Hess Management Discusses Q4 2012 Results - Earnings Call Transcript

Jan.30.13 | About: Hess Corporation (HES)

Hess (NYSE:HES)

Q4 2012 Earnings Call

January 30, 2013 10:00 am ET

Executives

Jay R. Wilson - Vice President of Investor Relations

John B. Hess - Chairman and Chief Executive Officer

Gregory P. Hill - Executive Vice President, Director and President of Worldwide Exploration & Production

John P. Rielly - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Evan Calio - Morgan Stanley, Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Brandon Mei - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

John P. Herrlin - Societe Generale Cross Asset Research

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Hess Corporation Earnings Conference Call. My name is Erin, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Mr. Jay Wilson, Vice President of Investor Relations. Please proceed.

Jay R. Wilson

Thank you, Erin. 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.

With me today are John Hess, Chairman of the Board and Chief Executive Officer; Greg Hill, President, Worldwide Exploration and Production; and John Rielly, Senior Vice President and Chief Financial Officer.

I will now turn the call over to John Hess.

John B. Hess

Thank you, Jay. Welcome to our fourth quarter conference call. I would like to review the progress we are making in executing our strategy, our key achievements for 2012 and our guidance for 2013. Greg Hill will then discuss our Exploration and Production business, and John Rielly will go over our financial results.

This past year has been one of significant change and progress for Hess. On our July call, we explained that Hess was in the midst of a 5-year transition to transform itself from an integrated oil and gas company to a predominately exploration and production company and shift its exploration and production growth strategy from one based primarily on high-impact exploration to one based on a combination of lower risk unconventionals, exploitation of existing discoveries and a smaller, more focused exploratory program.

On the first point, with the closure of our HOVENSA joint venture refinery in early 2012 and Monday's announcement that we will close our Port Reading, New Jersey refinery in February, Hess will have completely exited the Refining business. We also announced on Monday, after careful study, that we will seek to sell our terminal network along the U.S. East Coast in St. Lucia, as we believe we have the ability to access refined products from third parties to securely supply our Retail and Energy Marketing businesses. As a result of these actions, over 90% of Hess's capital employed will be in our Exploration and Production business.

We also have made significant progress in executing our Exploration and Production growth strategy. This three-pronged strategy, as you know, has been driven principally by our success in the Bakken Shale oil play in North Dakota, where we enjoy a leadership position. On our July call, we advised that at current oil prices, the significant upfront capital spend typical of unconventional shale oil development would likely result in a funding deficit of about $3 billion in 2012, moderate in 2013 due to lower spending and approach a balance in 2014. We also said that most, if not all, of these cumulative deficits would be funded by asset sales as the company rebalances its Exploration and Production portfolio in favor of lower risk, higher return and geographically more secure assets. Lastly, we stated that the new reserves and production base established as a consequence of these actions would be lower than it was before the divestitures, but our profitability on a per-unit basis would be higher.

Here is where we stand today. First, as to our funding needs. The actual shortfall in 2012 was approximately $2.5 billion. For 2013, we recently announced an 18% decrease in capital spending to $6.8 billion. This reduced level of spend is driven by lower well costs associated with our transition to pad drilling and decreased investments in infrastructure projects.

Our 2013 budget also includes a 30% drop in exploratory spend to $550 million, consistent with our strategy of pursuing a smaller, more focused exploratory program. For 2014, we continue to believe that at current prices, capital expenditures should more closely approach operating cash flow.

As to the reshaping of our portfolio, to date, we have announced divestitures totaling $2.4 billion, including our interest in the Bittern, Beryl and Schiehallion fields in the United Kingdom, the Snohvit Field in Norway and the ACG fields in Azerbaijan. In addition, we have also announced we are in the process of selling our Russian subsidiary, Samara-Nafta; and our Eagle Ford assets in Texas. Also, as previously mentioned, we plan to divest our terminal network, which in addition to its sales proceeds, should also allow us to release approximately $1 billion of working capital for redeployment to fund Hess's future growth opportunities.

Assuming the successful completion of these divestitures, we expect to more than cover our funding requirements, generating excess proceeds available to reduce our short-term debt. While these divestitures will complete the strategic reshaping of our portfolio, we will, in the normal course of business, continue to optimize and upgrade its composition in the future.

Looking back, last year was an important inflection point in the development and execution of Hess's long-term corporate strategy. However, looking forward, this year will also be important as we expect to complete our announced divestitures by year-end 2013 and in so doing, solidify this year's production and earnings base from which Hess will grow in the future.

