the first quarter, with Hess having a 40% working interest as operator and Shell and Chevron at 30% each.

[Greg Hill, Non Executive Director at Harbour Energy]

As part of our agreements with Shell and Chevron, we have also accessed additional Miocene prospect, prospects across Green Canyon and are excited about further potential in the play. In February, Shell plans to spud the Llano six development well, in which Hess has a 50% working interest. The well will be tied back to Shell's Auger platform, with gross production from the well expected to build to a plateau rate of between 10,000 and 15,000 barrels of oil equivalent per day by the end of this year. For the full year 2022, we forecast net production in the Gulf of Mexico to average approximately 35,000 barrels of oil equivalent per day. First quarter net production is forecast to average between 30,000 and 35,000 barrels of oil equivalent per day.

[Greg Hill, Non Executive Director at Harbour Energy]

In Southeast Asia, net production from the joint development area in North Malay Basin, where Hess has a 50% interest, averaged 66,000 barrels of oil equivalent per day in the fourth quarter and 61,000 barrels of oil equivalent per day for the full year 2021, in line with our guidance. For the full year 2022, we forecast net production in Southeast Asia to average approximately 65,000 barrels of oil equivalent per day. In the first quarter, we forecast net production to average between 60,000 and 65,000 barrels of oil equivalent per day. Turning to Guyana, where Hess has a 30% interest in the Stabroek Block and ExxonMobil is the operator. We have continued our extraordinary run of exploration success and increased our estimate of gross discovered recoverable resources to more than 10 billion barrels of oil equivalent.

[Greg Hill, Non Executive Director at Harbour Energy]

Net production from Guyana averaged 31,000 barrels of oil per day in the fourth quarter of 2021 and 30,000 barrels of oil per day for the full year 2021, in line with our guidance. For the full year 2022, we forecast net production in Guyana to average between 65,000 and 70,000 barrels of oil per day. In the first quarter, we forecast net production from Guyana to average between 25,000 and 30,000 barrels of oil per day, reflecting planned downtime on the Liza Destiny for production optimization, as previously mentioned, and net production in the fourth quarter will increase to between 85,000 and 90,000 barrels of oil per day. Earlier this month, we announced significant discoveries on the Stabroek Block at Fangtooth and Lau Lau.

[Greg Hill, Non Executive Director at Harbour Energy]

Positive results at Fangtooth, our first standalone deep exploration prospect, help confirm the deeper exploration potential of the Stabroek Block. In the coming months, we will complete the analysis of the exploration well results. Appraisal activities will then be conducted to determine the optimum development approach and timing. Lau Lau further underpins our queue of future low-cost development opportunities in the southeastern portion of the Stabroek Block. This discovery will also require appraisal to determine the ultimate development approach and timing. We continue to see multi-billion barrels of exploration potential on the Stabroek Block, and in 2022 we plan to drill approximately 12 exploration and appraisal wells that will target a variety of prospects and play types. These will include lower risk wells near existing discoveries, higher risk step outs, and several penetrations that will test deeper Lower Campanian and Santonian intervals.

[Greg Hill, Non Executive Director at Harbour Energy]

Exploration wells planned for the first quarter of 2022 include Barreleye-1, located approximately 20 miles southeast of Liza. The primary target is Lower Campanian with shallower and deeper secondary targets. The well spud on December 30. Tarpon-1, which is located approximately 63 miles northwest of Liza, will target Lower Campanian clastics plus a deeper Jurassic carbonate. The well will spud following completion of Fangtooth operations. Patwa-1 is near our Turbot area discoveries. The well is approximately 3 miles northwest of the Cataback-1 discovery with targets in Upper Cretaceous clastic reservoirs. This well is anticipated to spud in March. Lukanani-1 is in the southeastern part of the Stabroek Block, located approximately 2 miles west of Pluma and is anticipated to spud in March. The primary target is Maastrichtian age clastic reservoirs with secondary objectives in Lower Campanian reservoirs.

[Greg Hill, Non Executive Director at Harbour Energy]

The appraisal program in 2022 will be focused on delineating future developments. First quarter appraisal activities will include the Tilapia-2 appraisal well, located approximately 24 miles southeast of Liza One. The well will appraise the February 2019 Tilapia-1 discovery in the Turbot area and is anticipated to spud in March. In addition, we plan to conduct drill stem tests at Tilapia-1 and Pinktail-1. Turning now to our Guyana developments. Development activity this year will include drilling for both the Liza Phase 2 and Payara projects. Initial development drilling activities will also begin for the Yellowtail project following approval of the field development plan by the government. A planned turnaround will be conducted in March on the Liza Destiny FPSO. Work activities will include production optimization work designed to increase the vessel's production capacity.

[Greg Hill, Non Executive Director at Harbour Energy]

At Liza Phase 2, the Liza Unity FPSO vessel is undergoing final hookup and commissioning after arriving in Guyanese waters in October 2021. Unity is on track to start production in the first quarter of 2022 with a capacity of approximately 220,000 gross barrels of oil per day. With regard to our third development of Payara, the overall project is 66% complete. SURF activities are progressing ahead of plan and we are preparing for a 2022 installation campaign. The hull for the Prosperity FPSO vessel is complete and topside construction activities are ongoing in Singapore for planned production startup in 2024. The field development plan and environmental impact assessment for the fourth potential project, Yellowtail, have been submitted for government and regulatory review.

[Greg Hill, Non Executive Director at Harbour Energy]

The government is supportive of the project and startup remains on track for 2025. We look forward to continuing to work with the government of Guyana and our partners to realize the extraordinary potential of this world-class project. Moving to Suriname, planning is underway for our second exploration well on Block 42 at the Zanderij-1 prospect, targeting in the Santonian and deep play potential. The operator, Shell, has indicated they expect to drill a well around mid-year. We see the acreage as a potential play extension from the Stabroek Block, with similar play types and trap styles. Shell, Chevron, and Hess each have a one-third working interest in Block 42. In closing, our execution continues to be strong.

[Greg Hill, Non Executive Director at Harbour Energy]

The startup of Liza Phase 2 and steadily increasing production in the Bakken are expected to drive an approximate 30% increase in net production between the first quarter and fourth quarter of 2022, along with a significant increase in operating cash flow, which will underpin our commitment to increase cash returns to shareholders. I will now turn the call over to John Rielly.

