John Hess Jr. - Chief Executive Officer
Paul Cheng - Barclays
Hess Corporation (HES) Barclays CEO Energy Conference Call September 11, 2013 9:05 AM ET
Paul Cheng - Barclays
Good morning. Our next presentation is from Hess. We are extremely excited and happy to have John Hess, the CEO of the company, to share with us all the exciting news with the corporation. Without further delay, let me welcome John.
John Hess Jr.
Thank you, Paul and welcome to all of you. I especially want to thank Paul and Barclays for hosting this conference, and thanks to each of you in the audience for your interest in our company.
Slide 2, if I can just get too quickly, just is to refer to for information regarding projections and forward-looking information used in the presentation today. So, I will get started.
Our Board, and this is Slide number 3, and management team have made significant progress in a very short period of time basically to transform Hess. This is since 2010, and that is from an integrated oil company to a pure play E&P. We are committed to delivering the long-term sustainable value that our shareholders expect and deserve, and the continued execution of our plan and the company is performing well and on the right track will allow us to do that.
We have built a higher growth and lower risk E&P portfolio providing visible production growth of about 5% to 8% compound annual growth rate of pro forma 2012 base over a 5-year period going forward. It’s underpinned by our leadership position in the Bakken in North Dakota, where we and our Board were last week, and we continue to make great progress there. The Tubular Bells field development that should come on in the middle of next year, about 25,000 barrels a day of oil production; and in addition, the Valhall field, the oil production that is producing now about 28,000 barrels a day net to Hess and that has growth as well.
And then in the outer years, our growth is underpinned by our emerging play in the Utica shale in Ohio. And also, the North Malay Basin project in the Gulf of Thailand. So, these are all low-risk opportunities and very, very visible that underpinned at 5% to 8% growth rate. Nothing in there for exploration success, and that hopefully should it come would underpin future growth past 2017. So, just want you to understand those assumptions about our portfolio and our growth rate.
Obviously, we’ve worked hard to build the portfolio of long-life assets in areas where we have competitive and proven capability with five key areas representing almost 80% of our proved reserves and about 84% of our production. And we also have, and I think this is a distinguishing characteristic about our company’s portfolio, the highest leverage to oil prices in our peer group and industry leading cash margins.
We have a three-prong strategy and a balanced approach to drive growth and returns while managing our risk between our position in the unconventionals, which accounts for about 40% of our capital spend. Obviously, the Bakken and Utica are cornerstones of that. Exploitation of existing discoveries, Tubular Bells and North Malay Basin are examples, and then we have made a big change in our E&P strategy in the last three years where we have narrowed our focus in exploration. We still want to explore, but the company’s growth prospects in the past had too much money going there about $1 billion year, we have shrunk that close to the $500 million to $600 million a year.
We are also going to increase our partnering strategy, so we have lower working interest to get more exposures and shot at goal if you will, and at the end of the day, more focus in terms of where we direct our efforts. The areas that we are going to be talking about today in some more depth will be offshore deepwater Ghana and also Kurdistan.
But we also still have a very strong leadership position in the deepwater Gulf and Malaysian offshore as well. So the point is, this is a balanced approach and one that we really look for the projects that deliver the highest returns on a risk-adjusted basis and really look at it from a portfolio perspective.
We are in a capital intensive and commodity based business, so a strong balance sheet is essential to fund future growth and deal with the vicissitudes of the commodity markets, so strong balance sheet is key.
As part of our portfolio reshaping, we have had over the last several years a significant asset sales program and just this year, we have announced sales and completed most of them of about $4.5 billion. I will talk more about that in the next couple of slides, but the first use of those proceeds was used already to pay down short-term debt of $2.4 billion, and also increase the cash on our balance sheet.
We also are reducing the capital intensity of our portfolio and have made a major reduction in capital exploratory expenditures this year, but also anticipate further reductions next year, and with operating efficiencies, we expect to be on a $100 brent basis, free cash flow positive post-2014. So, the portfolio in terms of the ability to be cash generative is much stronger today than it has been in a long time in our company’s history.
Our portfolio reshaping allows for increased cash returns to our shareholders. At our last Board meeting in August, we announced that we would increase our annual cash dividend by 150% to $1 per share. This would be effective September 30. And the additional proceeds out of debt pay down and strengthening the balance sheet, addressing our deficit this year, and also improving our cash position on the balance sheet now have put us in a position with our energy marketing sale that was announced in July for $1 billion in the market to buy stock, and we are buying the company’s stock right now. And so, the stock repurchase program has started in the third quarter, I think that’s an important milestone that we are underway in that regard. We will be disciplined in our approach and also sensitive to market conditions in that regard.
