Hess Q1 2023 Earnings Report

Hess EPS Results

• Actual EPS: $1.13
• Consensus EPS: $1.03
• Beat/Miss: Beat by +$0.10
• One Year Ago EPS: $1.30

Hess Revenue Results

• Actual Revenue: $2.45 billion
• Expected Revenue: $2.37 billion
• Beat/Miss: Beat by +$83.38 million
• YoY Revenue Growth: +3.50%

Hess Announcement Details

• Quarter: Q1 2023
• Date: 4/26/2023
• Time: Before Market Opens
• Conference Call Date: Wednesday, April 26, 2023
• Conference Call Time: 10:00AM 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 Q1 2023 Earnings Call Transcript

Key Takeaways

• Production Growth: Hess projects >10% annual production growth through 2027 with six FPSOs on Guyana’s Stabroek Block reaching over one million bpd gross and a four-rig Bakken program targeting 200 kboepd.
• Cash Flow Acceleration: At $70–75 Brent, Hess forecasts ~25% annual free cash flow growth from 2022–2027, industry-leading cash cost declines (~25% to ~$10/boe by 2027) and a breakeven Brent price near $50/barrel.
• Capital Return Framework: Over 80% of 2023 capex is allocated to high-return Guyana and Bakken projects, with up to 75% of free cash flow returning to shareholders via a 17% dividend hike to $1.75 and increasing share buybacks.
• Operational Outperformance: Q1 net production of 374 kboepd exceeded guidance (345–355 kboepd), prompting a full-year increase to 365–375 kboepd, driven by strong Bakken, Guyana and Gulf of Mexico performance.
• Unit Costs & Hedging: Q1 E&P cash costs fell to $12.96/boe (below $14–14.50 guidance) and Hess hedged 130 kbpd with $70 WTI and $75 Brent puts to cap downside while preserving upside potential.

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to the first quarter 2023 Hess Corporation conference call. My name is Kevin, and I'll be your operator for today. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Jay Wilson, Vice President of Investor Relations. Please proceed.

[Jay Wilson, VP of Investor Relations at Hess]

Thank you, Kevin. Good morning, everyone, thank you for participating in our first quarter earnings conference call. Our earnings release was issued this morning and appears on our website, www.hess.com. Today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include those set forth in the Risk Factors section of Hess's annual and quarterly reports filed with the SEC. 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]

On the line with me today are John Hess, Chief Executive Officer, Greg Hill, Chief Operating Officer, and John Rielly, Chief Financial Officer. I'll now turn the call over to John Hess.

[John Hess, CEO at Hess]

Thank you, Jay. Good morning, welcome to our first quarter conference call. Today, I will discuss our continued progress in executing our strategy. Greg Hill will then cover our operations, and John Rielly will review our financial results. We believe that Hess offers a unique value proposition for investors. Our strategy is to deliver high-return resource growth at low-cost of supply and industry-leading cash flow growth. At the same time, maintain our industry leadership in environmental, social, and governance performance and disclosure. In terms of resource growth, with multiple phases of Guyana developments coming online and our robust inventory of high-return drilling locations in the Bakken, we can deliver highly profitable production growth of more than 10% annually through 2027.

[John Hess, CEO at Hess]

On the Stabroek Block in Guyana, we currently have line of sight to six floating production storage and offloading vessels or FPSOs in 2027, with a gross production capacity of more than 1.2 million barrels of oil per day. In terms of a low-cost of supply, as our resource base continues to expand, we will steadily move down the cost curve. By 2027, we forecast that our cash unit costs will decline by 25% to approximately $10 per BOE, and that our portfolio will achieve a break-even Brent oil price of approximately $50 per barrel. Our four sanctioned oil developments on the Stabroek Block have a break-even Brent oil price of between approximately $25 and $35 per barrel.

[John Hess, CEO at Hess]

In terms of cash flow growth, we have an industry-leading rate of change story and an industry-leading duration story, providing a highly differentiated value proposition. Based upon a flat Brent oil price of $75 per barrel, our cash flow is forecast to increase by approximately 25% annually between 2022 and 2027, more than twice as fast as our top line growth. Our balance sheet will also continue to strengthen with our most recent debt-to-EBITDAX ratio at approximately 1x. Successful execution of our strategy has uniquely positioned our company to deliver significant value to shareholders for years to come, both by growing intrinsic value and by growing cash returns.