[John Rielly, EVP and CFO at Hess Corporation]

Thanks, Greg. In my remarks today, I will compare results from the fourth quarter of 2021 to the third quarter of 2021 and provide guidance for 2022. Turning to results, we had net income of $265 million in the fourth quarter of 2021, compared with $115 million in the third quarter of 2021. On an adjusted basis, third quarter net income was $86 million, which excludes an after-tax gain of $29 million from the sale of our interest in Denmark. Turning to E&P. E&P had net income of $309 million in the fourth quarter of 2021, compared with adjusted net income of $149 million in the third quarter.

[John Rielly, EVP and CFO at Hess Corporation]

The changes in the after-tax components of adjusted E&P results between the fourth and third quarter were as follows: Higher sales volumes increased earnings by $158 million. Higher realized selling prices increased earnings by $103 million. Higher DD&A expense decreased earnings by $44 million. Higher midstream tariff expense decreased earnings by $22 million. Higher cash costs decreased earnings by $21 million. Higher exploration expenses decreased earnings by $10 million. All other items decreased earnings by $4 million for an overall increase in fourth quarter earnings of $160 million. For the fourth quarter, our E&P sales volumes were overlifted compared with production by approximately 690,000 barrels, which increased after-tax income by approximately $17 million. Turning to midstream.

[John Rielly, EVP and CFO at Hess Corporation]

The midstream segment had net income of $74 million in the fourth quarter of 2021, compared with $61 million in the prior quarter. Midstream EBITDA before non-controlling interest amounted to $246 million in the fourth quarter of 2021, compared with $203 million in the previous quarter. Turning to our financial position. At quarter end, excluding midstream, cash and cash equivalents were $2.71 billion, and total liquidity was $6.3 billion, including available committed credit facilities, while debt and finance lease obligations totaled $6.1 billion. In the fourth quarter, net cash provided by operating activities before changes in working capital was $886 million, compared with $631 million in the third quarter, primarily due to higher realized selling prices and sales volumes.

[John Rielly, EVP and CFO at Hess Corporation]

In the fourth quarter, net cash provided by operating activities after changes in operating assets and liabilities was $899 million, compared with $615 million in the third quarter. In October, we received net proceeds of $108 million from the public offering of 4.3 million Hess-owned Class A shares of Hess Midstream. In January 2022, we paid accrued Libyan income taxes and royalties of approximately $470 million related to operations for the period December 2020 through November 2021. Post the start-up of the Liza Phase 2 development, we intend to pay off the remaining $500 million on our term loan and increase our dividend.

[John Rielly, EVP and CFO at Hess Corporation]

With our strong cash and liquidity positions and our industry-leading cash flow growth, we are well positioned to significantly improve our credit metrics and increase cash returns to shareholders in the coming years. We remain committed to returning the majority of our increasing free cash flow to shareholders through further dividend increases and share repurchases. Now turning to guidance. First, for E&P, we project E&P cash costs, excluding Libya, to be in the range of $13.50-$14 per barrel of oil equivalent for the first quarter, reflecting the impact of lower company-wide production and higher initial per-unit cost for Liza Phase 2 during its production ramp following first oil.

[John Rielly, EVP and CFO at Hess Corporation]

Cash costs, excluding Libya, for the full year 2022 are expected to be in the range of $11.50-$12.50 per barrel of oil equivalent, as the low-cost Guyana production reduces our unit cash costs in the second half of the year as Liza Phase 2 reaches capacity.

[John Rielly, EVP and CFO at Hess Corporation]

DD&A expense, excluding Libya, is forecast to be in the range of $11.50-$12 per barrel of oil equivalent for the first quarter and $11.50-$12.50 per barrel of oil equivalent for the full year. This results in projected total E&P unit operating costs, excluding Libya, to be in the range of $25-$26 per barrel of oil equivalent for the first quarter and $23-$25 per barrel of oil equivalent for the full year 2022. Exploration expenses, excluding dry hole costs, are expected to be in the range of $40 million-$45 million in the first quarter and $170 million-$180 million for the full year.

[John Rielly, EVP and CFO at Hess Corporation]

The midstream tariff is projected to be in the range of $285 million-$295 million for the first quarter and $1.19 billion-$1.215 billion for the full year 2022. E&P income tax expense, excluding Libya, is expected to be in the range of $40 million-$45 million for the first quarter and $300 million-$310 million for the full year 2022. For calendar year 2022, we have purchased WTI collars for 90,000 barrels of oil per day with an average monthly floor price of $60 per barrel and an average monthly ceiling price of $100 per barrel.

[John Rielly, EVP and CFO at Hess Corporation]

We also have entered into Brent collars for 60,000 barrels of oil per day with an average monthly floor price of $65 per barrel and an average monthly ceiling price of $105 per barrel. We expect non-cash option premium amortization, which will be reflected in our realized selling prices, to reduce our results by approximately $55 million per quarter or approximately $225 million for the full year 2022. In the first quarter, we expect to have three liftings from Guyana, with two lifts coming from the Liza Destiny and our first lift from the Liza Unity expected to occur at the end of March. In the second quarter, we expect a total of five liftings.

[John Rielly, EVP and CFO at Hess Corporation]

After the Liza Unity reaches full production, which is currently projected for the third quarter of this year, we expect to have 8 liftings per quarter in Guyana from these two FPSOs. For the full year 2022, we expect 24 liftings in Guyana. Our E&P capital and exploratory expenditures are expected to be approximately $650 million in the first quarter and approximately $2.6 billion for the full year 2022. For midstream, we anticipate net income attributable to Hess from the midstream segment to be in the range of $65 million-$70 million for the first quarter and $275 million-$285 million for the full year 2022.

[John Rielly, EVP and CFO at Hess Corporation]

Corporate expenses are estimated to be in the range of $35 million-$40 million for the first quarter and $120 million-$130 million for the full year. Interest expense is estimated to be in the range of $90 million-$95 million for the first quarter and $350 million-$360 million for the full year 2022. This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

[Operator]

Thank you. As a reminder, ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered or you would like to withdraw your question, press pound. Questions will be taken in the order received. Please press star one to begin. Your first question comes from the line of Jeanine Wai with Barclays.