Last but not least, we also look for an additional return of capital to shareholders from the monetization of our Bakken midstream assets, that’s expected in 2015. It’s important to note, however, that we certainly intent to maintain operating control of these assets.
Most importantly is the way we will continue to manage the business and make decisions about our capital allocation, and we will allocate capital to the highest return projects on a risk-adjusted basis, and that is really what is going to drive our company going forward, and we are going to be very disciplined about that.
We thought – I’ll just talk in a short period about this, and this is really a score card, and I’ll repeat some of the points that I just made, but I think it’s important to see the significant progress the company has made in the short period and reflects the successful execution of our plan, and basically that -- we are doing what we said we would do. We promised to focus pure play E&P, the asset divestitures, investing more in the unconventional space really have transformed our portfolio, and also the changes we have made have made to our portfolio much stronger in terms of generating not only production growth, but improved margins.
We are in the process of finalizing our exit from the downstream. We closed the HOVENSA and Port Reading facilities. We just recently sold the energy marketing and we have a number of remaining divestitures underway which I will talk about in a bit.
In terms of financial flexibility to fund future growth, significant decrease in spending, we also have $150 million annual cost reduction program underway, I talked about the debt reduction a little bit earlier, and last but not least, we have honored our commitments about increasing cash returns to shareholders, not just the dividend but the share repurchase program as I said is underway.
In summary, we are delivering our commitments.
This is just a summary of our asset sales program, you can see the four E&P assets there from Beryl, Azerbaijan, Eagle Ford and our successful Russia sale which we announced in April and completed in May for $1.9 billion of proceeds, and then the energy marketing transaction that was announced in July and should hopefully close in November, and that’s $1 billion, and year-to-date, $4.5 billion of proceeds. I think the important thing together in our asset sale program is that we are ahead of schedule and ahead in valuations.
And the terminal network, our small trading business, HETCO, retail, Thailand, Indonesia, all of those divestitures are in progress, and as we get them successfully completed, we will be making appropriate announcements, hopefully the majority of those, if not all of them in the fourth quarter.
Just a picture of our portfolio, this Slide shows that our E&P portfolio is now sharply focused in five key areas representing about 80% of reserves in production I talked about earlier. These geographies are where Hess is competitively advantaged, be it onshore U.S. unconventionals, in the Bakken and Utica, North Sea chalk reservoirs in Valhall in Norway and South Arne in Denmark, then Then long-life shallow water natural gas fields in the Gulf of Thailand, then deepwater West Africa with Equatorial Guinea, and then our exploration operation in Ghana and last but not least a strong position in the deepwater Gulf.
Our production forecast calls for a compound annual growth rate of 5% to 8% from the pro forma 2012 base to 2017. We have a clear line of sight here, exploration as I mentioned before is not a factor in this forecast, but offers significant optionality in upside after 2017. And again, a lot of low risk projects underpinning this growth, the Bakken, Utica in the outer years, Tubular Bells starting in the middle of next year of 25,000 barrels a day, North Malay Basin with some early production in the fourth quarter and then more of that coming on in 2017, and last but not least Valhall, which I will talk about in a bit.
This is just a Slide to show our peer group that Hess has the highest leverage to oil and liquids among our peers; 79% of our reserves, about 76% on a production basis. And of our oil production, 85% is brent-based. Part of that is driven by our Bakken rail facility where we are able to access the East Coast, West Coast, and Gulf Coast for selling our Bakken instead of selling it at the wellhead, and only 6% of our portfolio on a production basis is exposed to U.S. natural gas.
Our strong oil leverage in the portfolio itself allows us to generate industry-leading cash margins. You can see over the time period from 2007 to 2012. On the 2012 pro forma basis, our margins have strengthened, and we are number one in this regard, and I think that’s an important distinguishing characteristic about our company.
In addition, with the Russia sale that I talked about earlier, we have been able to improve our cash margins, and this is a commitment we made to our shareholders as well earlier in the year by $5 per barrel BOE. So, the point is, not only are we industry leading in terms of our cash margins but versus that $44 number there for pro forma 2012 with the Russia sale, that number is even stronger.