[John Hess, CEO at Hess]

Our financial priorities are to allocate capital to our high-return, low cost investment opportunities, to maintain a strong balance sheet and cash position to ensure that we can fund our world-class investment opportunities in Guyana and the Bakken, where we have allocated more than 80% of our 2023 capital budget. Also return up to 75% of our annual free cash flow to shareholders through dividend increases and share repurchases. In line with our return of capital framework, in March, we increased our annual dividend by 17% to $1.75 per share. Looking ahead, we plan to continue increasing our regular dividend to a level that is attractive to income-oriented investors, but sustainable in a low oil price environment. As our free cash flow generation steadily increases in future years, share repurchases are expected to represent a growing proportion of our return of capital.

[John Hess, CEO at Hess]

To manage oil price volatility, we have hedged 130,000 barrels of oil per day in 2023, of which 80,000 barrels of oil per day have $70 per barrel WTI put options and 50,000 barrels of oil per day have $75 per barrel Brent put options, which positions our shareholders to be protected on the downside while fully benefiting on the upside. Key to our strategy is Guyana, the industry's largest oil province discovered in the last decade, where Hess has a 30% interest and ExxonMobil is the operator. Since 2015, we have had more than 30 discoveries on the block, including two since the start of 2023 at Fangtooth Southeast-1 and Lancetfish-1. Underpinning a gross discovered recoverable resource estimate of more than 11 billion barrels of oil equivalent, with multi-billion barrels of exploration potential remaining.

[John Hess, CEO at Hess]

We have the potential for up to 10 FPSOs to develop the discovered resources on the block. The Liza Phase One and Liza Phase Two developments produced an average of approximately 375,000 gross barrels of oil per day in the first quarter. The FPSO for our third sanctioned development at Payara arrived on the Stabroek Block earlier this month, ahead of schedule, and is targeted to start up early in the fourth quarter with a gross production capacity of approximately 220,000 barrels of oil per day. The fourth sanctioned development, Yellowtail, is expected to come online in 2025 with a gross production capacity of approximately 250,000 barrels of oil per day.

[John Hess, CEO at Hess]

Government and regulatory approvals are expected very soon, hopefully this week, for our fifth development at Uaru, which will have a gross production capacity of approximately 250,000 barrels of oil per day. A plan of development for our sixth development, Whiptail, is expected to be submitted to government and for regulatory and government approvals later this year. Turning to the Bakken, we plan to continue operating a four-rig program, which will enable us to grow net production to approximately 200,000 barrels of oil equivalent per day in 2025, lower our unit cash costs, fully optimize our infrastructure, and generate significant levels of free cash flow. Greg and his team continue to do an outstanding job of applying lean manufacturing principles to build a culture of innovation, improve efficiency, and mitigate inflationary cost pressures.

[John Hess, CEO at Hess]

As we execute our company's strategy, we will continue to be guided by our long-standing commitment to sustainability and are proud to be an industry leader in this area. Earlier this month, we announced a $50 million donation over the next five years to the Salk Institute's Harnessing Plants Initiative, which is a potential game changer in tackling the global challenge of climate change by developing plants, crops, and wetlands' natural ability to capture and store potentially billions of tons of carbon per year from the atmosphere. We are proud to once again have received a AAA rating in the latest MSCI Environmental, Social, and Governance rating assessment. AAA, which is MSCI's ESG's highest rating, designates our company as a leader in managing industry-specific ESG risks relative to peers. We received our first AAA rating in 2021 after earning AA ratings for 10 consecutive years.

[John Hess, CEO at Hess]

In February, Hess also earned a place on the 2023 Bloomberg Gender-Equality Index for the fourth consecutive year. In summary, we continue to successfully execute our strategy, which offers a unique value proposition for our industry by growing both our intrinsic value and our cash returns. With multiple phases of low-cost oil developments coming online in Guyana and our robust inventory of high-return drilling locations in the Bakken, our portfolio is positioned to become increasingly free cash flow positive, and as it does, we will continue to prioritize the return of capital to our shareholders through further dividend increases and further share repurchases. I will now turn the call over to Greg Hill for an operational update.

