Hess Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: Hess Corporation (HES)

Hess (NYSE:HES)

Q1 2014 Earnings Call

April 30, 2014 10:00 am ET

Executives

Jay R. Wilson - Vice President of Investor Relations

John B. Hess - Chief Executive Officer and Director

Gregory P. Hill - President and Chief Operating Officer of Exploration & Production

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

Analysts

Evan Calio - Morgan Stanley, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Guy A. Baber - Simmons & Company International, Research Division

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

Paul Y. Cheng - Barclays Capital, Research Division

Paul I. Sankey - Wolfe Research, LLC

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

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Hess Corporation Conference Call. My name is Crystal, and I will be the operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jay Wilson, Vice President of Investor Relations. Please proceed, sir.

Jay R. Wilson

Thank you, Crystal. Good morning, everyone, and thank you for participating in our first quarter earnings conference call. Our earnings release was issued this morning and appears on our website, www.hess.com.

Today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include those set forth in the Risk Factors section of Hess' annual and quarterly reports filed with the SEC.

Also, on today's conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website.

With me today are John Hess, 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, and welcome to you, all, on our first quarter conference call. I will make some high-level comments on the quarter and the progress we are making in executing our strategy. Greg Hill will then discuss our E&P operations, and John Rielly will go over our financial results.

Our results this quarter demonstrate continued execution of our plan to drive cash-generative growth and sustainable returns for our shareholders through a focused portfolio of world-class E&P assets. In the first quarter, our growth assets performed well with higher production from Valhall and North Malay Basin.

In addition, current Bakken production levels are in excess of 80,000 barrels of oil equivalent per day, following completion of the Tioga gas plant expansion. Tubular Bells is on track for first oil in the third quarter, and well results from the Utica Shale play are encouraging. Overall, we remain very enthusiastic about the prospects for our company in 2014 and beyond.

With regard to our financial results, net income for the first quarter of 2014 was $386 million or $446 million on an adjusted basis. Adjusted earnings per share were $1.38 compared to $1.95 in the year-ago quarter.

Cash flow from operations before changes in working capital was $1.4 billion. Compared to the first quarter of 2013, our results were impacted by asset sales, which reduced production by 77,000 barrels of oil equivalent per day and the shut-in of production in Libya, which reduced production by 23,000 barrels of oil equivalent per day.

Net production in the first quarter averaged 318,000 barrels of oil equivalent per day or 297,000 barrels of oil equivalent per day on a pro forma basis, excluding divestitures. This represents an increase of 11% from pro forma production of 268,000 barrels of oil equivalent per day in last year's first quarter, excluding Libya. This improvement was driven by higher production from the Valhall Field in Norway and North Malay Basin in Malaysia.

Regarding the Valhall Field, in which Hess has a 64% working interest, net production averaged 37,000 barrels of oil equivalent per day in the first quarter. This compares to 5,000 barrels of oil equivalent per day in the year-ago quarter when production was restarting, following the completion of the multi-year field redevelopment project. Two wells were brought online in the first quarter, and facility uptime and reliability have continued to improve.

In Malaysia, net production from the North Malay Basin, where Hess is the operator with a 50% interest, averaged 40 million cubic feet per day in the first quarter. The early production system commenced in October of last year and will maintain production at current levels through 2016. Full field development is ongoing and should result in net production increasing to 165 million cubic feet per day in 2017.

Net production from the Bakken averaged 63,000 barrels of oil equivalent per day in the first quarter. The Tioga gas plant commenced start-up operations on March 23 and began residual gas sales on March 25. Production from both the field and the plants increased through April. And as I mentioned earlier, current net production from the Bakken is in excess of 80,000 barrels of oil equivalent per day. Our full year 2014 production forecast remains 80,000 to 90,000 barrels of oil equivalent per day.

Our Bakken team continues to drive our well costs lower. In the first quarter, drilling and completion costs averaged $7.5 million, a 13% savings from the year-ago quarter. In addition, our wells continue to be more productive than the industry average.

