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Hess Corporation (NYSE:HES)

Investor Conference

March 04, 2013 9:00 am ET

Executives

Jay R. Wilson - Vice President of Investor Relations

John B. Hess - Chairman and Chief Executive Officer

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

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

Analysts

Paul Sankey - Deutsche Bank AG, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Evan Calio - Morgan Stanley, Research Division

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

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

Douglas Terreson - ISI Group Inc., Research Division

John P. Herrlin - Societe Generale Cross Asset Research

Blake Fernandez - Howard Weil Incorporated, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Hess March 4 Investor Call. My name is Grant, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Jay Wilson, Vice President, Investor Relations. Please proceed, sir.

Jay R. Wilson

Thank you, Grant. Good morning, everyone, and thank you for joining us. We have a lot to cover today and I suggest that you, if you haven't done so already, turn to the slide presentation we posted at www.transforminghess.com. We'll ask you to follow along with our slides. John Hess will walk you through the first 18 slides. We encourage you to review the remaining slides as well.

I trust you've already seen the press release and a shareholder letter that we also released this morning. Both are also available on the website. Before I turn it over to John Hess, some housekeeping. This presentation contains projections and other forward-looking statements within the meaning of the Securities Exchange Act of 1934. These projections and statements reflect the company's current views with respect to future events and financial performance. No assurances can be given, however, that these events will occur or that these projections will be achieved, and actual results could differ materially from those projected as a result of certain risk factors. A discussion of these risk factors is included in the company's periodic reports filed with the Securities and Exchange Commission. Finally, I will note that Hess, its directors and certain of its executive officers may be deemed to be participants in the solicitation of proxies from shareholders in connection with the matters to be considered at our 2013 annual meeting. Hess intends to file a proxy statement and White proxy card with the U.S. Securities and Exchange Commission in connection with any such solicitation of proxies from Hess' shareholders. Investors and shareholders are strongly encouraged to read Hess' proxy statement and any other document filed with the SEC carefully and in their entirety when they become available, as they will contain important information. With that, let me turn it over to John Hess, our Chairman and CEO, to get started.

John B. Hess

Thank you, Jay. Let me add my thanks to all of you for joining us this morning. We will begin today on Slide #4. As many of you know, our board and management team have been in the process of transforming Hess into a more focused and higher growth exploration and production company. Today, we are announcing the culmination of that process by exiting our Downstream businesses and becoming a pure play E&P company.

Specifically, we will be divesting our retail, energy marketing and energy trading businesses; divesting our E&P assets in Indonesia and Thailand; and pursuing the monetization of our Bakken midstream assets. Proceeds from all initiatives announced to date will be used, first, to strengthen our balance sheet in order to fund future growth and next, to increase current returns to all shareholders through a 150% increase of our annual dividend to $1 per share commencing in the third quarter of 2013, as well as to repurchase up to $4 billion of Hess shares.

We also expect to return additional capital to shareholders in connection with the monetization of our midstream Bakken assets expected in 2015. We are also adding 6 world-class independent directors to the board.

Last August, we met with a search firm to begin identifying candidates. The 6 new independent directors are outstanding by any measure. They bring the right mix of top corporate leadership, operational and financial expertise and top-level E&P experience. With these 6 new directors, 13 of the 14 members of our board will be independent. Before I continue, I would like to recognize our existing directors, former Treasury Secretary Nicholas Brady, former Governor Thomas Kean, former Senator Sam Nunn and Frank Olson will be retiring from our board. Two of our senior executives, Greg Hill and Borden Walker, also are leaving the board but will continue in their current leadership roles.

All of these directors have served with distinction. They, along with our management team and our continuing directors, deserve significant credit for building our company today and positioning us to create near and long-term value for all of our shareholders. The fact that Hess has some of the best oil and gas assets in our industry, including our leading position in the Bakken, is in large part due to their vision and commitment. They have my most sincere gratitude and respect, and I want to thank them for their service and many invaluable contributions to Hess over the years.

I am now looking at Slide #5. It was on our quarterly conference call in July 2012 that I first referred to the significant transformation which was underway at Hess. I described how we were at the midpoint of a 5-year transformation process. Subsequently, our shareholders and Wall Street analysts indicated broad support for Hess' strategic transformation. From the date of that announcement to the date we announced the sale of our terminal network, our stock has been up 34%.