[Greg Hill, President and COO at Hess]

Thanks, John. We demonstrated strong operational performance across our portfolio in the first quarter. Company-wide net production averaged 374,000 barrels of oil equivalent per day above our guidance of approximately 345,000 barrels of oil equivalent per day-355,000 barrels of oil equivalent per day. For the second quarter, we forecast the company-wide net production will average between 355,000 and 365,000 barrels of oil equivalent per day, reflecting planned maintenance activities at Liza Phase Two in Guyana, several of our Gulf of Mexico fields, and at North Malay Basin in Southeast Asia.

[Greg Hill, President and COO at Hess]

For the full year 2023, we now expect company-wide net production to average between 365,000 and 375,000 barrels of oil equivalent per day, an increase from our previous guidance of 355,000 to 365,000 barrels of oil equivalent per day due to strong performance in the first quarter of 2023. In the Bakken, first-quarter net production of 163,000 barrels of oil equivalent per day was above our guidance of 155,000 to 160,000 barrels of oil equivalent per day, reflecting high uptime and strong recovery from challenging weather conditions this winter. In the first quarter, we drilled 25 wells and brought 24 new wells online. In the second quarter, we expect to drill and bring online approximately 27 new wells.

[Greg Hill, President and COO at Hess]

For the full year 2023, we expect to drill and bring online approximately 110 new wells. Individual well results in terms of EURs and IP 180s continue to meet or exceed expectations. For both the 2nd quarter and full year 2023, we expect Bakken net production to average between 165,000 and 170,000 barrels of oil equivalent per day. Moving to the offshore. In the Deepwater Gulf of Mexico, first-quarter net production averaged 33,000 barrels of oil equivalent per day above our guidance of approximately 30,000 barrels of oil equivalent per day, primarily reflecting better uptime. In the 2nd quarter, we expect net production to average approximately 25,000 barrels of oil equivalent per day, reflecting planned maintenance at several of our Gulf of Mexico fields.

[Greg Hill, President and COO at Hess]

For the full year 2023, we continue to forecast Gulf of Mexico net production to average approximately 30,000 barrels of oil equivalent per day. The Deepwater Gulf of Mexico remains an important cash engine for the company as well as a platform for growth. In May, we plan to spud the Pickerel-1 well located in Mississippi Canyon Block 77. Pickerel is an infrastructure-led exploration prospect which will be tied back to Tubular Bells. Following Pickerel, we plan to drill another tieback well at Stampede and a hub class exploration well in the Green Canyon area. In Southeast Asia, first-quarter net production averaged 66,000 barrels of oil equivalent per day. 2nd quarter net production is forecast to average approximately 60,000 barrels of oil equivalent per day, reflecting planned maintenance at North Malay Basin.

[Greg Hill, President and COO at Hess]

Full year net production for Southeast Asia in 2023 is now forecast to average approximately 65,000 barrels of oil equivalent per day, compared with our previous guidance of 60,000-65,000 barrels of oil equivalent per day. In Guyana, where Hess has a 30% interest in the Stabroek Block, the operator, ExxonMobil, continues to deliver outstanding facilities reliability and project execution success. First-quarter net production averaged 112,000 barrels of oil per day above our guidance of approximately 100,000 barrels of oil per day, primarily driven by strong facility uptime and well performance. For the second quarter, net production from Guyana is expected to average between 105,000 and 110,000 barrels of oil per day, reflecting reduced capacity at Liza Phase Two for planned maintenance.

[Greg Hill, President and COO at Hess]

We now expect full year 2023 net production to average between 105,000 and 110,000 barrels of oil per day, compared to our previous guidance of approximately 100,000 barrels of oil per day. Turning to Guyana developments. The Prosperity FPSO with a production capacity of approximately 220,000 gross barrels of oil per day arrived at the Stabroek Block on April 11th. The vessel is undergoing hookup and commissioning and is targeted to achieve first oil from Payara, our third development, early in the fourth quarter. Yellowtail, our fourth development, is approximately 45% complete and remains on track for first oil in 2025. The 250,000 barrels of oil per day ONE GUYANA FPSO hull entered dry dock in Singapore on April 2nd.