[Jeanine Wai, Vice President, Investor Relations North America at TotalEnergies]

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

[John Rielly, EVP and CFO at Hess Corporation]

Morning.

[Jeanine Wai, Vice President, Investor Relations North America at TotalEnergies]

Good morning. Our first question is on cash returns for John Hess. How are you thinking about the trajectory of the base dividend increases? In the past, you've commented that the majority of your shareholders think that the base dividend needs to be higher than the S&P 500, but any more color on where your target is on that? For the buybacks, you've been pretty clear that the base dividend is the first priority. Is the catalyst for more meaningful share repurchases that really Payara coming online in 2024, but you could maybe initiate them on an earlier but more modest level and then accelerate them?

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Yeah. Jeanine, thank you. In terms of our return of capital framework, you know, once the Liza Phase 2 is up and producing oil, we will pay off the $500 million remaining on our term loan, and we'll start to increase our base dividend. At that time, we'll also communicate our return of capital framework, not just where we wanna take the dividend, but also how we plan on returning our free cash flow. As a reminder, as you said earlier, we've been consistent in saying that our cash flow compounding, as it does, we intend to return the majority of our free cash flow to our shareholders by further increasing our dividend and also accelerating share repurchases.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

In terms of the dividend itself, the base dividend, as our cash flow grows, we plan to have a dividend that will have a meaningful premium to the S&P 500 dividend yield.

[Jeanine Wai, Vice President, Investor Relations North America at TotalEnergies]

Okay, great. Thank you for that color. Our second question may be for John Rielly. It's on Libya and just maybe a housekeeping clarification thing. The release indicated that in January, Hess paid accrued Libyan income tax and royalties of $470 million, and that was related to operations from last year. Can you just provide a little bit of color on this and what, if anything, more we can expect for the rest of 2022?

[John Rielly, EVP and CFO at Hess Corporation]

Sure, Jeanine. Basically, you know, we had taxes and royalties related to our production on the Waha concessions, and these taxes and royalties were held by Hess and our other Waha partners after receiving instructions from the Libyan authorities to withhold payment. You know, just recently, the authorities instructed us to make those payments, so we did release it. Hess and our partners released those taxes and royalties and paid during January, as was mentioned in the release and I mentioned earlier in my discussion. Going forward, this is just normal taxes and royalties related to our production. It's typically paid monthly. We expect it to be paid monthly here in 2022. That's what I would say the go forward is. Just so you know, I mean, all those are just normal taxes and royalties.

[John Rielly, EVP and CFO at Hess Corporation]

They were all accrued, all in earnings, all in cash flow from operations during 2021.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

As a reminder, Jeanine, you know, we recently announced the sale of our interests in Libya to both TotalEnergies and ConocoPhillips, and we are still awaiting final approval from the government on that sale.

[Jeanine Wai, Vice President, Investor Relations North America at TotalEnergies]

Great. Thank you.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Thank you.

[Operator]

Thank you. Your next question comes from Arun Jayaram with J.P. Morgan.

[Arun Jayaram, Research Analyst at J.P. Morgan]

Yeah, good morning. John, for you, as you talked about adopting a formal capital allocation returns framework kind of near term. I was wondering if you could give us maybe some insights on how you're thinking about this. You know, some of your E&P peers have a very formulaic approach to this, while some of your major peers are a little bit more flexible. I was wondering if you could maybe give us a little bit of thoughts on how you and the board are thinking about that.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

No, great question. You know, we will be coming out with a framework that will be pretty clear about how we allocate capital, but also how we intend and how much we intend of our free cash flow to return. It will have some flexibility in it, but it will be very clear of our commitment to return the majority of our free cash flow to our shareholders by further increasing the dividend. You know, we'll have our first increase in the dividend once Liza Phase 2 is up and running and producing oil. We will intend, as our cash flow compounds, the majority of that free cash flow will go back to our shareholders by further increasing the dividend and also accelerating the share repurchases.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

I think the return of capital framework, when we announce it, will be clear and help provide clarity to the question you're asking.

[Arun Jayaram, Research Analyst at J.P. Morgan]

Great. Just my follow-up is on Guyana. Greg, you mentioned that the Yellowtail project could include you know resources of 1 billion barrels. I wonder if you could kind of compare how this development looks like relative to Payara. I think the subsea kit's a bit bigger of an FPSO, so maybe give us some thoughts on how this could look like. Then as well as maybe provide some insights on the objectives of the 2022 exploration program in Guyana. It looks like you're maybe targeting some more elephants, but I wanted to get some thoughts on those two questions.

[Greg Hill, Non Executive Director at Harbour Energy]

Sure. Let me take your second question first, Arun. As I mentioned in my opening remarks, you know, the objectives of the program this year are twofold, like they always have been. The first one being to explore for new opportunities. That includes things in the Upper Campanian, but also more penetrations in the deeper zone, such that we saw as Fangtooth, right? If you look at the 12 wells that we're gonna do this year, about two-thirds of those wells are exploration wells, and about one-third is appraisal wells. Pretty active this year on the exploration side. Again, we're gonna be testing deeper zones and also shallower zones, you know, with that exploration program.

[Greg Hill, Non Executive Director at Harbour Energy]

I kind of laid out the first quarter in my opening remarks as to where we're headed with that. Then appraisal, of course, is about you know appraising the existing discoveries so that we can figure out what that development queue is you know for the playout of the vessels you know the up to 10 FPSOs that we've talked about. If I get back to your question on Yellowtail. First of all, you know, the Yellowtail development's world-class economics will be the largest to date on the Stabroek Block. It's as you mentioned, it's gonna develop nearly 1 billion barrels of oil, have a gross capacity of 250,000 barrels a day.

[Greg Hill, Non Executive Director at Harbour Energy]

It's got a little bit bigger topsides, and it's also got more wells. Payara has 41 wells, whereas Yellowtail will have 51 wells. It's just a bigger project, very large area extent, very fantastic reservoir. It's gonna be one of the, again, the world-class economics.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Yeah, some of the highest returns in the oil industry, comparing it to shale or comparing it to offshore developments.

[Greg Hill, Non Executive Director at Harbour Energy]

Mm-hmm.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

It's gonna have a break-even cost that will be lower than Payara.

[Arun Jayaram, Research Analyst at J.P. Morgan]

Great. Thanks a lot, gents.