There have been essentially 3 phases that this transformation has followed and as you can see on this slide, we have made profound changes in taking a significant number of actions over the last several years. Beginning in 2010 with Phase I, we began a process of continuing to invest in our growth engines for the future, focusing the upstream business by pruning mature assets and reducing our exposure to the Downstream business. Specifically, we substantially built upon our leadership position in the Bakken, including adding 250,000 net acres in 2010. We established a core position in the emerging Utica Shale play and through a series of transactions, we increased our ownership interest in Valhall. Lastly, we closed our HOVENSA joint venture refinery in St. Croix, U.S. Virgin Islands.

In terms of Phase II, on our July 2012 earnings call, for the first time, we publicly communicated how we were at a midpoint of Hess' strategic transformation. On the call, we specified a number of steps that the company was committed to making in the future in support of that process. These steps included: focusing our E&P strategy on lower risk and higher growth shale assets, including our Bakken and Utica positions; exploiting existing discoveries such as Tubular Bells in the North Malay Basin; narrowing our exploration focus to a few key areas, such as offshore Ghana; further divesting Upstream assets to focus on our growth engines; continuing to reduce our exposure to Downstream by completing our exit from the refining business with the closure of our Port Reading New Jersey refinery; and divesting our terminal network. We also reduced capital expenditures by increasing efficiencies in the Bakken and sharpening our focus in explorations.

With today's announcement, we are entering Phase III, completing our transformation to a pure play E&P company. We will exit what remains of the Downstream and further focus our E&P portfolio on future growth. As Slide #6 makes clear, the market has been recognizing the value we are creating. From when we announced our July 2012 strategy update, our shares have outperformed our peer group. Our reported financial results have been strong. For the full year 2012, our net income of $2 billion was the third highest in Hess company history and our cash flow of $5.7 billion was the highest in our history. We are committed to delivering long-term sustainable value to all of our shareholders and the roadmap we have laid out today is going to help us do just that.

Let me take a moment now to sketch out the profile of the transformed Hess in greater detail. Moving to Slide 8. As I have said, with today's announcement, Hess will become a more focused, higher growth, lower risk, pure play E&P company. We will deliver current to returns to all shareholders while investing for future growth. With this focus, we expect to achieve a 5-year compound average annual growth rate in production through 2017 of 5% to 8% off of 2012 pro forma production. We also expect to grow our production in the midteens in the aggregate from 2012 pro forma to 2014.

In addition, beginning in 2013, pro forma cash margin per BOE is expected to increase by $5. Importantly, we have the breadth of technical skills and operating capabilities to deliver this growth and profit. Sharing these capabilities and technical skills across all of our projects globally enables us to drive better returns through cost and other efficiencies. As evidence of these capabilities, Hess is a partner of choice for leading international oil companies and host governments on major E&P projects. This recognition of our capabilities drives value creation for all of our shareholders now and for the future. We will also retain our financial flexibility to fund future development, return capital to shareholders and allocate capital efficiently.

Moving to Slide #9. You can see our focus on the 5 key areas I mentioned earlier. This map shows that 78% of our proved reserves and 84% of our production is concentrated in 5 geographic locations. All of our long-term growth opportunities are close to our near-term producing assets and in many cases, have been generated as a result thereof. These opportunities include Tubular Bells in the Deepwater Gulf of Mexico, North Malay Basin which is adjacent to, and share similar geology with the Malaysia/Thailand Joint Development Area in the Gulf of Thailand; Utica, where we are applying the expertise developed in the Bakken; and Ghana, which shares similar geology as Equatorial Guinea where we have a strong operating position.

On Slide #10, you'll see that we have 6 core projects. Collectively, they will underpin an expected 5-year compound annual average growth rate in production through 2017 of 5% to 8% off of 2012 pro forma production. Our production growth over the next 2 years will come from the continued development of the Bakken and Valhall and the start of production in North Malay Basin and Tubular Bells. Utica will also support our longer-term production growth. And Ghana is in the early stages. It is a promising longer-term opportunity. We recently announced that we have had 7 consecutive discoveries in Ghana. We are planning appraisal activities there and are conducting predevelopment studies.

And as I noted before, beginning in 2013, pro forma cash margin per BOE is expected to increase by $5. Slide #11 is a good snapshot of our proven reserve base. Simply put, we have the highest percentage of reserves that are liquids based among our peers. And as to production, 85% of our pro forma 2013 estimated crude oil production is Brent linked. Also, only 6% of our production is U.S. natural gas. Our significantly oil linked portfolio should allow us to achieve stronger cash margins and returns than our peers. The next 3 slides show how the breadth of our world-class technical capabilities translate into efficiencies, global synergies, higher returns and new investment opportunities.