[Greg Hill, President and COO at Hess]

Topside fabrication and installation activities have commenced and development drilling is underway. Government and regulatory approvals are expected very soon for our fifth development at Uaru, with a gross production capacity of approximately 250,000 barrels of oil per day. Finally, for our sixth development, Whiptail, the partnership is on track for final submission of the field development plan to the Government of Guyana later this year. Turning to exploration. The Lancetfish-1 well, located 4 miles southeast of the Fangtooth-1 discovery, encountered 92 feet of oil-bearing sandstone reservoir. This discovery further underpins the potential oil development in the greater Fangtooth area. Drill stem tests and core analysis are underway at Fangtooth-1, and further appraisal activities for Lancetfish and Fangtooth Southeast are planned for later in the year.

[Greg Hill, President and COO at Hess]

In the second half of the year, we plan to drill the Basher-1 well, which is a deep prospect located approximately 7 miles west of Fangtooth-1, and another deep exploration prospect called Lancetfish, located 2 miles southwest of Fangtooth-1. Moving to offshore Canada. We expect to spud the BP-operated Ephesus-1 well in the Northern Orphan Basin in May. The well will target a very large submarine fan of tertiary age. BP has a 50% working interest, and Hess and Chevron each have 25% interest. In closing, our execution continues to be strong. The Bakken is on a steady growth trajectory. Our Gulf of Mexico and Southeast Asia assets have active drilling programs, and we continue to advance our major projects and further delineate the enormous upside in Guyana, all of which position us to deliver industry-leading performance and significant shareholder value for years to come.

[Greg Hill, President and COO at Hess]

I will now turn the call over to John Rielly.

[John Rielly, EVP and CFO at Hess]

Thanks, Greg. In my remarks today, I will compare results from the first quarter of 2023 to the fourth quarter of 2022. We had net income of $346 million in the first quarter of 2023, compared with $497 million in the fourth quarter of 2022, or $522 million on an adjusted basis, which excluded items affecting comparability of earnings. Turning to E&P. E&P net income was $405 million in the first quarter of 2023, compared with an adjusted net income of $565 million in the fourth quarter of 2022. The changes in the after-tax components of E&P earnings between the first quarter of 2023 and fourth quarter of 2022 were as follows.

[John Rielly, EVP and CFO at Hess]

Lower sales volumes decreased earnings by $138 million. Lower realized selling prices decreased earnings by $45 million. Lower cash costs and midstream tariffs increased earnings by $16 million. Lower exploration expenses increased earnings by $7 million. For an overall decrease in first quarter earnings of $160 million. For the first quarter, our E&P oil sales volumes were under lifted compared with production by approximately 325,000 barrels, which decreased our after-tax income by approximately $15 million. Now turning to Midstream. The Midstream segment had net income of $61 million in the first quarter of 2023, compared with $64 million in the fourth quarter of 2022.

[John Rielly, EVP and CFO at Hess]

Midstream EBITDA before non-controlling interests amounted to $238 million in the first quarter, compared to $244 million in the previous quarter. Turning to our financial position. At March 31st, excluding the Midstream segment, cash and cash equivalents were $2.1 billion. Total liquidity was $5.4 billion, including available committed credit facilities, and debt and finance lease obligations totaled $5.6 billion. In March, we received net proceeds of $50 million from the sale of approximately 1.8 million Hess-owned Class B units to Hess Midstream. In the first quarter of 2023, net cash provided by operating activities before changes in working capital was $1 billion, compared with $1.3 billion in the fourth quarter of 2022, primarily due to lower sales volumes and realized selling prices.

[John Rielly, EVP and CFO at Hess]

Changes in operating assets and liabilities during the first quarter decreased cash flow from operating activities by $394 million, which includes premiums paid for hedging contracts. E&P capital and exploratory expenditures were $765 million in the first quarter of 2023, compared to $818 million in the fourth quarter of 2022. Turning to guidance. First for E&P. Our E&P cash costs were $12.96 per barrel of oil equivalent in the first quarter of 2023, which was lower than our guidance of $14-$14.50 per barrel of oil equivalent due to higher production and the deferral of work overspend to the second quarter.