In the deepwater Gulf of Mexico, development of the Tubular Bells Field, in which Hess has a 57% interest and is operator, remains on schedule to achieve first oil in the third quarter. During the first quarter, the SPAR and Topsides were towed out and installed on location. Three producing wells have been predrilled with pay counts coming in above expectations. As a result, we plan to drill a fourth producer in the second half of this year.

In terms of divestitures, on April 23, we announced that we completed the sale of our Exploration and Production assets in Thailand for $1 billion based upon an effective date of July 1, 2013. The divestiture processes for our retail marketing and trading businesses are well advanced. Also, we continue to make progress in our plans to monetize our Bakken midstream assets in 2015, most likely through an MLP structure, through which Hess will retain operational control while maximizing the value of our infrastructure investment.

Regarding our share repurchase program, through April 29, we have repurchased 14.3 million shares for $1.1 billion in 2014. Since commencement of the program in August of 2013, we have repurchased 33.6 million shares for $2.7 billion.

In sum, we are pleased with the progress we continue to make in our transformation to become a pure-play E&P company. We are confident that our initiatives have positioned the company to achieve 5% to 8% compound average annual production growth through 2017, off of our 2012 pro forma base and to generate free cash flow post 2014 based upon $100 Brent. In addition, the strength of our balance sheet provides the financial flexibility to fund this cash-generative growth that will deliver strong sustainable returns for our shareholders.

I will now turn the call over to Greg.

Gregory P. Hill

Thanks, John. I'd like to provide an operational update and a review of the progress we are making in executing our E&P strategy.

Starting with unconventionals. In the first quarter, net production from the Bakken averaged 63,000 barrels of oil equivalent per day. While the severe winter weather in the first quarter delayed the start-up of the Tioga plant by approximately 3 weeks and deferred bringing new wells online, the Bakken team has done an outstanding job of getting us back on schedule.

First gas was introduced to the Tioga plant on March 23. First residue gas sales commenced on March 25 and ethane recovery on April 23. Also, we brought 24 new wells online in April compared to 30 wells in the first quarter, and current net Bakken production is in excess of 80,000 barrels of oil equivalent per day.

In the second quarter, we forecast net Bakken production to average between 75,000 and 80,000 barrels of oil equivalent per day. Our full year 2014 Bakken production guidance remains at 80,000 to 90,000 barrels of oil equivalent per day.

Drilling and completion costs continue to be reduced with the first quarter averaging $7.5 million per well versus $8.6 million per well in the year-ago quarter and $7.6 million per well in the fourth quarter of 2013. And the productivity of our wells continues to be above industry average.

We are continuing with our down spacing pilots of 17 well pads, having 13 wells per drilling spacing unit with 7 wells in the Middle Bakken and 6 in the Three Forks to allow us to determine optimal spacing and cross play. Early field results are encouraging.

We are also conducting pilots on 2 pads with an even tighter 17 well per DSU configuration with 9 wells in the Middle Bakken and 8 in the Three Forks. By the end of this year, we expect to have sufficient data to provide updated guidance for well spacing, production, drilling locations and resource potential.

Turning to the Utica. The appraisal and early development of our 43,000 core net acres in the Hess CONSOL joint venture continues, and we are encouraged by well results to date with rates averaging 1,800 barrels of oil equivalent per day with 59% liquids based on 24-hour tests.

In 2014, Hess and CONSOL plan to drill some 30 to 35 wells across our joint venture acreage. In the first quarter we drilled 8 wells, completed 3 and tested one well in the joint venture acreage.

In the offshore, progress continues at Valhall, North Malay Basin and Tubular Bells. At the BP-operated field in Norway, in which Hess has a 64% interest, net production averaged 37,000 barrels of oil equivalent per day in the first quarter. Two producers were brought online following workovers, and facilities reliability has been considerably improved. Full year 2014 net production from Valhall is forecast by the operator to be in the range of 30,000 to 35,000 barrels of oil per day.