Slide #12 shows that we are a leader in the Bakken and are realizing significant operating efficiencies there, which is North America's most promising shale oil play. Our daily production is increasing and we are demonstrating exceptional performance. On a 30-day initial production rate basis for 2012, 3 of the top 5 wells in the Bakken and 10 out of the top 25 are Hess wells. You can see along the top 1/2 of the slide how we have substantially driven drilling and completion costs down and expect continued reductions as we have moved to pad drilling. We also have some of the best people in the industry working on the Bakken play. As shown on Slide #13, our well cost now rank us among the lowest cost and best in our peer group.

Please turn to Slide #14. We are a recognized quality global operator. Because of the breadth of our expertise and technical capabilities, we continue to be trusted and picked by leading international oil companies and host governments to operate major new oil and gas developments. For example, Chevron endorsed us as the operator of the $2.3 billion Tubular Bells Deepwater Gulf of Mexico development, and PETRONAS picked us as operator of the $2.9 billion North Malay basin offshore development. This breadth of our technical capabilities has delivered great opportunities to develop new areas of growth now and in the future.

To highlight just 3 examples, we are currently deploying our Bakken frac-ing methodology to our drilling and completions in the Malaysia/Thailand joint development area. We are leveraging our managed pressure drilling expertise from South Arne in Denmark to the Utica Shale play in Ohio. And we are using expertise gained in the Gulf of Mexico and Equatorial Guinea to drive our recent success in Ghana.

Turning to Slide #15. Our plan is laser-focused on creating value for our shareholders, including returning capital to shareholders, retaining financial flexibility for future growth and continuing to allocate capital efficiently. Specifically, we expect to deploy the proceeds from all of our initiatives announced to date in the following manner: First, to pay down short-term debt, provide a cash cushion of an additional $1 billion against future commodity price volatility, as well as help fund the development of our focused growth projects; next, to increase current returns to all shareholders through a 150% increase of our annual dividend to $1 per share, commencing in the third quarter of 2013; third, to repurchase up to $4 billion of Hess shares with amount and timing of these repurchases tied to our asset sale program; fourth, in addition to this $4 billion repurchase authorization, we also expect to return capital to shareholders in connection with the monetization of our midstream Bakken assets expected in 2015.

We are also efficiently allocating capital to maximize returns. In 2013, we decreased upstream capital and exploratory expenditures by 17% and we expect further reductions in 2014. In terms of our exploration, we focused our budget by decreasing allocated spend by 29% when compared to 2012. Lastly, we have a cost-reduction program underway which we anticipate could save us at least $150 million annually.

Slides #16 and #17 introduce our new independent directors. We do not think there's a better team anywhere for what we are trying to achieve. These independent directors agreed to join our board because they believe in our outstanding plan and they recognize that our plan is the right plan for all of our shareholders. I would like to take some time to tell you about each of these accomplished recognized leaders in their fields.

John Krenicki was 1 of the 4 vice chairman of GE and served as President and Chief Executive Officer of GE Energy. John is recognized as one of the best operating executives in corporate America. He was responsible for doubling GE's revenue base and building it into one of GE's largest businesses, representing 2/3 of GE's nonfinancial revenues. He is currently a partner at private equity firm, Clayton, Dubilier & Rice.

Doctor Kevin Meyers is recognized as one of the oil and gas industries' top senior E&P executives. As ConocoPhillips' Senior Vice President, Exploration and Production, he ran the company's E&P business for the Americas. He has over 30 years experience in exploration and production, both domestic and international, and spearheaded the company's development of the Eagle Ford Shale and drove their operations in the Permian Basin and the Bakken.

Fred Reynolds is recognized as one of the best CFOs in America. Fred has had an extensive career in corporate finance and accounting as Executive Vice President and Chief Financial Officer of CBS Corporation and its predecessors, from January 1994 until his retirement in August 2009. During his tenure as CFO, shareholders experienced substantial share price appreciation and significant capital returns.

Bill Schrader held Senior Executive Positions at BP, overseeing many of BP's most important E&P assets. Bill was Chief Operating Officer of TNK-BP, which comprised 27% of BP's reserves and 29% of BP's production. Bill also served as President of one of their most valuable assets, BP Azerbaijan. And as CEO of BP Exploration, Angola, he oversaw a number of BP's deepwater oil discoveries. Bill was also responsible for all of BP's E&P business in Indonesia, including the Tangguh LNG project.

Dr. Mark Williams served at the highest management levels of Royal Dutch Shell during his 35-year career there, one of the world's largest oil and gas companies. He has 17 years of broad experience in E&P and the remainder in the midstream and downstream businesses. As a Shell Executive Committee member, he was part of the Senior leadership team, collectively responsible for all strategic, capital and operational matters.