We expect production in 2013 to average between 375,000 and 390,000 barrels of oil equivalent per day. This forecast assumes that the sale of Samara-Nafta, which produces approximately 50,000 barrels of oil equivalent per day, closes at the end of the year. However, excluding the contribution from assets planned for divestiture this year, our new base production level is expected to be in the range of 325,000 to 340,000 barrels of oil equivalent per day.

In terms of 2014 production, we anticipate that the expected decrease in production resulting from our 2013 asset sales will be largely offset by increased production from the Bakken and the Valhall Field, as well as the start up of the Tubular Bells Field in the deepwater Gulf of Mexico and North Malay Basin development.

With regard to our 2012 results, consolidated net income was $2.2 billion. Exploration and Production earned $2.4 billion, and Marketing and Refining earned $231 million. Compared to 2011, our results were positively impacted by higher crude oil sales volumes and improved Marketing and Refining results, which more than offset the negative impact of lower realized crude oil selling prices.

With regard to Exploration and Production, in 2012, we replaced 141% of production at an FD&A cost of approximately $38 per barrel. At year end, our proved reserves stood at 1.553 billion barrels of oil equivalent, and our reserve life was 10.3 years. Including last year's results, our 5-year average reserve replacement ratio was 148%, and our average FD&A cost is about $27 per barrel of oil equivalent.

In 2012, our crude oil and natural gas production was 406,000 barrels of oil equivalent per day, a 10% increase from 2011. The increase resulted from the restoration of production in Libya and strong operating performance in the Bakken and across our portfolio.

In the Bakken Shale oil play in North Dakota, net production averaged 56,000 barrels of oil equivalent per day in 2012, up 87% year-over-year. In 2013, we forecast net production from the Bakken to average between 64,000 and 70,000 barrels of oil equivalent per day. We have built a strong position in the Bakken, which is arguably one of the best shale oil plays in the world. In 2012, we drove our drilling and completion costs down by more than 30% during the course of the year while significantly increasing production.

In the fourth quarter, we transitioned the majority of our rigs to pad drilling, which will allow us to drive further improvement in capital efficiency and financial returns. Regarding developments, in the third quarter of 2012, we entered into an agreement with PETRONAS to develop 9 discovered natural gas fields offshore Peninsular Malaysia. The North Malay Basin project, in which Hess has a 50% interest and is the operator, is expected to commence production in the fourth quarter of 2013 at a net rate of approximately 40 million cubic feet per day and to increase to 125 million cubic feet per day in 2016.

Also, we continue to advance our Tubular Bells project in the deepwater Gulf of Mexico, in which Hess has a 57% interest and is the operator. Production is planned to commence in mid-2014 at a net rate of 25,000 barrels of oil equivalent per day. In terms of our 2012 exploration results, we enjoyed considerable success offshore Ghana, where we have 6 discoveries to date on the Deepwater Tano Cape Three Points Block, in which Hess has a 90% interest.

Our financial position remains strong. Our debt-to-capitalization ratio at year-end 2012 was 27%. This ratio is expected to improve in 2013 as our asset sales are completed. A strong balance sheet and investment-grade rating remain a priority to enable us to have the financial flexibility to fund future growth opportunities.

We are confident that our strategy of selling noncore assets and investing in lower-risk and higher-return projects in Exploration and Production is the right one and will produce profitable growth and create long-term value for our shareholders.

I will now turn the call over to Greg Hill.

Gregory P. Hill

Thank you, John. I'd like to give an update on our progress in the Bakken and the Utica unconventional shale plays, as well as Valhall and Exploration.

We made good progress in the Bakken during 2012. In the first half of the year, we transitioned from a higher cost 38-stage hybrid completion design to a lower cost sliding sleeve design. This, along with other efficiency gains, allowed us to drive our drilling and completion costs down by more than 30% over the course of the year from $13.4 million per well in the first quarter to $9.0 million in the fourth quarter.

Also in the fourth quarter of 2012, we transitioned the majority of our rigs from held-by-production drilling to pad drilling. This transition will enable us to drive further improvement in capital efficiency and financial returns. However, as we mentioned in our third quarter conference call, this process change will result in a onetime flattening to slightly declining production during the first half of 2013 as the number of new wells online will be skewed to the back half of the year.