[Operator]

Thank you. Your next question comes from Doug Leggate with Bank of America.

[Doug Leggate, Managing Director at Wolfe Research]

Thanks. Good morning, everybody. I don't know if it's too late.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Morning, Doug.

[Doug Leggate, Managing Director at Wolfe Research]

... to say Happy New Year, but Happy New Year, everybody.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Happy New Year as well.

[Doug Leggate, Managing Director at Wolfe Research]

John or Greg, I'm not sure who wants to take this, but I wanna ask a portfolio question, given you touched on the Libya news earlier. You have a very, very large footprint in the Gulf of Mexico. Obviously, you've taken advantage of lease rounds when no one else cared and so on. But when I look at Payara, Yellowtail adding essentially five times the current production in the Gulf of Mexico, I gotta ask if the Gulf of Mexico is a keeper longer term for the portfolio, given the effort that has to be put into maintaining the production and so on. Just long-term thoughts on whether the Gulf stays in the portfolio.

[John Rielly, EVP and CFO at Hess Corporation]

Yeah. Greg?

[Greg Hill, Non Executive Director at Harbour Energy]

Yeah, sorry. It took me a second to get off mute. Doug, as we talked before, you know, the Gulf of Mexico remains an important cash engine and platform for growth for Hess. We have top-quartile capability in both deepwater drilling and project delivery in the Gulf. Our objective is maintain that cash hub, sustain production and cash flow generation through both tiebacks and also selectively pursuing these high return hub class exploration opportunities. Hopefully, Huron would be the first cab off the rank there. And as you said, you know, we've been selectively rebuilding our Gulf of Mexico portfolio, acquired more than 60 lease blocks at really low prices. And that's again, that balance of high return tieback opportunities, hub class prospects.

[Greg Hill, Non Executive Director at Harbour Energy]

It remains a very important province for Hess, good returns in the Gulf of Mexico. As I mentioned, we do have the capability to execute well there. It's a core hold for us.

[Doug Leggate, Managing Director at Wolfe Research]

Okay. That's very clear. I appreciate the answer. My follow-up is actually a balance sheet question, so it's probably a John Rielly question. John, I'm just curious, when you think about the scale of the free cash flow that you're gonna be able to generate, you still carry in absolute terms, you know, a sizable amount of debt. What do you see as the right level of debt? Where does the priority sit in the cash return framework to actually bring that debt down to, let's say, sector leading levels like some of your peers? I'm not talking about zero net debt, for example.

[John Rielly, EVP and CFO at Hess Corporation]

Sure. Doug. As you know, right, once we start up Liza Phase 2, we are gonna pay off the remaining $500 million of that term loan. Our next maturity, 'cause we've got a nice liquidity position, isn't till 2024, and it's $300 million. We do intend, as you said, with our rising free cash flow to pay off that maturity in 2024. We don't have really another debt maturity until 2027. We're happy when we pay off that 2024 amount with the absolute level of debt that we have. If we're like $65 Brent and we run this out, we bring Payara on and obviously other FPSOs, we're gonna drive our leverage down to under 1x debt to EBITDA. That's gross debt to EBITDA.

[John Rielly, EVP and CFO at Hess Corporation]

We're gonna have really, you know, a strong low leverage position, improving credit metrics as I mentioned earlier. We're happy with that, you know, debt level, that absolute debt level as our EBITDA grows from there. There's no real benefit. We've run NPVs on doing some things with either just paying off the debt at this point. Right now, with our low leverage, we are very comfortable with leaving the debt levels where they're at. Like we said, with that balance sheet so strong at that point and the rising free cash flow from Payara, from Yellowtail, from the fifth development, we will then increase returns to shareholders.

[John Rielly, EVP and CFO at Hess Corporation]

Obviously, with the rising free cash, more of that free cash will return versus will be share repurchases, but we'll also be growing our dividend over the time too as well. I think we're in a really good position for this with Guyana coming on, these low-cost developments, strong balance sheet, and an increasing return of capital to shareholders.

[Doug Leggate, Managing Director at Wolfe Research]

Great. I appreciate the answer, fellas. Thanks again.

[Operator]

Thank you. Your next question comes from Neil Mehta with Goldman Sachs.

[Neil Mehta, Managing Director and Energy Research Analyst at Goldman Sachs]

Good morning, team. A couple of questions here.

[John Rielly, EVP and CFO at Hess Corporation]

Morning, Neil.

[Neil Mehta, Managing Director and Energy Research Analyst at Goldman Sachs]

Morning, John. Our first one's around Liza 2. We're weeks away here from startup. How do you think about any gating issues around the startup? Just, can you give a sense from an operational standpoint, how is it going around construction at Payara as well? Just any thoughts around the logistics of getting these assets turned on.

[John Rielly, EVP and CFO at Hess Corporation]

Yeah. Greg, please.

[Greg Hill, Non Executive Director at Harbour Energy]

Yeah, sure. Let me just talk about phase two first. You know, we'll have 19 wells available at startup. Those are all ready to go. All the risers have been recovered, so they're hooked up into their porches now. We've got a few left to commission, so we've still got some commissioning of those risers. The FPSO topsides readiness is nearly complete. Neil, what that means is we are on track for that first quarter startup as we said in our opening remarks. If you look at Payara, again, it's still relatively early in the project, but you know, right now we're running slightly ahead of schedule in Payara. I would say we're firmly on track for that 2024 startup.

[Greg Hill, Non Executive Director at Harbour Energy]

The project is about 66% complete, you know, as we sit here today. We're in good shape, but again, it's early days in Payara, so I think the operator having some contingency in there is wise at this point. On track for a 2024 startup.

[Neil Mehta, Managing Director and Energy Research Analyst at Goldman Sachs]

Thanks, Greg. The follow-up here-

[Greg Hill, Non Executive Director at Harbour Energy]

Mm-hmm.

[Neil Mehta, Managing Director and Energy Research Analyst at Goldman Sachs]

This is for John Hess and John Rielly on the hedging strategy here. You did provide an update around the collars and increased the ceiling price there. Just talk about how you think about the optimal way to approach hedging. John, if you don't mind tying that into your own view of the oil macro as you've been constructive here, we're nearing $90 Brent. Is anything changing for the better or for the worse relative to what you've talked about over the last couple months?