At North Malay Basin in the Gulf of Thailand, where Hess has a 50% working interest and is operator, first quarter net production continued at 40 million cubic feet per day through the early production system and is expected to remain at this level through 2016. Contracts for the central processing platform for the full field development will be awarded in the second quarter, and we continue to advance our full field development project, which is expected to increase net production to 165 million cubic feet per day in 2017.

At our 57% owned and operated Tubular Bells development in the deepwater Gulf of Mexico, the SPAR and Topsides were installed on schedule during the quarter. And we are on track for field start-up in the third quarter of 2014 with net production building to 25,000 net barrels of oil equivalent per day. Due to the positive results from the wells drilled to date, we intend to spud a fourth producer mid-year, which is expected to be run [ph] on production in the first quarter of 2015.

At the Malaysia/Thailand Joint Development Area, there's a 30-day planned shutdown commencing in early June for work associated with booster compression tie-ins. As a result, net production from this asset is expected to be curtailed by approximately 11,000 barrels of oil equivalent in the second quarter.

Company-wide production on a pro forma basis, and excluding Libya, is forecast to average between 295,000 and 300,000 barrels of oil equivalent per day in the second quarter of 2014. And our full year 2014 forecast on the same basis remains 305,000 to 315,000 barrels of oil equivalent per day.

In terms of exploration, in the Deepwater Tano Cape Three Points Block in Ghana, in late March, we successfully farmed out a 40% license interest. Hess will retain a 50% license interest in operatorship. Our new partner will pay a disproportionate share of the cost during the appraisal phase to earn their interest in the block. Appraisal drilling is expected to commence in May, beginning with a down-dip pass on discovery.

In Kurdistan, where Hess has a 64% license interest and is operator of the Shakrok and Dinarta blocks, we completed drilling at the Shakrok-1 well. We plan to perform production tests over multiple intervals in Jurassic age reservoir, which was the primary target of the well. In May, we plan to spud the well the Shireen well on the Dinarta block.

In closing, in this quarter, we have continued executing against our plan and delivering key milestones, including those on Tioga, Tubular Bells and North Malay Basin. We see increasing upside in our high-quality acreage position in the Bakken, where we continue to drive top quartile operational performance and leverage our infrastructure advantage. And finally, we are entering a key phase of exploration in Kurdistan and appraisals in Ghana.

I will now turn the call over to John Rielly.

John P. Rielly

Thanks, Greg. In my remarks today, I will compare results from the first quarter of 2014 to the fourth quarter of 2013.

The corporation generated consolidated net income of $386 million in the first quarter of 2014 compared with $1,925,000,000 in the fourth quarter of 2013. Adjusted earnings were $446 million in the first quarter of 2014 compared with $319 million in the previous quarter.

Turning to Exploration and Production. E&P had income of $508 million in the first quarter of 2014 and $1,029,000,000 in the fourth quarter of 2013. E&P adjusted earnings were $514 million in the first quarter of 2014 and $436 million in the fourth quarter of 2013.

The changes in after-tax components of adjusted earnings were as follows: higher realized selling prices increased earnings by $46 million, lower operating costs increased income by $56 million, lower exploration expenses improved earnings by $15 million, lower sales volumes decreased earnings by $12 million. All other items net to a decrease in earnings of $27 million, for an overall increase in first quarter adjusted earnings of $78 million.

Our E&P crude oil operations were under-lifted compared with production by approximately 1.1 million barrels in the quarter, which decreased after-tax income by approximately $35 million. The E&P effective income tax rate, excluding items affecting comparability, was 39% for the first quarter of 2014 and 38% in the fourth quarter of 2013.

Turning to Corporate and interest. Corporate and interest expenses, net of income taxes, were $89 million in the first quarter of 2014 compared with $115 million in the fourth quarter of 2013. Adjusted Corporate and interest expenses were $81 million in the first quarter, down from $108 million in the fourth quarter. The decreased costs in the first quarter were a result of lower interest expenses and reduced employee-related costs.

Turning to downstream. The downstream businesses reported losses of $33 million in the first quarter of 2014 compared with income of $1,011,000,000 in the fourth quarter of 2013. Adjusted earnings were $13 million in the first quarter compared to an adjusted loss of $9 million in the fourth quarter of 2013, reflecting improved trading results.