In the first half of 2013, we plan to bring 70 wells to production, whereas, in the second half of 2013, we expect to bring 105 wells to production. Fourth quarter production from the Bakken averaged 64,000 barrels of oil equivalent per day, up 68% from the fourth quarter of 2011. As John mentioned, full year 2012 averaged 56,000 barrels per day, up 87% from 2011. We expect 2013 net production to average between 64,000 and 70,000 barrels of oil equivalent per day and for most of the growth to occur in the second half of the year.

Our 2013 capital budget for the Bakken is $2.2 billion versus $3.1 billion in 2012, a reduction of nearly 30%. The primary drivers for this decrease are lower drilling and completion costs and a lower level of infrastructure spend. We expect to operate a 14-rig program in 2013.

In 2012, we drilled 176 Hess-operated wells and completed 206. The average 30-day initial production rate for the wells we completed was 750 to 900 barrels of oil per day. Our estimated ultimate recovery per well averaged between 550,000 and 650,000 barrels of oil equivalent per well.

In 2013, we plan to drill 185 Hess-operated wells and complete 175, of which, approximately 2/3 will target the Middle Bakken, and the remainder will target the Three Forks. With regard to our Bakken infrastructure, in April of 2012, we commissioned our Tioga crude oil rail loading facility, and in the second half of the year, we shipped an average of 41,000 barrels per day via rail to higher-value markets.

Our Tioga Gas Plant expansion project is targeted to be commissioned late in the fourth quarter of 2013, enabling us to capture more value from our own gas and third-party volumes, which will generate attractive returns and cash flow for shareholders.

In the Utica, we continue to appraise our position. We are encouraged by the results based on data from our own wells and industry wells. In 2012, we drilled 2 wells and completed one of those wells on our 100% owned acreage. This well, the NAC 3H-3, tested at a rate of 11 million cubic feet per day and is currently maintaining a rate of 4 million cubic feet per day under surface facility constraints.

On our CONSOL joint venture acreage, we drilled 2 Hess-operated wells and completed one of them. This well, the Athens 1H-24, tested at a rate of 13.9 million cubic feet per day and 1,056 barrels of condensate per day. In 2012, our joint venture partner, CONSOL, also drilled 8 wells, of which 4 were completed and 3 were tested. In 2013, we plan to drill 5 wells on our 100% owned acreage, and the joint venture is planning to drill 27 wells mainly concentrated in Harrison, Guernsey and Noble Counties.

Moving to the Valhall Field in Norway, in which Hess has a 64% interest, the field redevelopment project was completed earlier this month, and the operator resumed production on January 26 after being shut in since August of 2012. We expect Valhall net production to average between 24,000 and 28,000 barrels of oil equivalent per day in 2013, which is approximately double 2012 production of 13,000 barrels of oil equivalent per day. The majority of the activities going forward at Valhall will focus on development drilling to fully utilize platform capacity.

Regarding Exploration, as John said, we enjoyed considerable success in Ghana where we have 6 discoveries to date. As announced in December, our fifth discovery, the Pecan-1 well, encountered 245 feet of net oil pay in a Turonian-aged reservoir. In January of 2013, we completed drilling our sixth discovery, the Cob prospect, results of which are being kept confidential due to it being a lease line well.

Also in January, we spudded the Pecan north #1 well, which is located approximately 7 miles north of Pecan-1 and is expected to reach TD in February, targeting Turonian-aged oil reservoirs. We have begun predevelopment activities and plan to submit an appraisal plan to the government in the third quarter.

Drilling activities were also completed on 2 outside operated exploration wells, Ness Deep #1 [ph] in the deepwater Gulf of Mexico, operated by BHP; and Ajek-1 in Indonesia, operated by Niko Resources. Both wells encountered noncommercial quantities of hydrocarbons and were expensed in the fourth quarter.

In Kurdistan, we are continuing our seismic acquisition on the Dinarta and Shakrok blocks and plan to spud 2 wells in the second half of 2013. Hess has an 80% interest in these blocks and is the operator.

In closing, our focus in 2013 will be on executing our strategic plan, improving capital efficiency and delivering higher financial returns.

I will now hand the call over to John Rielly.

John P. Rielly

Thank you, Greg. Hello, everyone. In my remarks today, I will compare fourth quarter 2012 results to the third quarter. The corporation generated consolidated net income of $566 million in the fourth quarter of 2012 compared with $557 million in the third quarter. Excluding items affecting comparability of earnings between periods, the corporation had earnings of $409 million in the fourth quarter of 2012 and $495 million in the previous quarter.