[John Rielly, EVP and CFO at Hess]

We project E&P cash costs to be in the range of $15.50-$16 per barrel of oil equivalent for the second quarter, reflecting planned maintenance activities at the Liza Unity, North Malay Basin, and several facilities in the Gulf of Mexico, and higher work overspend in the Gulf of Mexico. Full year cash cost guidance in the range of $13.50-$14.50 per barrel of oil equivalent remains unchanged. DD&A expense was $13.16 per barrel of oil equivalent in the first quarter of 2023. DD&A expense is forecast to be in the range of $13-$13.50 per barrel of oil equivalent for the second quarter, and full year DD&A expense in the range of $13-$14 per barrel of oil equivalent remains unchanged.

[John Rielly, EVP and CFO at Hess]

This results in projected total E&P unit operating costs to be in the range of $28.50-$29.50 per barrel of oil equivalent for the second quarter, and $26.50-$28.50 per barrel of oil equivalent for the full year 2023. Exploration expenses, excluding dry hole costs, are expected to be in the range of $40 million-$45 million in the second quarter, and full year guidance of $160 million-$170 million remains unchanged. The Midstream tariff is projected to be in the range of $305 million-$315 million for the second quarter, and full year guidance of $1.23 billion-$1.25 billion remains unchanged.

[John Rielly, EVP and CFO at Hess]

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

[John Rielly, EVP and CFO at Hess]

We expect non-cash option premium amortization, which will be reflected in our realized selling prices, will be approximately $50 million for the second quarter and approximately $190 million for the full year 2023. Our E&P capital exploratory expenditures are expected to be approximately $975 million in the second quarter and full year guidance of approximately $3.7 billion remains unchanged. For Midstream, we anticipate net income attributable to Hess from the Midstream segment to be in the range of $55 million-$60 million for the second quarter and full year guidance of $255 million-$265 million remains unchanged.

[Greg Hill, President and COO at Hess]

For corporate expenses are estimated to be approximately $30 million for the second quarter. Full year guidance of $120 million-$130 million remains unchanged. Interest expense is estimated to be in the range of $80 million-$85 million for the second quarter. Full year guidance of $305 million-$315 million remains unchanged. This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

[Operator]

Thank you. Ladies and gentlemen, if you have a question, please press star followed by one one on your phone. Questions will be taken in the order they were received. Please press star one one to begin. One moment for our first question. Our first question comes from Ryan Todd with Piper Sandler. Your line is open.

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

Great. Thanks. Sorry, I was on mute there.

[Greg Hill, President and COO at Hess]

No worries.

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

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

[Greg Hill, President and COO at Hess]

Yeah. Thanks, Ryan. First of all, the wells have been performing extremely well, above expectations. Subsurface going great. Continue to see, you know, further upside, you know, in the subsurface as we kind of produce the wells. As I mentioned in my opening remarks, you know, ExxonMobil and SBM are just doing an outstanding job of, you know, topsides reliability and also, you know, the debottlenecking side. Recall that, you know, phase one was debottlenecked, you know, to the 140. It's actually producing between 140 and 150, sort of in that range. If you look at phase two, it has a nameplate of 220. It's on track to be debottlenecked towards 250, you know, by the end of the year.

[Greg Hill, President and COO at Hess]

Again, more upside, you know, coming on phase two. It's been operating, you know, kinda 230 or so on a regular basis, but we'll pick up that up towards 250 by the end of the year. Upside, upside.

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

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

[Greg Hill, President and COO at Hess]

Sure, yeah. You know, in some areas such as oil country tubular goods, we're, you know, expecting some moderation and inflation coming. Onshore rigs pretty much staying flat, but we're still seeing some pressure in certain areas, particularly labor. Now, specifically in the Bakken, you know, we anticipated year-over-year inflation of between 10%-15%. That's about where it's running. However, remember, we're mitigating about half of these impacts through the application of, you know, strategic contracting, lean manufacturing and technology. Our Bakken well guidance of $6.9 per well for the year remains unchanged. If we look at the offshore, we're expecting year-over-year industry inflation there between 15%-20%. Now, remember, in Guyana, the first four FPSOs are contracted, so they'll have limited exposure going forward.

[Greg Hill, President and COO at Hess]

In addition, ExxonMobil is just doing a fantastic job of mitigating kind of inflation effects through their outstanding execution and performance using that design one, build many strategy, which is sort of like lean manufacturing in the offshore. Finally, in our Gulf of Mexico operations, we contracted our services in 2022, so we missed some of the recent uptick. Because of that, our overall capital guidance of $3.7 billion remains unchanged this year.