[John Rielly, EVP and CFO at Hess Corporation]

Sure, Neil, I'll start and then hand it over to John Hess. Our hedging strategy, it really is consistent with what we're doing with our past strategy. You know, as we continue to invest in our world-class opportunity in Guyana, we wanna ensure that we have significant price protection, which we did in 2022. Just to reiterate, we have 90,000 barrels of oil per day with WTI puts at a floor of $60, and then we have 60,000 barrels a day of Brent puts at a floor of $65.

[John Rielly, EVP and CFO at Hess Corporation]

Now, this year, we did use high ceiling calls, so we have a call at 100 for the WTI and 105 for Brent to reduce the cost of the program while retaining exposure basically to greater than $2 billion in additional cash flow in the case of higher oil prices above the hedged floor. In addition, we haven't hedged all of our oil production, and obviously we have unhedged NGL and gas production as well that will benefit from higher prices. When I say this is consistent with our strategy, we provide significant downside protection while also giving the majority of upside to our shareholders as we continue to invest in the opportunity in Guyana.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Yes, Neil, and obviously it does reflect a constructive view on the market and very consistent with our approach of protecting the downside and giving the majority of the upside to our shareholders. On the macro oil outlook, on the demand side, V-shaped recovery, temporary setback of about 1 million barrels a day globally because of Omicron. Starting to see cases going down, thank God. We think we'll be back at pre-COVID global demand levels of 100 million barrels a day in the next month or so. As the year unfolds, we see jet demand increasing as international travel increases, and probably see a number of about 102 million barrels a day by the end of 2022. Supply side, different. It's a U-shaped recovery, more sticky.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Shale is growing, but at a more tempered pace, a function of the rig count of about 604 U.S. rigs operating. We think that adds about 750,000 barrels a day over the year of increased oil production. Remember, U.S. production probably end up at the end of the year about 12.2 million barrels a day. That's still short of the 13 million barrels a day we had pre-COVID. Shale's on the recovery, but not at pre-COVID levels in terms of absolute U.S. oil production. OPEC sounds like they're gonna stick to their 400,000 barrels a day increases each month. As has been written by a number of commentators, a couple of countries are not meeting their quotas there.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

I'd say disciplined tempered recovery on OPEC+ and disciplined tempered recovery in shale, all of which adds up to global oil inventories, which had been a year and a half ago, April, 1.2 billion excess inventories globally. That's all been eaten up, and now we see global oil inventories about 200 million barrels less than pre-COVID levels. As you go through this year with demand increasing, inventories tight, not much spare capacity in OPEC+, we're pretty constructive on the oil market. Really the oil price is giving a signal that investment has to increase, which is why I referred to the World Energy Outlook earlier.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Depending upon what scenario you pick, any credible scenario from the International Energy Agency, more investment is going to be needed to grow oil and gas supply to meet global oil and gas demand. Currently, we're not investing enough as an industry to do that. We're gonna have to have the right balance of being capital disciplined, returning capital to shareholders, but at the same time, grow the resource and grow the production capacity of the world. That's the challenge that we have ahead, and I think that also really presents a constructive oil market as the year unfolds.

[Neil Mehta, Managing Director and Energy Research Analyst at Goldman Sachs]

Thanks, John.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Thank you.

[Operator]

Thank you. Your next question comes from Paul Cheng with Scotiabank. You may proceed with your question.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

Hey, guys. Good morning.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Morning.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

I guess two questions. Yes, one for Greg and the other one is for John Rielly. Greg, when you're looking at the Fangtooth and the other that you also have penetration in the deepest formation, is there anything you can tell us that in terms of the oil and gas ratio, in terms of the permeability, oil quality comparing to the more shallow formation, is there any significant differences that we see or any kind of conclusion that you can share?

[Greg Hill, Non Executive Director at Harbour Energy]

Paul, you know, I guess the first thing I'd say is, you know, the positive result at Fangtooth, which, you know, was our first standalone deep exploration prospect. Remember, it's up towards Liza, so it's kind of in that country. Very good oil quality. It confirms, you know, the deeper exploration potential of the Stabroek Block. In the coming months, we're gonna complete the analysis of that well, the Fangtooth well, and then plan appraisal activities, you know, to really determine, you know, the best development approach. Generally, we see these deeper zones as being developed through a combination of standalone developments and tiebacks potentially to existing FPSO. Very encouraged, very pleased by the results, you know, we saw at Fangtooth.

[Greg Hill, Non Executive Director at Harbour Energy]

Also remember, we had other penetrations prior to Fangtooth into those deeper zones that confirmed the same thing, good reservoir quality and good, you know, good fluid property. Very excited. That's why we're gonna drill a lot more wells, you know, in kind of the deeper prospectivity this year than years past. Watch this space, but we're encouraged by the outcome, in particular of Fangtooth-2.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

Well, we understand that, yes, good. Is there any contrast or comparison you can provide in terms of the gas oil ratio, the degree of the oil and the permeability, any kind of data that you can share?

[Greg Hill, Non Executive Director at Harbour Energy]

No, not at this point, because again, we need to do some more analysis of the wells and do some more appraisal of, particularly in the Fangtooth-2 area. Yeah.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

Okay. The second question is for John Rielly that by the fourth quarter, as you indicate that your unit cost is going to come down a lot because Guyana these are two years ramp to the full capacity and all that. What's the target unit cost that you have by the fourth quarter in Guyana? And also that I know you guys talking about next year that you may start the buyback. Have you decided between the variable dividend and the buyback and that the plus and minuses and why you decide that a variable dividend is not a better tool, and the buyback is the right tool for the company? I'm not saying that you should be variable dividend.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

Just curious as to how the internal debate that has been the case.

[John Rielly, EVP and CFO at Hess Corporation]

Sure. Let me start with cash costs. Through the year, as I said, and you mentioned, yeah, our unit costs will be dropping basically as Guyana Phase 2 comes online and it's lower cost. Let me just remind you where the costs are for Guyana. On Phase 1, obviously, it's a smaller boat, and what we've been saying is that the cash costs per barrel there were $12. However, you did hear, as mentioned, that we're doing the production optimization work, so that 120 gross capacity is going up. So the cash cost per barrel for Phase 1 will be decreasing as that production optimization is completed. On Phase 2, the cash costs per barrel are $10 per barrel for Phase 2 when it is fully up and running.