And finally, also joining our board is Jim Quigley, who ran one of the world's largest consulting and accounting firms, Deloitte. Culminating with his role of as the Chief Executive Officer of Deloitte, he has 38 years of experience in consulting, audit, tax and financial advisory services. Jim was a senior trusted advisor to the CEOs and boards of many of the world's largest companies.

Each of these new Independent Directors has reviewed our plan and is excited about joining our board. We are delighted to have these outstanding individuals on our team. I welcome them all.

I'm now on Slide #18. In closing, I want to repeat a few key points. First, with today's announcement, Hess will become a pure-play E&P company and exit the downstream. Second, in the next 5, years we expect to achieve a 5% to 8% compound average annual growth rate in production with aggregate growth through 2014 in the midteens. Third, we will apply the proceeds from all asset sales announced to date: first, to bolster our balance sheet and ensure our ability to fund this growth; second, to raise our common stock dividend by 150% to $1 per share; third, return the remaining cash proceeds from asset sales to shareholders through share buybacks; fourth, the strength of Hess lies in its world-class team of E&P professionals. Their collaborative efforts to share their experience and expertise form the basis of our confidence in delivering on our 5-year plan and creating significant shareholder value in the years beyond.

Lastly, I want to thank our outgoing directors for their instrumental role in guiding the company through this transformation. There is no stronger statement of their leadership and contribution to this company than the quality of the incoming members who will follow in their footsteps. I look forward to speaking with you more about Hess in the days and weeks ahead. John Riley and Greg Hill are here with me and we would be happy now to take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Paul Sankey from Deutsche Bank.

Paul Sankey - Deutsche Bank AG, Research Division

John, I guess a simple question is why did this take so long? I mean why did it take an activist to prompt this?

John B. Hess

First of all, Paul, a couple of things I'd like to say to this. We have had the strategic transformation, as my remarks noted, underway really going back not only since I became Chairman and we started this shift to E&P, but predominantly when we started to build our Bakken position in 2010. So this is not something that just happened overnight and is response to an activist. In fact, Elliott got on the train after it really left the station. This is a carefully structured strategy that's been given a lot of thought, and it's really the natural culmination of the strategic transformation I went through in my remarks. So I think it's important to realize that.

Paul Sankey - Deutsche Bank AG, Research Division

Okay. And just to be specific on the volumes, can you just talk through again how we're getting to the numbers? If you could just add some details, if you want, around where we're going to be in 2013 and where we're going to go to from there?

John P. Rielly

Sure, Paul. If we look at it first, let's just take 2012 pro forma production. So if our actual production was 406,000 barrels a day and if you include all the sales that we've announced prior to today and then including Indonesia and Thailand, that drops that pro forma production to 289,000 barrels a day in 2012. As we look forward in 2013 on our prior call, we had talked about the headline production number would be 375,000 to 390,000 barrels a day but that included the assets that would be producing that would be sold ultimately during 2013, the biggest piece of that being Russia. So then, our guidance at that time was if you excluded the production from those assets being sold, that'd be 325,000 to 340,000 barrels a day. With Indonesia and Thailand, the expected production from those 2 assets is approximately 35,000 barrels a day. So if you take that 35,000 off the guidance that we gave, that takes it to that 290,000 to 305,000 barrels a day that we have in the presentation. So that's your base then, so 289,000 going to this 290,000 to 305,000 in 2013. We expect a significant increase as we noted in the presentation, in 2014 where the Bakken production really begins to ramp up from the change to our pad drilling, continued Valhalla drilling of production wells and then the Tubular Bells development coming on. So we have significant growth then showing in 2014. But again, our guidance then on the 5% to 8% CAGR growth comes off the 289,000 barrels a day pro forma in 2012 and it's driven by those projects that John Hess went through.

Paul Sankey - Deutsche Bank AG, Research Division

Yes, that's very clear. Can you just confirm how you're assuming assets are sold, what timing?

John P. Rielly

At this point, I'd guide you -- we'd say 12 to 18 months. I mean, it's early in the process but our guidance would be that we complete these sales by the end of 2014.

Paul Sankey - Deutsche Bank AG, Research Division

This is an aggressive and impressive response.

Operator

Our next question comes from the line of Edward Westlake from Crédit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

I guess in terms of resource replacement, as you look forward from here, you've laid out obviously Bakken Shale and that 3/4 potential there. You've got the Utica. You've got Ghana. I mean, are you comfortable that the assets and drilling around the assets that you have can, I guess, extend growth beyond 2017? Or maybe talk about your confidence in longer-term reserve replacement.