Turning to Exploration and Production. Exploration and Production reported earnings of $517 million in the fourth quarter of 2012 compared with $608 million in the third quarter. Excluding items affecting comparability, Exploration and Production had income of $431 million in the fourth quarter of 2012 and $546 million in the third quarter.

Fourth quarter results included an after-tax gain of $172 million related to the sale of the corporation's interest in the Bittern Field and an income tax charge of $86 million for a disputed application of an international tax treaty. Third quarter results included net after-tax income of $62 million from items affecting comparability of earnings between periods.

Excluding these items, the changes in the after-tax components of the results were as follows: higher natural gas selling prices increased earnings by $43 million; lower sales volumes decreased earnings by $32 million; higher exploration expenses, primarily for dry hole expenses, decreased earnings by $110 million; all other items net to a decrease in earnings of $16 million for an overall decrease in fourth quarter adjusted earnings of $115 million.

Our E&P operations were underlifted in the quarter compared with production, resulting in decreased after-tax income of approximately $30 million. The E&P effective income tax rate, excluding items affecting comparability, was 45% for the full year of 2012.

Turning to Marketing and Refining. Marketing and Refining generated income of $159 million in the fourth quarter of 2012 compared with $53 million in the third quarter. Marketing earnings were $152 million in the fourth quarter of 2012 and $17 million in the third quarter. Fourth quarter marketing results included after-tax income of $104 million from the partial liquidation of LIFO inventories, partly offset by after-tax charges totaling $33 million for asset impairments and other charges.

Fourth quarter marketing results also reflect the impact of higher margins. Port Reading refining operations reported income of $8 million in the fourth quarter of 2012 and $18 million in the third quarter, principally due to lower margins. Operating activities generated a loss of $1 million in the fourth quarter of 2012 compared with earnings of $18 million in the third quarter.

Turning to Corporate. Net Corporate expenses were $43 million in the fourth quarter of 2012 compared with $38 million in the third quarter. After-tax interest expense was $67 million in the fourth quarter of 2012, which was comparable with the third quarter.

Turning to cash flow. Net cash provided by operating activities in the fourth quarter, including an increase of $443 million from changes in working capital, was $1,570,000,000. Capital expenditures were $1,779,000,000. Proceeds from the sale of Bittern were $187 million. Net borrowings were $246 million. All other items amounted to a decrease in cash of $110 million, resulting in a net increase in cash and cash equivalents in the fourth quarter of $114 million.

We had $642 million of cash and cash equivalents at December 31, 2012 and $351 million at December 31, 2011. Total debt was $8,111,000,000 at December 31, 2012 and $6,057,000,000 at December 31, 2011. The Corporation's debt-to-capitalization ratio at December 31, 2012, was 27.5% compared with 24.6% at the end of 2011. This ratio is expected to improve in 2013 as our asset sales are completed.

With our 2013 capital program and the uncertain financial markets, we thought it prudent to have some price insurance. Therefore, in January, we hedged 55,000 barrels per day for the remainder of 2013 at an average Brent price of $108.50 per barrel.

Turning to 2013 guidance. In addition to the 2013 production and capital expenditure guidance provided by John Hess, I would like to provide estimates for certain 2013 metrics based on our expected production range of 375,000 to 390,000 barrels of oil equivalent per day. For full year 2013 unit cost, E&P cash operating costs are expected to be in the range of $21 to $22 per barrel of oil equivalent produced. Depreciation, depletion and amortization expenses are expected to be in the range of $19 to $20 per barrel for total production unit cost of $40 to $42.

For the full year of 2013, we expect our E&P effective tax rate to be in the range of 46% to 50%. Net Corporate expenses in 2013 are estimated to be in the range of $160 million to $170 million. We expect our 2013 after-tax interest expense to be in the range of $255 million to $265 million.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Doug Leggate from Bank of America Merrill Lynch.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

John, first of all, I think you guys should be congratulated in the progress you've delivered in the last year or so. However, obviously, there's a lot of news of -- clearly, an activist involved now. Could you share your thoughts not specifically about their suggestions in terms of business strategy, but more about their proposals for the board constitution? Any thoughts you could share there, please? And then, I have a follow-up on Production.