[John Rielly, EVP and CFO at Hess Corporation]

I also should mention that both of these is when we're leasing the FPSOs. Phase 2 will actually drop down to $7-$8 post purchase of the FPSOs. For this year, around $10. You have cash costs for phase two at $10, and you've got phase one under $12. What it does, along with increasing production in the Bakken, is by the fourth quarter, our cash costs will drop to around $11 per barrel for the company in the fourth quarter. Then I'll pass it over to John.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Yeah. Paul, is someone on the-

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

Actually.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Oh, is that you, Paul?

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

Yes. Yes.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

Okay. Yeah. No, we were getting some feedback. In terms of the dividend, you know, we've done studies. We don't think the variable dividend sustains the creation of long-term value. We believe strengthening the base dividend and consistent share repurchases are a better way to go. In terms of the timing on that, as I said, once Liza Phase 2 is up and producing, we pay the $500 million of remaining debt off from our term loan. We will increase our base dividend. We will start the process of that increase. As you look forward in time, further dividend increases and accelerating share repurchases will be a function of market conditions and the growth in our cash flow.

[John Hess, 'Former Chairman and CEO at Hess Corporation]

The framework for that will be very clear, and I think something that will be very competitive.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

Okay. Thank you, John. John Rielly, can I go back to when you're talking about the Guyana unit cost? Wondering what is the timeline in terms of when the consortium will decide to buyback the FPSO, I mean, for both Liza One and Liza Phase 2. Secondly, when you're talking about those numbers, $12 for Phase 1, $10 for Phase 2, are those, what is the denominator on that? Is that based on, say in Phase 2, 220,000 barrels per day, but your actual reported in your financial statement will be different? Or that this is what you expect to report in your financial statement?

[John Rielly, EVP and CFO at Hess Corporation]

Okay. Answering your last question first. Yes, that's what will be reported in our financial statement. That's our, if you wanna call it, our net cash costs on our entitlement production in Guyana. Those are the numbers. As far as the FPSO purchases, the operator, ExxonMobil, is still in discussions with SBM on the actual date of the purchases of the FPSOs. We'll give you the specific timing to that when that is set. Having said that, as you noted in our 2022 CapEx release, we don't expect any purchases in 2022 or in 2023.

[Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank]

Thank you.

[John Rielly, EVP and CFO at Hess Corporation]

You're welcome.

[Operator]

Thank you. Next question comes from David Deckelbaum with Cowen.

[David Deckelbaum, Managing Director and Senior Research Analyst at TD Cowen]

Thanks, John. Thank you guys for squeezing me in here. I'll try to make it quick. I had one question just on the reserve report. It looked like your net additions organically at the drill bit, like 241 million, were, as you noted in the press release, primarily from the Bakken. Does that just reflect increased gas capture, or have there been some performance revisions there as well?

[John Rielly, EVP and CFO at Hess Corporation]

John?

[Greg Hill, Non Executive Director at Harbour Energy]

No, there have been. Go ahead, John.

[John Rielly, EVP and CFO at Hess Corporation]

Go ahead, Greg. You go first.

[Greg Hill, Non Executive Director at Harbour Energy]

Yeah. Look, there were both performance additions in the Bakken, plus, you know, we brought additional wells into our five-year plan due to price increase, which was $107, but then the other wells bring it in. If you look at the Bakken, you know, we had adds of about $209 million, and then the price of about $119 million specifically to the Bakken, right? Both performance adds and also bringing additional wells into the five-year plan.

[John Rielly, EVP and CFO at Hess Corporation]

Great. Thanks, Greg.

[David Deckelbaum, Managing Director and Senior Research Analyst at TD Cowen]

Appreciate the color on that, Greg. Maybe for John, just my last question, just around you've laid out the timeline for paying down the $500 million term loan, noted the fact that you don't really have that many maturities beyond. As I guess, the free cash profile ramps here, you talked about getting sub-1x leverage, which we have on our numbers at a run rate, you know, sort of in that 2Q, 3Q timeframe. Should we be thinking about investment grade sort of coinciding sort of with mid-year? How do you think about the tangible benefits from that outside of the obvious of refinancing some of that higher cost debt stack?

[John Rielly, EVP and CFO at Hess Corporation]

Again, with our growing free cash flow and obviously our growing cash flow, our debt metrics are going to significantly improve and basically as each FPSO comes on. Like I said, we are targeting to be on a gross debt to EBITDA under 1x, and we will achieve that as the cash flow grows. Now, I can't specifically say, you know, with the rating agencies on timing. Obviously, we are investment grade with two of them and we're below on one, but have a positive outlook with the one. I do expect as our cash flow improves, that we'll become investment grade and actually will improve from where we are today as our cash flow grows.

[John Rielly, EVP and CFO at Hess Corporation]

What we try to do from our own strategy standpoint is we want to have a strong balance sheet, obviously to fund the growing resource base that we have and also to for further return to shareholders. From our standpoint, that will be the outcome of our strategy of having a low leverage, strong liquidity position, which you mentioned as well. Then as each FPSO comes on, it will just continue to improve and will improve our credit metrics, as well as still providing increasing cash returns to shareholders. The portfolio is set to be in a nice spot. As John has mentioned earlier, this is kind of the inflection year, and we'll expect to grow on it from here.

[David Deckelbaum, Managing Director and Senior Research Analyst at TD Cowen]

Appreciate the answers, guys.

[John Rielly, EVP and CFO at Hess Corporation]

Thank you.

[Operator]

Thank you. Your next question comes from Ryan Todd with Piper Sandler.

[Ryan Todd, Managing Director and Senior Research Analyst at Piper Sandler]

Chris, thanks. Maybe just a couple of quick ones. I know, as we think about the medium-term outlook in the Bakken, I know you've talked about eventually wanting to get back to a four-rig program, and a production plateau closer to 200,000 barrels a day. How much impact does the price of oil have on the timing of adding a fourth rig? Is that something that would be possible by the end of this year if prices stay high, or is that further down the line?

[John Rielly, EVP and CFO at Hess Corporation]

Go ahead, Greg.