John B. Hess

Yes. I think as John mentioned in his opening remarks, as you kind of go into the long term, you have additional growth in the Valhall and Bakken in the early days. In the outer years, it's driven by the Utica and Ghana. Ghana, as John said, very promising early days, have a lot of appraisal drilling left to do. And then also the Utica, although early days, very promising. So we're gaining confidence daily in those 2 areas.

Edward Westlake - Crédit Suisse AG, Research Division

And then on the Bakken, I mean do you think you could get below $9 million, obviously, as you shift into pan drilling? And have you done any tests in your acreage of the Three Forks?

Gregory P. Hill

We have done some tests of the Three Forks and we anticipate additional appraisal drilling in the Three Forks this year. As John mentioned in his opening remarks, we're at 9 now and we're just now really fully transformed into pad drilling. So I'm optimistic that further reductions will come.

Operator

Our next question comes from the line of Evan Calio from Morgan Stanley.

Evan Calio - Morgan Stanley, Research Division

John, could you expand on the strategy or new hierarchy in the use of cash? I mean, is the $4 billion buyback largely onetime funded from new asset sales given that your free cash flow or forecasting free cash flow flat in 2013?

John P. Rielly

Yes, sure. I'll walk you through that. I mean, again, so what do we talk about today? We are now -- we put our strategy of returning capital to shareholders via an enhanced sustained common dividend. So we've increased our dividend and now we have the authorization for the $4 billion share repurchase. So what we expect at this time, as I said, it will take about 12 to 18 months to get the asset sales done. We expect the total proceeds from our asset sales to fund the proceeds that John had articulated. So the first thing that we'll do with the proceeds is to repay our short-term debt and that will be approximately $2.5 billion. We will the add cash to the balance sheet of approximately $1 billion, really to cushion against commodity price volatility. And then we'll also use the proceeds to fund our development program that Greg just discussed. Then, we will have excess cash. We expect to have excess cash from those asset sales and we're going to use that excess cash to repurchase, and at this point, expect to repurchase up to $4 billion of sales.

Evan Calio - Morgan Stanley, Research Division

Any additional hedging in connection with that commitment of those cash strategies?

John P. Rielly

In our 10-K for 2013, we now have 90,000 barrels a day hedged at a price of $109.74 Brent. So we do have that in 2013.

Evan Calio - Morgan Stanley, Research Division

On the -- if I could ask another question. On the potential monetization of the Bakken midstream assets that you discussed, I mean these are embedded assets. Could you provide any range on that EBITDA potential or just clarify the description of assets you're considering -- or you would consider including here? And in addition, why 2015 as most of those assets would be operating -- generating potential cash and something that could be monetized in the 2014 window?

John P. Rielly

So, you're right. I mean, it's -- the timing of monetizing the midstream infrastructure just depends on when that midstream infrastructure has distributable cash flow. And as you know, we're building out our gas plant right now and there's additional gathering facilities. And on our last call, we talked about that we'll be spending about $500 million in the Bakken on the midstream infrastructure. So we do expect, to your point, to complete this kind of build-out by early 2014. And so with our guidance for 2015, what that just means is we think we need some historical performance there of the cash flow, of the EBITDA from these midstream assets. And as we get that historical performance, we expect the timing of the monetization is 2015.

Evan Calio - Morgan Stanley, Research Division

Perfect. And if I can just follow up with just one last question and really a follow-up to the first question. I didn't -- could you guys provide any -- like a pro forma 2013 CapEx on the lower production volume that you're showing as 289 2012 pro forma? Meaning, how much of the CapEx is associated with assets being sold in this -- in your $6.8 billion guidance of earlier in the year?

John P. Rielly

Sure. It is actually in the back slides that we didn't walk through. But as you -- in the slide that talks about kind of some of our reductions in capital, so on the upstream side we have $6.7 billion of capital that we gave out. That's capital and exploratory spend. The pro forma number on that is $6.2 billion excluding these asset sales.

Operator

Our next question comes from the line of Roger Read from Wells Fargo.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

I guess quick questions I had, just to think about kind of future margins or returns here as we look at a more focused asset base, can you kind of walk us through the impacts of where you're going to be seeing production increasing, for example, the Northern Malay Basin versus the asset you're selling there and then also sort of the impact on tax structure once assets such as the Russian operations are gone versus what we know as a high-tax area such as Norway? It may be a little early for some of that, but I'm just trying to understand as we try to make an expectation of '14 or '15 cash flow some of the moving parts here.