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

Great. Thanks, Greg.

[Operator]

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

[Doug Leggate, Managing Director at Bank of America]

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

[Greg Hill, President and COO at Hess]

Morning.

[Doug Leggate, Managing Director at Bank of America]

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

[Greg Hill, President and COO at Hess]

Thanks, Doug. Let me take Kokwari first. Recall, that was a higher risk carbonate play that was located 37 miles from Liza-1. You know, it didn't encounter commercial hydrocarbons, but it did provide a lot of valuable data, you know, that further improves our understanding, you know, of the subsurface. You know, going forward, Doug, we still continue to see multi-billion barrels of upside. That hasn't changed. Finally, in reference to your question, the 11 billion barrels, the majority of that is in the Upper Campanian. Obviously, you know, with our exploration program this year, we're really starting to understand the deep and what potential that holds. Across the block, this multi-billion barrels of additional upside remains unchanged.

[Greg Hill, President and COO at Hess]

Yes, we'll have a few dry holes as we test different things along the way, but there's still a lot more to play with.

[Doug Leggate, Managing Director at Bank of America]

Are we talking, like, two-thirds of the wells are the 11 billion barrels or the discoveries rather? It's not 31 is my point. What's not included?

[Greg Hill, President and COO at Hess]

What's not included in the $11 billion? The recent discoveries that we've had are obviously not included in that. Again, Doug, it's mainly Upper Campanian, right? As we get results.

[Doug Leggate, Managing Director at Bank of America]

Right.

[Greg Hill, President and COO at Hess]

The lower, you know, the Lower Campanian, you know, obviously that will be incorporated. The multi-billion barrels of additional upside encompasses the upper and the lower. It's not just the lower, there's still a lot of Upper Campanian to play for as well.

[Doug Leggate, Managing Director at Bank of America]

All right. Thank you for that. I'll take the rest offline. My follow-up is just a housekeeping question, maybe for John Rielly. John, you walked through the working capital moves. I guess my question is, when I look at the accretion math on Guyana, you know, the NPV accretion with the potential buybacks, it seems kind of obvious that the value that you're in your share price today, a lot of it is obviously not being reflected. I'm curious on what the strategy is for the buyback program, meaning is it after working capital cash flow number that you're looking at, or is it, because that's obviously gonna move around quarter to quarter. Just how are you thinking about it?

[Doug Leggate, Managing Director at Bank of America]

We were anticipating you might have a little quicker buyback pace this quarter.

[John Rielly, EVP and CFO at Hess]

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

[John Rielly, EVP and CFO at Hess]

For us, you know, we have this capital return framework, and we're going to follow that we put out. What we do is return up to 75% of our free cash flow on an annual basis. That is after working capital, that is after capital expenditures, and even after debt maturities, which we don't have any this year, we do have $300 million in 2024. The first thing that we'll do in that return to capital framework is focus on the dividend. As John mentioned in his opening remarks, we wanna increase that dividend each year, and we did do that in March. We had that 17% increase, the $0.25 per share increase. That is gonna be the first thing.

[John Rielly, EVP and CFO at Hess]

We did increase our returns to shareholders here in the first quarter with that dividend increase. The remainder of that free cash flow, that 75%, will be done in share repurchases. You're right, we agree with you about the NAV accretion that we'll be having with these FPSOs. Just to remind everybody, when each FPSO comes on, like when, you know, obviously we have Payara here coming early this year, that generates net to us $1 billion of cash flow. Again, you then Payara, and then Yellowtail, Uaru. We're getting that $1 billion kind of a year adding to our portfolio. As we go forward, more and more of our capital returns will be share repurchases.

[John Rielly, EVP and CFO at Hess]

Buying our shares basically in advance of those as we get, you know, as Payara comes on, generates that $1 billion and gets in front of Yellowtail and Uaru, obviously we'll be, I think, be able to deliver significant value to shareholders just following this framework that we have.

[Doug Leggate, Managing Director at Bank of America]

Okay. That's very clear. Thanks, folks.

[Operator]

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

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Yeah. Good morning, team, and congrats on a super quarter. John, the first.