[Greg Hill, Non Executive Director at Harbour Energy]

Yeah, again, you know, Ryan, I think as we've talked before, you know, the role of the Bakken in the portfolio is to be a cash engine. Any decisions on, you know, pace or timing, you know, of addition of a fourth rig is gonna depend upon corporate cash flow needs and also returns. Now, having said that, you know, assuming prices hold, you know, at this, relatively high level, we would look to add that fourth rig next year. By doing so, we could then take the Bakken to 200,000 barrels a day. With the inventory we have at four rigs, we could hold that flat at broadly that 200,000 barrels a day for almost a decade, with that fourth rig. Now, at 200,000 barrels a day, we really maximize utilization of the infrastructure.

[Greg Hill, Non Executive Director at Harbour Energy]

That would be another objective, to fill that infrastructure up. Of course, you know, gosh, at these prices, you know, the Bakken becomes, you know, this massive cash generator. At that 200,000 barrels a day, even at $60-$65, it generates about $1 billion of free cash flow. You can see the real cash firepower of the Bakken.

[Ryan Todd, Managing Director and Senior Research Analyst at Piper Sandler]

Thanks, Greg. I appreciate the comments on cost inflation and well cost in the Bakken earlier. As you think about the rest of the portfolio, any comments on what you're seeing in terms of, you know, service or material cost inflation in an offshore environment, particularly as we think about upcoming potential project sanctions?

[John Rielly, EVP and CFO at Hess Corporation]

Yeah, Greg, please.

[Greg Hill, Non Executive Director at Harbour Energy]

Yeah, sure. You know, like the onshore, we're also seeing some inflation, you know, in the offshore. However, recall the majority of our offshore portfolio right now is driven by Guyana. Of course, the projects currently in development are covered by EPC contracts, so we're largely insulated, you know, from current cost increases in the offshore. ExxonMobil, with this design one build many strategy, is just doing an outstanding job, you know, of delivering efficiencies, you know, across that portfolio down there, as well. If you look at our in the Gulf of Mexico, you know, the rig that's gonna drill the Huron well. $255,000 day rate.

[Greg Hill, Non Executive Director at Harbour Energy]

I think that still reflects, you know, the low cost on a relative basis of, you know, the offshore drilling.

[Ryan Todd, Managing Director and Senior Research Analyst at Piper Sandler]

Thanks for all the help.

[Operator]

Thank you. Your next question comes from Bob Brackett with Bernstein Research.

[Bob Brackett, Managing Director and Senior Research Analyst at Bernstein Research]

Good morning, all. Had a question around Payara, and I'm gonna try to tie a date and a % completion. If I'm not incorrect, Payara was sanctioned maybe five quarters ago. First production's expected maybe eight plus quarters from now, but at the same time, it's 66% complete. If those numbers are right, can you talk about maybe the rate-limiting steps for Payara and maybe for future developments?

[John Rielly, EVP and CFO at Hess Corporation]

Morning, Bob. Great question. Greg, it's yours.

[Greg Hill, Non Executive Director at Harbour Energy]

Sure. Yeah. Bob, Payara, I think, you know, what's different about Payara is there are three offshore installation campaigns. Yes, the project is 66% complete, but because there's three installation campaigns, you will build a little bit more contingency, you know, into that project. Because while you don't have, you know, hurricane issues or anything down there, you do have some current issues, you know, offshore currents during the installation campaign. That's why there's still contingency in Payara. We agree with the operator that that's the appropriate thing to do, you know, at this stage of the project. We are firmly on track for a 2024 startup. A little ahead right now, but again, it's early days.

[Bob Brackett, Managing Director and Senior Research Analyst at Bernstein Research]

Understood. Is there a good rule of thumb for the number of development wells a drill ship in Guyana can do in a year?

[Greg Hill, Non Executive Director at Harbour Energy]

You mean in terms of drilling?

[Bob Brackett, Managing Director and Senior Research Analyst at Bernstein Research]

Yeah.

[Greg Hill, Non Executive Director at Harbour Energy]

No, Bob, it's really kinda bespoke. Some of these horizontals are longer than other ones, for example, in some of these developments. There's not a great rule of thumb that I would say, because again, each development is very bespoke on not only, you know, the length of the horizontals, but also what reservoirs they're tapping into as well.

[Bob Brackett, Managing Director and Senior Research Analyst at Bernstein Research]

Okay. Fair point. Thanks all.

[Greg Hill, Non Executive Director at Harbour Energy]

Thank you.

[Operator]

Thank you. Your next question comes from Noel Parks with Tuohy Brothers.

[Noel Parks, Managing Director at Tuohy Brothers Investment Research]

Good morning.

[John Rielly, EVP and CFO at Hess Corporation]

Morning.

[Noel Parks, Managing Director at Tuohy Brothers Investment Research]

I just had a general question about the exploratory program this year. Just wondering, what's the next most informative data point you're looking for out of the program? Because there's quite some large step-outs there, so there's possibility for areal expansion. It also sounds like some of the particular formations you're going at are, I believe, the first time you're gonna be tapping them in Guyana. I was wondering if any of these really opens up a lot of new doors, if it meets or surprises you, or your expectations.

[John Rielly, EVP and CFO at Hess Corporation]

Yeah, Greg.

[Greg Hill, Non Executive Director at Harbour Energy]

No, I think again, you know, the objectives of this year's program is, you know, to continue to do kind of the Upper Campanian, you know, exploration, but also most importantly, is to get more penetrations, you know, in the deep. You know, the deep penetrations that we're gonna be watching closely, and these are wells that we're gonna spud in the first quarter are Barreleye-1, which is a Lower Campanian primary target, but it's also got some shallower things as well. Tarpon-1, which is another Lower Campanian well, plus a deeper Jurassic carbonate feature that we see. Kind of in the Upper Campanian space, you know, is Lukanani-1. It also has some objectives in the Lower Campanian reservoirs.

[Greg Hill, Non Executive Director at Harbour Energy]

Finally, Patwa-1, which has got some targets in the Upper Cretaceous reservoir. You can see it's a mixture, you know, play type. I wouldn't wanna call one out specifically and say, "Oh, that's the most significant." They're all significant in this year's program. They're all very promising wells on seismic.

[Noel Parks, Managing Director at Tuohy Brothers Investment Research]

Are most of those deeper targets things that you've identified largely through seismic? Or are your expectations informed on any of them by actual analogies you have or have already seen?