John B. Hess

Yes, no, I think it's important to just make a point here. We look at everything to enhance long-term shareholder value. We have no sacred cows in the business. We have no sacred cows in the boardroom. It should be obvious that we have made a lot of moves with a multiyear strategy to put our company in a position to generate long-term shareholder value, that we look at things for all shareholders' benefit. And as a consequence, we're happy to discuss with shareholders their ideas. And specifically, in terms of Elliott's proposals, we're looking carefully at them and the presentation. We will have a response to that presentation in a short period of time. But this earnings call is not the appropriate forum to respond to Elliott.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Great. My follow-up, John, is I just wanted to try and understand what you're trying to tell us about production, and maybe I'm being a little dumb here, but could you walk us through what, essentially, the sequential growth that you expect between '13 and '14, excluding the asset sales? Because if I heard you right, you're basically -- and maybe, I'll let you answer the question, but it sounds like you're suggesting the flat production before adjusting for disposals. In other words, up around 40,000 barrels a day year-over-year. Could you just give us some help us to how we get through that math?

Gregory P. Hill

Yes, Doug, I think -- thanks for the question. I think the way that John said in his opening remarks really kind of characterized what we were trying to say. So if you back the sales out, so you rebase the company. What John said is, in terms of 2014 production, we expect that the increase -- or the decrease in production resulting from those sales is going to be largely offset by the increased production from the Bakken and the Valhall Field, the start up of Tubular Bells and the North Malay Basin developments.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

So what is that number, Greg?

Gregory P. Hill

We're not giving guidance yet, Doug, on 2014 but obviously, you can get close by what I just said.

Operator

And your next question comes from the line of Evan Calio.

Evan Calio - Morgan Stanley, Research Division

With the announced terminal sales, potential sale earlier in the week, should we draw any conclusions on your intent to form an MLP? I know it's been a topic on the last 2 earnings calls. I know there is infrastructure assets that you will need to control, primarily, in the Bakken, maybe gas plant ramping up in 4Q that you discussed and owning a GP -- an MLP would achieve that control. Yet with this sale to a potential third party, you lose some MLP-able EBITDA. So I mean, we should read anything into this sale and your potential intent to utilize that structure?

John B. Hess

No. Obviously, we're going to look at all strategic options to maximize value in terms of the divestiture of our terminal network in the United States. Most likely, it will be as outright sale. I think it's important that we will take the appropriate steps to ensure supply, security, competitive prices and to maintain the high quality service for our customers in Retail and Energy Marketing businesses, which are very profitable and a good source of U.S. income. But at the end of the day, we're just starting the sale process for those terminals. And obviously, when we have a transaction completed, we'll give you an update on that. So all options are on the table, but most likely, we're looking at an outright cash sale. So I think it's important to understand that for our terminal network divestiture. In terms of an MLP in the Bakken for our infrastructure, this is not new. This idea, it's been in the industry for some time. We've done study on it, constantly. We're very aware of the benefits that it might create. And so as a consequence, if it makes sense to create long-term shareholder value, it will be given serious consideration. But we certainly do not believe that an MLP in the Bakken is appropriate at this time.

Evan Calio - Morgan Stanley, Research Division

Okay. And I appreciate that. A follow-up, I know that you've been reshaping the portfolio over the year and into 2013, kind of comprehensive update this morning. But did I understand your comments that the major portion of this will be completed following the sale of Russia, Eagle Ford and the terminals; and that other potential sales will be more in the ordinary course of portfolio management. So I guess the question is, do we largely know all the larger moving pieces at this juncture? Is that a fair statement?

John B. Hess

I absolutely -- that is a correct understanding of my remarks, that the major moves to reshape our portfolio in terms of divestiture to complete the strategic reshaping of our portfolio will have been completed by the end of 2013, but I think it has to be very clear. We have, we'll continue to do so and currently look at all opportunities to enhance long-term shareholder value for our shareholders. There are no sacred cows. It should be obvious by our behavior over the last several years, as it is most recently, and we will in the normal course of business continue to look at opportunities to optimize and upgrade our portfolio in the future.

Operator

And your next question comes from the line of Paul Sankey from Deutsche Bank.

Paul Sankey - Deutsche Bank AG, Research Division

John, one interesting question that's been raised is whether it's a good idea to mix the global business with the domestic business. Can you just remind us what the global footprint mix the Bakken growth gives you and what kind of competitive advantage you have in that particular area? And could you continue into the subject of exploration, how that's gone and very specifically, finally, on a positive note, talk a little bit more about Ghana?