John P. Rielly

Sure, Roger. I mean, it is early but I can give you some general ideas on what we see with our pro forma portfolio. As John had mentioned in his remarks, right now with our -- this focused portfolio, as you mentioned, will generate higher growth than we had before. The other thing that the portfolio is providing is a higher cash margin per barrel. And as John mentioned, we're estimating that to be at $5. So every barrel we're producing in this new portfolio is, on average, giving us a $5 higher cash margin. And then just in relation to the last question, as we see in our portfolio, we have some reduced capital spending that we'll have going forward as Greg is talking about some efficiencies that we'll continue drive in the Bakken. And as John has mentioned earlier, we're undergoing a significant cost reduction program so that we see incremental savings, and this is beyond the direct costs associated with the assets being sold, of $150 million right now. So overall, just to answer your question, obviously we see the returns of the new portfolio obviously being positive as compared to the prior portfolio. And the assets driving it is, as I think was your question, again the growth in the early stages were going to be Bakken, which has great cash margins and excellent returns. Valhall now has completed its redevelopment project, so the significant capital is behind it. So what we're doing now is just -- is now drilling up the field and BP is now drilling up the field. So it's just drilling production wells and taking it through this infrastructure that we've already paid for. So those 2 are driving our early production. And then Tubular Bells, obviously having assets producing in the Gulf of Mexico in the fiscal terms that you have here in the U.S., is extremely favorable. So with those assets really driving our short-term growth, to your point, we're seeing going to be a nice EBITDA and cash flow coming out of this new focus portfolio.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Okay. And then just kind of a follow-up on the returns question, I mean I understand where you intend to grow here. But if you were to just say what area, which region produces the best returns for you right now, I mean is it clear that it's the Bakken? Or does another one of the opportunities compete favorably with that?

John P. Rielly

I'd -- the Bakken has excellent returns on it. I mean, the way you have to look at this, though, is there will be assets, as I spoke of before, that have the complete infrastructure build-out and then drilling a well and turning it on will have fantastic returns. Pick Equatorial Guinea. So we've been operating there for a while. It's mature. We are drilling wells of there that have unbelievable returns. So you have different aspects going across the portfolio that -- where we can allocate capital, and we're going to allocate it efficiently. In our growth assets, though, Bakken, Valhall and Tubular Bells, just -- we have excellent returns that will be coming from those assets.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Okay. And then my final question, if we think about Ghana, I know that's much further out here, but you have a very high working interest ownership position there. I would expect that you'd sell that down. Is some of that capital? Or is that capital in addition to do $4 billion we're talking about that would be returned to shareholders via the asset sales of everything that was talked about today?

Gregory P. Hill

Of course, no. That's out further in the future. We'll begin an appraisal program next year and that's in all of our funding growth estimates for the proceeds. We're early phases there, as we said. We're going to be in an appraisal program, as we've stated previously on conference calls, we would like to bring our working interest down. That's going to be a matter of timing as to when that occurs.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

And the funds for that would be whatever you need funds for at the time, that we're not pegging those funds to something in particular right here?

Gregory P. Hill

No, we aren't.

Operator

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

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

I have 3 quick ones, if I may [indiscernible]. First of all, on the downstream. The exit of retail in downstream, is that intended as a sale or are there any other options on the table, for example, an IPO? I know it's probably small, but just wanted to get -- just make sure we dot the I's there on any types of consequences from John Rielly, please?

John B. Hess

Yes, in terms of moving forward, in terms of pursuing strategic options to maximize value, be it the retail, marketing business or Energy Marketing business, we are evaluating several options to monetize these businesses to maximize shareholder value and we are just starting that process. We're moving forward in an orderly manner, and we'll keep you informed.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

And tax consequences?

John P. Rielly

Sure, Doug. As I see it now, the U.S. cash taxes will be substantially deferred because of the intangible drilling costs deductions from our unconventionals operations. Of course, the combination of timing structure and Alternative Minimum Tax come into play. But relative to proceeds and gains, cash tax deferral will be substantial.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

What I'm referring to specifically is that if you sell the downstream is the tax -- what's the tax basis on those assets?

John P. Rielly

The tax basis of those assets -- we'll generate a significant taxable gain, Doug, from that standpoint. However, the cash taxes associated with those will be deferred because of the deductions we have from the IDCs in the unconventionals.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Understood. My second question is, John, the additional asset sales are -- I think you had -- somebody indicated [indiscernible] in the past as potentially going poor, but can you help us with the pro forma cash per borrow impact as to what the portfolio looks like? I guess, what I'm really trying to figure out is were these assets for sale significant free cash generators? And when answering the question, if I could also ask you about some of your other peripheral assets that you haven't mentioned, for example, Australia, your small working interest in nonoperated exploration in Brunei. And I guess what I'm really trying to get to is, is the process done now? Or are there still additional things that could be sold? And I've got one follow-up, please.