Enhanced financial flexibility and increased cash returns; our asset sales have strengthened, the financial flexibility to fund our growth with that debt going down $2.4 billion. The tables on the right show the capital intensity going down of our portfolio, $8.1 billion in 2012, capital exploratory expenditures going to $6.7 billion on a pro forma basis, that number is really $6.2 billion. And the next year’s number should be lower as well, meaning it should have $5 billion in it. We haven’t finalized that plan, but the point is that capital intensity of our portfolio is going down offering lower risk growth, and with the cost reduction program, the $150 million program underway that I talked about for operating efficiencies, that should allow our portfolio to be cash generative and positive post-2014.
Now, what I would like to do is just cover some of our key assets that are fundamental and underpinned, our growth going forward, and the ability for us to deliver the results that I just talked about. First and foremost is our world-class position in the Bakken shale in North Dakota. Our operations are working well there. We have a world-class team that is supplying lean manufacturing to our operation. It’s really the single largest contributor to 2013- 2017 production growth, currently producing about 72,000 barrels a day of oil equivalent, and we are on track to meet our guidance for the year of 64,000 to 70,000 barrels a day.
Well cost and productivity are heading in the right direction and put us in an industry leading position and as we drill more wells and we have operated and drilled about 600 wells in the Bakken and have participated in competitor wells of about another 600 so we have about 1200 well data base. We found from that we have material upside through down spacing or infill drilling in the middle Bakken but also in the Three Forks. So lot of our acreages competitively advantaged in terms of having Three Forks potential as well.
We built a position here about 640,000 acres, overall about 70% working interest and we are a large operator. We are currently running a 14 rig program in 2013. Our goal of net production is 120,000 barrels of oil equivalent today in 2016. We have identified over 2500 operated drilling locations, our 2013 30 day IPs or 750 to 850 barrels of oil equivalent. Our EURs in 2013 are about 600,000 to 650,000 barrels and overall if you assume five wells per drilling spacing unit or 250 acre spacing and that’s where the middle Bakken and maybe four for the Three Forks. We think we have estimated recoverable resource here of over a billion barrels of oil equivalent. We only have booked now about 300 million barrels.
So there is a lot more upside to go forward here. We are currently in the process of doing a updated depletion plan for our future growth and we think there is a strong opportunity that we can down space more potentially to 180 acre spacing for the Bakken and about 210 acre spacing for the Three Forks. And therefore, there is upside above and beyond the billion barrels of oil equivalent here. And potential to increase our growth projections beyond our 120,000 barrels a day.
But we are still in the evaluation mode and obviously as we complete the study, we will inform the investment community about our future plans. But right now these are the assumptions to go from.
Now this is to show that we truly are the industry leader in creating value in the Bakken and you have to look at this two ways, its how much you spend but also what you get for what you spend. And we have been with our team, I think doing an outstanding job, reducing our well cost. Currently, I think in the second quarter, we (set forth) drilling and complete, it’s about $8.4 million the third quarter number will be lower than that. And at the same time, at the bottom of the Slide you can see that our well productivity compared to our competitors on a 90-day IP basis as improved over time. But also, from the North Dakota industrial commission data on the bottom right side of the chat, our wells we have 18 of the top 50 wells in terms of the – in the Bakken since 2012 in terms of 90-day IP.
So Hess truly is a leader and creating value in the Bakken and this Slide hopefully helps you understand that.
We also have a competitive advantage in our infrastructure, we have invested in the infrastructure for the long-term to provide competitive advantage to get the highest value for our products. On the crude side, we have real capacity for 54,000 barrels a day, it has been operating since year ago April, spent about $200 million here and basically we captured almost all that investment already, so it’s been a very good return project.
In terms of evacuating our crude from the region, we have access to pipeline to sell the Mandan refinery to the prior presenter as part of our crude also access to the Enbridge pipeline for 30,000 to 40,000 barrels a day and then the flux is the – trains themselves. We have been able to exploit the WTI brent differential, last month it was advantageous to move all our crude to (St. Chain) for the Gulf Coast refineries on train outside of the pipeline commitments that we have in North Dakota for crude marketing.