John B. Hess

We've been clear. We're very proud of the global portfolio we have. We definitely believe that our three-pronged strategy -- we had been too focused on high-impact exploration, which we've addressed by cutting it way back, giving it more focus. Greg talked about it. Obviously, some good news in Ghana. We can talk about that a little bit more. Greg will address that. But our strategy now of balancing and combining low-risk unconventionals, exploitation of existing discoveries, such as the North Malay Basin gas development that we're in. And the smaller, more focused exploratory program is the right strategy. It's being recognized, obviously, in the market, and our key objective now is to stay focused on executing it to deliver long-term value for our shareholders. So the global reach and balance, some of those assets in our conventional portfolio generate the cash needed to fund the unconventional growth that we have in the Bakken and the Utica. And just having the Bakken and Utica stand alone, they would not be self-funding. They could not get access to the credit markets, and that's a real issue. So this balanced approach we definitely think is the right one that will create the most returns, financial returns for our shareholders over the long term. So we feel very good about our global portfolio. We feel very good about the balance of unconventionals and conventionals from a financial return perspective and a funding perspective. And I think the strategy is being recognized. I think another point to bring out here, Paul, is that in these divestitures, we've gotten rid of about 1/3 of our assets. So often, when -- hidden in your question could be you're global, you're too spread out. Well, actually, Hess has brought down the focus considerably of the portfolio of assets that we have. So we're very, very comfortable that we can manage it, that we can execute it, and we can deliver long-term shareholder value from it. So hopefully, that gives you some perspective on both the global portfolio and the benefits of it in terms of diversifying risk and maximizing return and also, having the funding that we need for the unconventionals. But also, that we have much more focus to our portfolio that, hopefully, will be recognized by investors. And we believe that, that strategy is the right one, and it's being recognized. And I might turn the call just over -- about exploration, one, what we're doing in exploration but two, more specifically the focus that we have there and talk about Ghana a little bit.

Gregory P. Hill

Yes, thanks, John. Again, just to reiterate what John said, we've been refocusing exploration, and we've significantly reduced investment. We're at $550 million of investments this year, focused on our 3 primary areas: the Gulf of Mexico; Southeast Asia, Malaysia in particular and then also, the West Africa play, which Ghana is clearly a part of. As I said in my kind of opening remarks about Ghana, we've got 6 discoveries under our belt on Ghana. December, our fifth discovery came out, which was the Pecan-1 well, which had 245 feet of pay and Turonian pay. And then, in January, we announced the Cob well, which was another discovery. So that brought our discovery count again to 6. Now we can't talk much about Cob just because it's a lease line well. So we have to stay confidential for now. In fact, our competitors are in the midst of drilling the adjacent well on the lease line. And so the last well that we're currently going to drill in 2013, we're on right now, and we expect to reach a TD in February, and that's north of the Pecan-1 well, which was a big discovery, the big Turonian oil discovery, and that again, is targeting Turonian-aged oil reservoirs. So we're in predevelopment studies now. So we're looking at all of these discoveries and how are we going to develop all these. We plan to file an appraisal plan with the government mid-year. So we're progressing Ghana. We don't expect to drill any more wells in 2013, most likely, if any more drilling, appraisal -- drilling will be in 2014.

Paul Sankey - Deutsche Bank AG, Research Division

Are you still pursuing that partner there?

Gregory P. Hill

Yes, we will. Yes, we will. That's, again, part of our stated strategy in Exploration, to continue to partner these things. Obviously, now we have significant discoveries, so our partnering strategy, we'll pick the right kind of partner to help us with that.

Paul Sankey - Deutsche Bank AG, Research Division

Great, just a brief other question on Russia. Is there anything you can add about that disposal given its size and importance to how we look at volumes for the year?

Gregory P. Hill

Well, I think as John said in his opening remarks, Russia currently makes about 50,000 barrels a day, and that's about what it's projected to make in 2013.

John B. Hess

Yes, and specifically, in terms of the sale, when we can give you an update on the progress or the consummation of it, we will.

Operator

And your next question comes from the line of Ed Westlake from Crédit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

We're clearly seeing some of the signs of progress in terms of reshaping, which we like. Just as people focus on the Bakken, I mean, obviously, you've worked there for a while. At this point, would you have an estimate of, say, acreage that you think is in the core or perhaps, even -- and this might be a long shot, the economic well inventory that you have across the Bakken and Three Forks at $100 per barrel Brent?