[Greg Hill, Non Executive Director at Harbour Energy]

No, I think they're all, you know, they all have seismic features, right? So the primary driver down here is their seismic signature. Now, obviously, as we've gotten more data in the deep, we're getting better at teasing out what that seismic is going to show us. The additional data-

[Noel Parks, Managing Director at Tuohy Brothers Investment Research]

Right.

[Greg Hill, Non Executive Director at Harbour Energy]

The pickup from these deeper wells will improve that even more, you know, kinda as we go forward.

[Noel Parks, Managing Director at Tuohy Brothers Investment Research]

Okay, great. Thanks a lot.

[Operator]

Thank you. Your next question comes from David Heikkinen with Pickering Energy.

[David Heikkinen, Chief Development Officer at WhiteHawk Energy]

Good morning, guys. Really just making sure that I'm thinking about this correctly. Y'all continue to be cash taxpayers in the U.S. and Malaysia, and then continue to build a cost pool at a faster pace, given your spending and the ring fencing in Guyana for the next couple of years. Just thinking $80+ oil, 2022 and 2023 is, you got this, call it the hug of higher oil prices, but a punch of higher cash taxes. You're already essentially a full payer, is the way we're thinking about it.

[Greg Hill, Non Executive Director at Harbour Energy]

David?

[John Rielly, EVP and CFO at Hess Corporation]

No. For us, we are not cash taxpayers in the U.S. We have a net operating loss carry forward.

[David Heikkinen, Chief Development Officer at WhiteHawk Energy]

How long-

[John Rielly, EVP and CFO at Hess Corporation]

I would tell you.

[David Heikkinen, Chief Development Officer at WhiteHawk Energy]

How long does that last?

[John Rielly, EVP and CFO at Hess Corporation]

I don't see us paying cash taxes even with these high prices, let's just say for five years and beyond. That's where we are in the U.S. The only place that we really are paying cash taxes is in Southeast Asia.

[David Heikkinen, Chief Development Officer at WhiteHawk Energy]

Okay.

[John Rielly, EVP and CFO at Hess Corporation]

That's a small amount in the portfolio.

[David Heikkinen, Chief Development Officer at WhiteHawk Energy]

I think I said that opposite. Sorry, I've got a little COVID brain fog.

[John Rielly, EVP and CFO at Hess Corporation]

The-

[Greg Hill, Non Executive Director at Harbour Energy]

Day five.

[John Rielly, EVP and CFO at Hess Corporation]

No, no. The only thing you would see is in our, you know, when you're looking at it, 'cause I always do it ex-Libya. Libya obviously has, you know, it's a 93.5% tax rate.

[Greg Hill, Non Executive Director at Harbour Energy]

Got it.

[John Rielly, EVP and CFO at Hess Corporation]

That's the one place, you know, that we are paying cash taxes. The Guyana taxes are actually within the PSC, so it's in the economics-

[David Heikkinen, Chief Development Officer at WhiteHawk Energy]

Mm-hmm.

[John Rielly, EVP and CFO at Hess Corporation]

in our net entitlement. We pay them there.

[David Heikkinen, Chief Development Officer at WhiteHawk Energy]

Yeah. You just keep building a cost pool for the next three years, even at these prices?

[John Rielly, EVP and CFO at Hess Corporation]

Correct.

[David Heikkinen, Chief Development Officer at WhiteHawk Energy]

Yeah. Okay, thanks guys. I think I said that opposite. My apologies.

[John Rielly, EVP and CFO at Hess Corporation]

No, no problem.

[David Heikkinen, Chief Development Officer at WhiteHawk Energy]

You answered my question. Thank you all.

[Operator]

Thank you. Your next question comes from Phillips Johnston with Capital One.

[Phillips Johnston, Senior E&P Analyst at Capital One]

Hey, guys. Thanks. Just one question for Greg on the production outlook. You guys have a large ramp throughout the year, and I know that you don't give specific guidance on oil production. Just wondering if you could help us with the oil mix in both the Bakken and the Gulf of Mexico, and how those numbers should trend throughout the year. I realize the Bakken mix can fluctuate depending on gas capture and NGL prices. Just from a high level perspective, should we stick with around 50% of the Bakken and around 65% or so for the-

[John Rielly, EVP and CFO at Hess Corporation]

Greg?

[Phillips Johnston, Senior E&P Analyst at Capital One]

Gulf of Mexico for the rest of the year?

[Greg Hill, Non Executive Director at Harbour Energy]

Yeah. Let's address the Bakken first. First of all, the mix at the wellhead is constant at around 65%, and will be for the next several years for us in the Bakken, and that's because we still have a lot of undeveloped well locations. Now, you're right, when you get to the corporate results, it goes to 50%, and that's because of increased gas capture and, you know, our third-party volumes and our POP contracts and all that. That's how you get to the 50%. At a corporate level, broadly, you could assume that that's gonna be the same mix. You're on target for the Gulf of Mexico, kind of that 65% or so mix in the Gulf.

[Phillips Johnston, Senior E&P Analyst at Capital One]

Okay. Perfect. Thanks, Greg.

[Greg Hill, Non Executive Director at Harbour Energy]

Thank you.

[Operator]

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

Participants

Executives

• Jay Wilson, VP of Investor Relations
• John Hess, 'Former Chairman and CEO
• John Rielly, EVP and CFO

Analysts

• Arun Jayaram, Research Analyst at J.P. Morgan
• Bob Brackett, Managing Director and Senior Research Analyst at Bernstein Research
• David Deckelbaum, Managing Director and Senior Research Analyst at TD Cowen
• David Heikkinen, Chief Development Officer at WhiteHawk Energy
• Doug Leggate, Managing Director at Wolfe Research
• Greg Hill, Non Executive Director at Harbour Energy
• Jeanine Wai, Vice President, Investor Relations North America at TotalEnergies
• Neil Mehta, Managing Director and Energy Research Analyst at Goldman Sachs
• Noel Parks, Managing Director at Tuohy Brothers Investment Research
• Paul Cheng, Managing Director and Senior Equity Analyst at Scotiabank
• Phillips Johnston, Senior E&P Analyst at Capital One
• Ryan Todd, Managing Director and Senior Research Analyst at Piper Sandler