John P. Rielly

Why don't I start? I'll start, Doug, because you had a lot of questions there. So I'm going to just go through the beginning part and I think you're trying to get some help on cash flow from -- per barrel or cash margins going forward. And as we said, that will increase $5 per barrel on the remaining portfolio. But to help you out, let's just talk 2012 pro forma. The capital expenditures for all these assets that we are selling in 2012 was $1,030,000,000. That was the actual capital associated with those assets being sold. The after-tax -- or sorry, the net cash flow, so the cash flow above and beyond that capital spend was approximately $430 million for those assets. So Indonesia and Thailand will have, because they are more gas-linked than oil-linked, they have a lower cash margin per barrel than the remaining part of our portfolio. They real driver, I think as you know, to increase the cash margin per barrel going forward relates to Russia where the prices that we get for the Russian crude is significantly lower than the rest of the portfolio. So that's what drives the ultimate increase in our cash margin then going forward.

Gregory P. Hill

Yes, Doug, you had mentioned a couple of other assets, why you didn't you sell them, one of them being Australia. And I guess for assets like Australia and Stampede and even Brunei, frankly, we just don't feel like they're at the right point in their life cycle to really pursue monetization alternatives.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

And my very last one is I'm just going to try this one on for size. But Ghana, you really haven't given us any idea of scale. Is there any color you can share there as particularly you're including it in your growth targets? Is there a meaningful amount of volume associated, and if so, what is that?

John P. Rielly

Doug, can I just start and Greg will add about Ghana? But those growth targets that we talked about, that 5% to 8% CAGR growth of 2012 pro forma production, does not include any production from Ghana. So that is beyond 2017. And Greg can give you some color on Ghana.

Gregory P. Hill

Yes, Doug, so on Ghana, as you know, we're in the middle of negotiating an appraisal program with the government. So we do not want to share any volumes at this point in time. What I will say, however, though, is we are progressing predevelopment studies. So I think that's a clue that we believe we have enough for a commercial hub there to begin development.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

What is that commercial threshold, Greg?

Gregory P. Hill

Can't be specific right now, Doug. Sorry.

Operator

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

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

Just a question. One thing you've been working towards has been a better balance between cash flow and CapEx. And just curious with the higher growth rate now, I realize some of these proceeds are going to be used to help fund CapEx over the next year or so. But long term, can you make any comments on how you're thinking about that balance will look like?

John P. Rielly

Sure, Arjun. Obviously, over a long-term period, obviously we want to be spending underneath our cash flow as we go forward and still -- and generate this growth. What we have, as Greg has mentioned, I think we talked about earlier, we still do have some build-out of the Bakken going on. We've got the midstream buildout, $500 million, that we're estimating this year on the Bakken and we're beginning to ramp up now with the production drilling in Valhall with -- so the production and the cash flow will come a little bit later. So at this point in time still, as we see in '13 and '14, some of these -- this asset sale proceeds, as we said, are being allocated to fund this program. Then, this focus portfolio as we see going forward, begins to generate that excess cash flow.

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

I think, John, you'd previously targeted having kind of the balance between cash flow and CapEx in '14, but you are targeting a higher growth rate now. So I guess, x asset sales, so we just think about maybe there's a bit more CapEx that in return we're getting a higher targeted growth rate?

John P. Rielly

Yes, that is correct.

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

That's terrific. You mentioned the potential to monetize the Bakken midstream. Are there other midstream assets that you could also stick in some vehicle, for example, the Gulf of Mexico, you have some producing fields, or you're really just thinking of the Bakken at this point?

John B. Hess

At this point, Arjun, we're just thinking about the Bakken.

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

Okay, great. And then just lastly, one thing about Valhall is you have a large interest, but BP is the operator with the smaller interest. You've got some smaller interests in the Gulf of Mexico in their fields. Can I presume there are additional asset exchanges and swaps you'll be looking at as just part of normal ongoing restructuring activities and business development?

John B. Hess

Yes, Arjun, not to be specific about Valhall, but as you know, we're -- we've been very active portfolio managers. So I think in the course of normal business, we will always be looking at ways to further optimize our portfolio.

Operator

Our next question comes from the line of Doug Terreson from ISI.