Gregory P. Hill

All right. I think on the acreage, as we've said before, we've got between 550,000 and 600,000 net acres that we call core in the Bakken. Our acreage count is actually higher, but we think that 550,000 to 600,000 is really the core part of the play. As far as wells, a lot of it depends upon infill spacing. All those questions that are still being answered as we speak. But eventually, it'll be in the order of 2,000 to 3,000 wells buildout in the Bakken. So obviously, very significant drilling and completion programs.

Edward Westlake - Crédit Suisse AG, Research Division

Great. And then, just on -- you said complete reshaping, which makes sense. But say, the wells are collapsing oil prices and you still wanted to fund, and maybe, the debt markets' closed up and you were looking to sell further international assets beyond what you've already identified, have you looked at -- would tax leakage be a constraint on further asset sales?

John P. Rielly

No, they would not, Ed.

Edward Westlake - Crédit Suisse AG, Research Division

Okay, and just a final one. Any actual resource estimate for Ghana from what you've drilled so far that you could release?

Gregory P. Hill

No, not yet. We really want to get this next well down and importantly, get our predevelopment study done because there's a number of accumulations on the block, how they tie back, which ones you can tie back, et cetera. So we don't have a commercial estimate yet.

Operator

And your next question comes from the line of Pavel Molchanov from Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Just conceptually, you've stated in the past your preference to retain the field distribution assets for now. Since there is very little precedent in the industry for essentially, in E&P pure play with a fuel marketing division, can you just talk about the logic for retaining that as opposed to spin-off for sale?

John B. Hess

Yes, just to be clear, it's not a fuel marketing business. If it were just a fuel marketing business, we probably wouldn't have kept it. But we have morphed our fuel marketing business into an Energy Marketing business, where the same customer that might -- and these are commercial industrial accounts, about 22,000 of them from Massachusetts down to South Carolina across to Ohio, where we sell -- we're currently selling over 1.5 billion cubic feet a day of gas, which obviously, will help us if we find gas in Utica and certainly put us in a good position so we wouldn't have to discount that gas. So there are going to be some strategic benefits there, and we also sell 4,500 megawatt hours around the clock to those customers as well. It's a very profitable business. It makes, I'd say, very acceptable strong returns. So the fact that it's U.S. income, it gives us some marketing capability. We have a strong brand. We think, that if anything, it enhances the company from a financial and reputational point of view.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. Can I also just get a quick update on your plans for Kurdistan this year?

Gregory P. Hill

Yes, I mean, we're shooting seismic, and we plan to drill 2 wells in 2013, one on the Shakrok block and one on the Dinarta block.

Operator

And your next question comes from the line of Brandon Mei from Tudor, Pickering.

Brandon Mei - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

On the Bakken, can you provide a split in production for 4Q actual and '13 guidance for the operated and non-operated portion?

Gregory P. Hill

Yes, I can. So I can give you 2012 actuals. If you look at operated production, fourth quarter was about 55,000 barrels a day of operated. Outside operated, it was about 9.5. That brings you to the 64.5 for the quarter.

Brandon Mei - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay, and what about 2013 guidance?

Gregory P. Hill

You can assume a similar split.

Brandon Mei - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay, and then on a similar basis, give a split on CapEx.

Gregory P. Hill

Yes. Next year, we'll spend about $150 million in outside operated wells in capital, and the balance being on our own account.

Brandon Mei - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay, and then, my final question is on -- do you have a debt-to-cap target? And then, I guess, if you are in a position where you meet that target, can you just walk through the pecking order of investment opportunities that could attract capital?

John B. Hess

Yes, I think the most important thing there is, we want to have a strong investment grade rating, and we want to pay off the debt that we've incurred as we've made this transition into unconventionals and get our strong balance sheet back. And as John Rielly reflected, by the end of 2013, we should be there. And then, it's going to be a function, looking forward, at attractive investment opportunities, current returns to shareholders and getting the balance right. As it turns out, our company is a growth company and has very attractive investments. They have to compete for capital. They have to meet our 15% hurdle rate, meaning, meet or exceed our 15% hurdle rate of $100 Brent. And I wouldn't want to speculate on where we're going to be investing the money a year from now until some of the investment growth opportunities we have, have more time to mature such as the Utica, potentially Ghana, potentially [indiscernible] in the deepwater Gulf.

Gregory P. Hill

Yes, let me just come back to your question on the Bakken, just to be clear, in 2013. So if you look at the capital spend next year in the Bakken, the external guidance was 2.2, about $500 million of that is facilities. So that's a significant reduction from last year. About $1.4 billion or so or $1.5 billion is owned wells, and the rest is outside operated, and we have a small amount of land and seismic and studying money in there as well. I just wanted to make that clear.