This period where LLS has pretty much collapsed in the last couple of weeks, we’re selling our crude to the East and the West Coast refinery. So we’re able to arbitrage the best markets creating a lot of value here. Secondarily, it’s not just about oil, it’s about natural gas. And we have (an advantage), gas plant up there in Tioga. We’re going to be expanding that plan from a 110 million cubic feet to-date to 250. That plant should come on before the end of the year as we tied in and that should increase our competitive advantage on net backs from the gas perspective as we stripe out more liquids, to be a natural gasoline, ethane, propane, butane and that again should create more value for our shareholders.
It also give us advantage as gas flaring becomes more of a political issue and our company wants to stay ahead on that and as a gas flaring reduction program as part of our future capital spend as well.
Lastly, this infrastructure is what we are currently evaluating to put it in a MLP structure. There is a lot of work to do there. We also want to get the Tioga gas plant up and operating and the EBITDAs reflected before we would monetize that. So we’re still looking at a 2015 event here. But again, key to this is operating control even though it might be in a different financial structure.
Remember coming here a couple of years ago, talking about our Utica position saying it had potential to be a growth engine for Hess and I’m happy to say now with the approximate 30 wells drilled. This is looking more exciting and encouraging. We have overall two acreage positions, one our joint venture acreage with CONSOL which is about 65,000 acres, 50% working interest and 98% NRI, so that’s very high and obviously improves your return profile, 20 wells planned in 2013, some of those in blue on the bottom left show pretty good test results 1000 to almost 4000 barrels a day with liquids. This is of 24-hour test, however, important to know.
And then the Hess acreage which is about 95,000 acres, more to the east in the gas window and the joint venture acreage is more in the liquids window but we’ve a 100% working interest, 84% NRI and five wells planned in 2013 and again pretty good production test there.
On a oil equivalent basis, even though a number of those wells or gas from 1000 barrels a day to 3000 barrels a day. So the point here, this holding of our company offers material growth potential 2015 and beyond to JV acreage with CONSOL as in the wet gas sweet spot. We’re able and already are leveraging our Bakken capabilities some of the people have worked in the Bakken and lean manufacturing already working here in Ohio. So those best practices we are scaling here and right now we are focused on appraising the wet gas acreage and holding the dry gas acreage.
Our Valhall field in the North Sea in Norway, it’s a long-life material asset about 3.2 billion barrels originally in place that’s gross. I think the recovery here is about 23% to 25%, potential to go to 40% or more. There is upside in production here. We’re currently producing about 42,000 barrels a day gross 28 net; our goal of net production by 2017 is between 40 and 50. We’re working with BP, the operator here to push forward on a multi-year drilling program to ensure that we can grow our production in a value accretive way and yet still meet some of the requirements we have to manage this older field where we have chalk reservoir experience and capability.
Not too far away in Denmark in South Arne and this field we actually operate 61% interest. We’ve had a significant development in drilling campaign here started the multi-year drilling program in 2013. 2013 net production is estimated at 9,000 barrels a day with the goal of growing it to 15,000 to 20,000 barrels a day by 2017. This is high margin free cash flow oil production and low risk exploitation upside, again leveraging the capability in shallow water here of the chalk reservoir experience that we’ve developed.
Equatorial Guinea, we’ve applied 4D seismic here and that resulted in an additional very high return drilling opportunities to maintain our production plateau. Net production about 40,000 to 50,000 barrels a day expected between 2013 and 2015. It’s a material contributor to production but also high margin and strong cash flow for the company and actually gives us the operating and development capability we need to hopefully develop offshore Ghana, the exploration opportunity that we have under appraisal there.
And we go to the Gulf of Thailand, this is a strategic asset to both the Thai’s and Malay’s, the joint development area. It’s a low cost long life natural gas asset, material production and free cash flow for the company exploitation upside, very low risk, leverages are offshore development capabilities here that we’ve then were able to show Petronas that created the North Malay basin opportunity.
We have a 50% working interest net production over 250 million cubic feet to-date. It’s an oil-linked gas price over $7 per MMBtu and the PSC here go through 2029. So it’s a good, stable, low cost, long-life asset that generates good free cash flow.
That position basically gave us the opportunity where Petronas asked us to be the operator of this venture, North Malay Basin, where there are nine low-risk natural gas field that have been discovered. This is a joint venture between the two of us where Hess is the operator. Early production is estimated to be 40 million in cubic feet to-date and the fourth quarter of 2013 and full field production is estimated to increase to 165 million cubic feet to-date 2017 and beyond.