Douglas Terreson - ISI Group Inc., Research Division

John, there was a lot of commentary today on capital allocation, return of capital to shareholders, et cetera. And on this point, my question is, post the transition to becoming a pure play E&P company, where will emphasis be placed as it relates to measurement of corporate performance? Meaning, while it may be too early to know since the newly proposed board is yet to assemble, did you envision growth superseding returns and importance or vice versa? Or do you think changes are even needed in this area?

John B. Hess

Well, I think it's a very good question. We've got the right balance. What did we say? We want to fund our growth of our reserves and production. We're in the E&P business to build that value for our shareholders, and we certainly feel we have the right plan to maximize shareholder value that our board and management team have put in place. Having said that, obviously, as you invest money, the whole reason you invest money is to maximize returns. So we intend to do both. We're going to have a growth rate, but we're also going to have an expanding cash margin that we talked about. But in all of that, we will allocate capital to maximize returns. And I think the other important thing is we are very happy and proud to have the new directors that just joined us. They're all independent. Three have extensive experience in E&P, and the other 3 have extensive experience in business and finance. And I think that the new directors have approved our strategy, are enthusiastic about our strategy as a testament that it's the right strategy to maximize value for our shareholders and it's the right one for our shareholders.

Operator

Our next question comes from the line of John Herrlin from Societe Generale.

John P. Herrlin - Societe Generale Cross Asset Research

Three quick ones. There's been no mention of potential restructuring charges. Could you address that, John Rielly?

John P. Rielly

Sure. I mean, as part of this transition, there clearly will be restructuring charges. And I think as John had mentioned earlier with the cost savings program that we're looking at, I would tell you that we would look to see that beginning to flow through in 2014 because there will be costs associated with the asset sales, restructuring costs and actually just costs associated with putting the cost reduction programs in place. So that will come about. It's a little early right now. I think as we get through our first quarter earnings call, we'll begin to have a little bit more of a view on that and we can provide updates on that.

John P. Herrlin - Societe Generale Cross Asset Research

Okay, that's fine. How about the tax efficiency of the international sales? You mentioned domestic ones. What about international?

John P. Rielly

Right now, I would tell you, John, I do see some tax leakage on the international sales. I would say it's small in relation to the aggregate proceeds and gain that we will see there. It's going to depend on the buyer and how the sale is structured. I mean, I'll have better idea of that as we get further into the process.

John P. Herrlin - Societe Generale Cross Asset Research

Okay. Last one from is on kind of headcount and this may be premature, too. You ended last year with close to 15,000 employees, like 14,700 something or like that. How will the new Hess look, pro forma everything? How much small are you getting?

John B. Hess

As we reshape our portfolio and business, we'll give you an update of that. I might tell you that approximately 1/2 of those of employees are associated with the retail business. And obviously, as we exit the retail business, they will not be with the E&P company. But more definition than that, let us out get our plans in place and as soon as we can give definitions, we will.

Operator

Our next question comes from the line of Blake Fernandez from Howard Weil.

Blake Fernandez - Howard Weil Incorporated, Research Division

John Rielly, just to ensure that our estimates are aligned with the way you're going to be reporting going forward, is it fair to say, the assets being marketed, are those going to be stripped out as assets being held for sale?

John P. Rielly

That's a great question, Blake, and we are looking at that right now. I can't tell you the exact format of how the reporting would be, but we are looking at it. Again, it depends on some of the structures that we do. But what I would tell you is no matter what the actual statements go in per GAAP, we will give you a pro forma reporting. So we'll be able to give the guidance and the numbers associated as if these assets were not in the portfolio.

Blake Fernandez - Howard Weil Incorporated, Research Division

Okay, great. The second question I had, I think you addressed the fact that you're in, like, the initial phases of evaluating the retail, whether it's a spin or a sale, et cetera. Is that also the case for the Bakken midstream? In other words, is an MLP a consideration or is that an outright sale?

John B. Hess

Yes, we're going to look at all the options, and what's going to be behind it is maximizing shareholder value.

Blake Fernandez - Howard Weil Incorporated, Research Division

Okay, great. The last question I had and I think this may have tied in with the previous question. But I'm just -- is there a fourth phase to come here down here down the road? Or are we really kind of at the final phases of the -- of shaping the portfolio here?

John B. Hess

No, this is -- fair question. This is the culmination of a multiyear strategy to transform Hess into a pure E&P play. Any asset sales or acquisitions after this is totally to upgrade the portfolio. So this is the culmination right here, becoming a pure play E&P company.

Operator

Ladies and gentlemen, we have no further questions. Now, thank you for your participation in today's conference. This now concludes your presentation. You may now disconnect. Have a good day.

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