Operator

[Operator Instructions] Your next question comes from the line of John Herrlin from Societe Generale.

John P. Herrlin - Societe Generale Cross Asset Research

Two quick ones for me on the Bakken. With the Three Forks, Greg, are you going to be pursuing that earlier or later in the year versus the Middle Bakken number?

Gregory P. Hill

We're actually going to where the best wells are. So we have some outstanding wells in the Three Forks, and they're just going to be part of our normal mix of wells. We're doing very -- a very small amount of appraisal work in the Three Forks so that most of the Three Forks drilling next year is in proven high-profitability, high-return areas.

John P. Herrlin - Societe Generale Cross Asset Research

Okay. I know you said that you've finished the HBP nature of your drilling program. Have you given any thought to piloting a higher-density programs or greater-density programs?

Gregory P. Hill

Well as you know, as we've said before, we do have an ongoing close-space pilot in the Middle Bakken. We plan to continue that pilot into this year, and so again, the spacing varies by the drilling unit depending on the quality of the rock and all those factors. So there won't be a generic spacing that you can say for the Bakken. It's really going to depend upon the quality of the rock at the end of the day.

John P. Herrlin - Societe Generale Cross Asset Research

Yes, I was just shooting for whether or not you'd go for greater density. Okay, the last question for me is with respect to both Port Reading and the terminal length. Are there any environmental tails or liabilities that we should be concerned of or aware about?

John P. Rielly

No, there are not.

Operator

And your next question comes from the line of Arjun Murti from Goldman Sachs.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Just a question on the exploration expense, which you're taking down to about $550 million this year, and you've talked about rightsizing that. Is this still a transition year where we can expect further reductions in the years ahead, or do you view that as kind of an appropriately sized program for a company of your size?

Gregory P. Hill

I think, in general, for now, that's an appropriate size program. Guidance in 2014, obviously, we can't give. I will say, part of that will depend upon Ghana.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

And, Greg, do you have any update on your long-term targets there? I think it was 120,000 barrels a day out 5 years, but wondering if you had updated thoughts on that.

Gregory P. Hill

Yes, I think 120,000 barrels a day remains our goal. It'll largely be a function of our investment levels, which in turn are, obviously, are function of oil prices and competing investment opportunities in the portfolio.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Do you want to keep a year to that target, or is that just a generic goal based on the factors you just mentioned?

Gregory P. Hill

No, I think we've said before, mid-decade is kind of our goal.

Operator

And your next question comes from the line of Doug Leggate from Bank of America Merrill Lynch.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Just 2 quick ones, if I may. I guess, they're both for John Rielly. John, deferred taxes. How should we think about -- you've given us a tax rate, but can you talk about Norway? Can you talk about the tax position in the U.S.? And in answering the question, can you tell us what the current status is of Retail in terms of whether you spun it or not, how would that change your IDC allowances? And I've got a quick follow-up, please.

John P. Rielly

Sure, Doug. So for Norway, we don't expect to be paying cash taxes in Norway until 2015. So over the next several years, our cash taxes will be fairly low, and I'm going beyond '15 with that. As you look in the U.S., and I think your particular question is about the IDC cost and how they're deducted and whether as an integrated, you have a 70% limit; and if you're not integrated, you have 100% ability to take all the IDCs. Yes, with our closure of HOVENSA, actually, the way the rules work, we actually exited the refining business under the rules during 2012. And then, so long as we have a structure to where the Marketing business that we have on the downstream side is segregated from the E&P operations, you are allowed -- then we are not classified as an integrated. And therefore, we can get 100% on the IDC deduction. So starting right at the beginning of 2013, we have the 100% IDC deduction, and so there's nothing else that we need to do to attain that.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Just to be clear, do you still get to have the tax shield on the U.S. earnings from Retail coming from the E&P?

John P. Rielly

Absolutely, yes. So, I mean, we have excess deductions being generated out of the Bakken that we can use in Retail and our other U.S. assets.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Great. And my follow-up, I don't know who wants to take this one, but can you quantify the level of interest in the Eagle Ford and Russia in terms of drilling [ph] activity and so on, and I'll leave it there.

John B. Hess

Yes, there's strong interest on both, Doug. So that's, I think, as far as we can go. And once the sale process consummates, we'll inform you to the outcome.

Operator

And there are no further questions at this time. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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