[Greg Hill, President and COO at Hess]

Thanks, Neil.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

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

[Greg Hill, President and COO at Hess]

No, look, we obviously focused, and thank you for the question. We focused our portfolio on

[John Hess, CEO at Hess]

High-return, low-cost of supply, opportunities. Obviously, we think we have built a highly differentiated value proposition, part of that is the low-cost model. You know, the fact that over the next five years, we can get our breakeven to $50 Brent. Also the cash costs going down 25% as well. I think that makes our portfolio very resilient in a low price environment. John Rielly talked about capital discipline, also the priority on keeping a strong balance sheet and cash position. Our cash position at the end of the quarter was over $2 billion, we will continue to hedge by buying puts to protect the downside and still give our shareholders the upside.

[John Hess, CEO at Hess]

I think relative to a lot of our competitors that are having cost pressures going up, our costs are going down, and we're gonna keep a strong balance sheet to stay resilient through the cycle.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Yeah, that's very clear. Follow up just on the Bakken. Can you talk about the trajectory that you anticipate over the course of the year? When do you think we get to plateau and at what level?

[Greg Hill, President and COO at Hess]

We, you know, we exited Q1 in line with our forecast. A little bit ahead of guidance, but it was in line with our forecast, and we expect to see it build through the end of the year as we continue to steadily bring wells online. Now we'll provide, you know, guidance for the Bakken as usual in our second quarter conference calls for the rest of the year. I think, Neil, just expect sort of a steady increase with a 4-rig program across 2023 and 2024. We'll get to 200,000 barrels a day in 2025, and then be able to hold that flat for almost a decade with the inventory that we have. Steady increase to 200, hold it flat for a decade.

[Greg Hill, President and COO at Hess]

Want to remind people that when, you know, when Bakken reaches that 200,000 plateau, it'll generate about $1 billion of free cash flow. Steady cash flow generator for the company.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Thanks, guys.

[Operator]

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

[Paul Cheng, Managing Director at Scotiabank]

Hey, guys. Good morning.

[John Hess, CEO at Hess]

Hi. Morning.

[Paul Cheng, Managing Director at Scotiabank]

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

[John Hess, CEO at Hess]

Sure, Paul. I mean, we remain committed to maximizing the long-term value of Hess Midstream. It's been a key strategic partner for us. You know, it adds differentiated value to our E&P assets up there in the Bakken. With us maintaining that operational and marketing control, so it provides takeaway optionality to high-value markets. Also, it's key to our gas capture and driving down flaring and our GHG emissions intensity. I would say, think about Hess Midstream more of the same. They've been executing brilliantly really for us on the ESG and also the just getting the E&P production to markets. When you think about Hess Midstream, it has a very strong credit position, and it continues to generate free cash flow growth.

[John Hess, CEO at Hess]

The Hess Midstream, they did outline that they have about $1 billion of financial flexibility through 2025 for capital allocation, which includes then the potential for incremental returns of capital, like the recent $100 million transaction that they just did. That $100 million is a small, you know, part of that $1 billion of financial flexibility. Hess Midstream has the potential to execute multiple buybacks, you know, basically each year through 2025. I think you can think about it just more the same that way, Paul. And we are happy with the investment.

[Paul Cheng, Managing Director at Scotiabank]

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

[Greg Hill, President and COO at Hess]

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

[Paul Cheng, Managing Director at Scotiabank]

I'm sorry.

[Greg Hill, President and COO at Hess]

Yeah, go ahead.

[Paul Cheng, Managing Director at Scotiabank]

That, for the 10 well per year, do you have a split, roughly that, between exploration and appraisal?

[Greg Hill, President and COO at Hess]

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

[Paul Cheng, Managing Director at Scotiabank]

Okay. Thank you.

[Greg Hill, President and COO at Hess]

Yep. Regarding Yellowtail, look, it's too early. I mean, Yellowtail's running ahead of schedule right now. Looking good, you know, these are major projects. I think just right now in 2025 is the right way to think about it. Obviously, as we get further down, we'll narrow the window, you know, on those dates.

[Paul Cheng, Managing Director at Scotiabank]

All right. Will do. Thank you.

[Operator]

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

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

Hi, good morning.

[Greg Hill, President and COO at Hess]

Morning.