Again, in oil-linked gas price even higher than the JDA and the PSC year goes to 2033. So again, we’ve been able to leverage our JDA experience and Petronas asked us not one of the other major oil companies or national oil companies to develop this field for them because we have lower cost development capability and operating capability is evidenced from the JDA to apply here. So we are honored to have this opportunity and I think this is going to be a very good return project to our shareholders that also we’ll have significant exploration upside as the years unfold.
We have a strong position in the Deepwater Gulf, we target to maintain production of about 70,000 barrels of day oil equivalent through 2017, that includes tubular bells in that number of 25,000 barrels a day. Material high margin assets, a successful exploitation record on fields like Conger or Llano, you can see in the green flags, we also have in the orange flags identified tubular bells and then stampede, which is hopefully getting in a position with our four other partners to have a final investment decision next year. Hess would be operator of that and we have over 200 exploration blocks in the Miocene and Paleogene.
So it’s a core area for us and now that Macondo’s behind the industry is an area that we intend to start investing more in assuming we get the returns that we expect on a risk adjusted basis. But we have the capability here to apply that not only helps us in West Africa but obviously is build from our years of experience operating in the Deepwater Gulf.
Tubular bells, material high margin asset, oil production of 25,000 barrels a day, sub-sea wells tied back to a third-party owned spar, the status is, the hole is 84% complete, sale out by hopefully the December of this year. And then the topside is 80% complete February of 2014, first production is on track for the third quarter of 2014 and again, this is an example of our deepwater capability and leveraging that.
Ghana, Deepwater Tano/Cape Three Points, an exploration prospect Hess has 90% interest, seven discoveries, material to our resource base build on our West Africa and Gulf of Mexico deepwater experience. Industry leading well-cost, our last three wells we drilled, I think Greg being here about $40 million a piece, competitor wells $60 million. So we know how to drill these wells across effectively, we’re currently working with the government to get our appraisal plan approved of about three appraisal wells, one-test and a seismic program, very good relationship there with the government. And we’re also looking at bringing a partner in here to share some of the risk of the capital going forward. But this is an area that we think has good development opportunity in the next phase appraisal.
And last but not least, we have a unique exploration opportunity in Kurdistan, one of the more stable countries in the region of the Mid-East. Hess has a 64% working interest. We currently spud the first of two wells. Here, Shakrok and then we will have another called Dinarta, this is where you have to build roads in the mountains to get your drilling locations setup, surface anticlines with oil seeps, you can see that on the picture and significant reserve upside. And again, here we’re looking at a partnership strategy.
So again, exploration upside, optionality as we go forward not figuring in our growth plans through 2017 but hopefully we’ll provide between Ghana and Kurdistan what we’re doing in the deepwater Gulf and Malaysia, some future growth beyond next five years.
So hopefully from this presentation, you will agree that we have an exciting investment opportunity for all of you. We’ve made significant progress in executing our plan. We basically have done what we said we would do. We’re ahead on timetable and valuations in our asset sales program. The Bakken is doing very well both in cost and production. And most of all, we believe, we have a very bright future with our growth prospects to generate significant future value for our shareholders.
Very much appreciate your attention and attendance today. Thank you.
Paul Cheng - Barclays
Thank you, John. We have time for one or two questions, before we move to the breakout session. There is a question here.
Hi. When do you expect to complete the Bakken reserve estimate review and release it?
John Hess Jr.
Hopefully, if not by the end of the year, the beginning of next year, we want to present it to our Board. But as soon as we can tell you, basically the definition of our depletion plan, we’ll be sharing it with our shareholders in the investment community.
The Elliott report from last winter that estimated the value of Hess’ $95 to $125 a share, used $3 billion to $3.5 billion for the downstream, you got $1 billion for an asset, we didn’t even know existed, you got that phase in network, you got the terminals, you’ve got two codes and you’ve got hedge fund. Do you think that what you know now that those estimates for the value of the downstream were conservative?
John Hess Jr.
So far, the proceeds we receive both upstream and downstream on valuation have exceeded our estimates. We have these other asset sales underway, I wouldn’t want to (inaudible) on those processes but as we move forward and get -- completed sales contracts, let’s let the results speak for themselves. I’m cautiously optimistic that we will continue the outstanding results we’ve had on asset sales so far going forward but wouldn’t want to get ahead of that.
Paul Cheng - Barclays
Well, with that, thank you everyone. We will move to the breakout session for additional Q&A, we will be in Liberty 1 and 2. Thank you.
John Hess Jr.
Thank you, very much.
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