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

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

[Greg Hill, President and COO at Hess]

Sure. Our philosophy on the hedging is we believe it is strategic importance, just like you said, from the downside protection. We view it as, you know, insurance. What we do with insurance, we buy the insurance, and we use puts. Our strategy is to use puts to protect the full downside but leave the upside for investors. Again, that's what we did this year. You see, we have 130,000 barrels a day this year. We're very comfortable with that level. We had 150,000 barrels a day last year. I think you can think about that, let's just say approximate 150,000 barrel a day level as we go forward.

[Greg Hill, President and COO at Hess]

For your question, like for 2024, you can assume we'll put on insurance or hedges at that type of level as we move into 2024. With the put options, the way we do that is we'll look more to do that in the latter part of this year, right? Because of the cost, the time value of the money on the put option. You typically would see us putting it on either towards the end of 2023 or early in 2024 like we did this year. Again, so we're trying to get obviously within our putting the insurance on, trying to be as opportunistic as possible, but we will eventually get that hedge on because we want that downside protection, really, just as John Hess mentioned earlier.

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

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

[John Hess, CEO at Hess]

No. You know, the Guyana government is very rigorous in overseeing the government and regulatory approvals. I think there's a very good working relationship with ExxonMobil as operator and the government itself. I think the approval process is appropriate for both sides. The fact of the matter is, you know, hopefully this week we'll be getting approval on Uaru. I think that speaks volumes about the approval process. No, it's going appropriately in timing and also in depth of analysis by the government. The government obviously has their own priorities and the ExxonMobil as operator addresses those. I'd say the approval process continues to be one that's diligent and thoughtful for both sides.

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

Perfect. Thanks a lot.

[Operator]

One moment for our next question. Our next question comes from Arun Jayaram with JPMorgan. Your line is open.

[Arun Jayaram, Research Analyst at JPMorgan]

Yeah, good morning.

[Greg Hill, President and COO at Hess]

Good morning, Arun.

[Arun Jayaram, Research Analyst at JPMorgan]

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

[Greg Hill, President and COO at Hess]

Sorry, I've turned. Yeah, thanks, Arun. You know, first oil from Payara, remember, now has been brought forward. We were saying end of the fourth quarter to early fourth quarter now. We've already pulled it forward, you know, a few months. You know, in terms of what has to be done, remember, Payara is more extensive than phase 2. It's got 30% more wells. It's got 80% more SURF than leads in phase 2. It's expected to take, you know, a bit longer to hook up and commission than phase 2 is. Things are well on track. I think we've adequately risked things as well as the operator, ExxonMobil, to confidently say at this point, you know, early first quarter or early fourth quarter of this year. Yep.

[Arun Jayaram, Research Analyst at JPMorgan]

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

[Greg Hill, President and COO at Hess]

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

[Arun Jayaram, Research Analyst at JPMorgan]

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

[Greg Hill, President and COO at Hess]

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

[Arun Jayaram, Research Analyst at JPMorgan]

Great. Thanks a lot.

[Greg Hill, President and COO at Hess]

Mm-hmm.

[Operator]

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

[Paul Cheng, Managing Director at Scotiabank]

Hey, thanks. This is for John Rielly. Just a quick follow-up. We need to Guyana. It looked like you guys have been booking some deferred tax on there. Can you give us a trajectory that how that is going to shake up over the next several quarter or over the next several years? I assume that at some point you will catch up, maybe by 2026, 2027, and whether that will be on the ballpark, correct? Thank you.

[John Rielly, EVP and CFO at Hess]

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

[Paul Cheng, Managing Director at Scotiabank]

John, how about for the next several years?

[John Rielly, EVP and CFO at Hess]

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

[Paul Cheng, Managing Director at Scotiabank]

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

[John Rielly, EVP and CFO at Hess]

Yes. Yes, you can assume that.

[Paul Cheng, Managing Director at Scotiabank]

Okay, we're good. Thank you.

Participants

Executives

• Greg Hill, President and COO
• Jay Wilson, VP of Investor Relations
• John Hess, CEO
• John Rielly, EVP and CFO

Analysts

• Arun Jayaram, Research Analyst at JPMorgan
• Doug Leggate, Managing Director at Bank of America
• Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs
• Noel Parks, Managing Director at Tuohy Brothers Investment Research
• Paul Cheng, Managing Director at Scotiabank
• Ryan Todd, Managing Director and Senior Research Analyst at Piper Sandler