Turning to cash flow. Net cash provided by operating activities in the first quarter, including a decrease of $248 million from changes in working capital, was $1,158,000,000. Net proceeds from asset sales were $1,237,000,000. Capital expenditures were $1,444,000,000. Common stock acquired and retired amounted to $1,043,000,000. Repayments of debt were $333 million. Common stock dividends paid were $79 million. All other items amounted to a decrease in cash of $22 million, resulting in a net decrease in cash and cash equivalents in the first quarter of $526 million.

Turning to our stock repurchase program. During the first quarter, we purchased approximately 12.6 million shares of common stock at a cost of approximately $1 billion or $79.33 per share, bringing cumulative purchases through March 31 to 31.9 million shares at a cost of $2.54 billion or $79.53 per share.

We have continued to buyback our common stock. And through April 29, total program-to-date purchases were 33.6 million shares at a cost of $2.68 billion or $79.84 per share. We had $1,288,000,000 of cash and cash equivalents at March 31, 2014, compared with $1,814,000,000 at the end of last year. Total debt was $5,576,000,000 at March 31, 2014, down from $5,798,000,000 at December 31, 2013. The corporation's debt-to-capitalization ratio at March 31, 2014, was 18.7%, which was improved from 19% at the end of 2013.

Turning to second quarter 2014 guidance. I would like to provide estimates for certain metrics. For the second quarter, E&P cash operating costs per barrel of oil equivalent are estimated to be in the range of $22 to $22.50 per barrel. The expected increase in cash cost per barrel over the $21.11 in the first quarter of 2014 is primarily related to lower production volumes following the asset sale in Thailand as pro forma cash costs were $22.17 in the first quarter.

E&P depreciation, depletion and amortization expenses per barrel are estimated to be in the range of $28 to $28.50 for the second quarter. The increase from the $25.19 per barrel in the first quarter of 2014 is primarily due to higher production volumes in the Bakken, lower volumes at the JDA due to a planned shutdown and the impact of selling assets in Thailand, which were not being depreciated while classified as held for sale.

Full year 2014 unit cost guidance of $20.50 to $21.50 per barrel for cash costs, and $29 to $30 per barrel for depreciation, depletion and amortization expenses remains unchanged. For the full year 2014, the E&P effective tax rate is still expected to be in the range of 37% to 41%, and the second quarter rate is expected to be in the range of 37% to 39%. The estimate for Corporate expenses in 2014 remains in the range of $125 million to $135 million after taxes. And after-tax interest expenses are still estimated to be in the range of $225 million to $235 million. Second quarter Corporate expenses are expected to be in the range of $35 million to $40 million, and interest expenses are expected to be in the range of $50 million to $55 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] Our first question will come from the line of Evan Calio from Morgan Stanley.

Evan Calio - Morgan Stanley, Research Division

Yes. Earlier in the week, there was a retail acquisition [indiscernible] 14x forward EBITDA. It was a utilization reminder of MLP structure for wholesale fuels business and ability to characterize some of that retail site value as wholesale fuel and thus MLP qualifying income. So, I mean, my question is have you examined the potential MLP value in your retail assets? And do you consider that potential value when you consider the value in a sale process? And I have a follow-up.

John B. Hess

Yes, Evan. As you well know, our divestiture process for our Retail business is well advanced. We certainly are prepared to move forward with a spin, and at the same time, we're conducting a parallel process to look at all of our other options, including outright sale. And the process is well underway.

Evan Calio - Morgan Stanley, Research Division

Okay. The transaction surely highlights the value there. Can you share a tax basis in the retail?

John P. Rielly

What we're going to do, Evan, is anything related to disclosures on that would come through future SEC filings. So should we pursue a spin option. So again I think, as John said, we're well advanced in the processing, and that's where we want to be right now from a disclosure standpoint.

Evan Calio - Morgan Stanley, Research Division

Fair enough. Can you give me the tax basis on the electric JV interest sale or the tax implications there?

John P. Rielly

Sure. The gain on sale on that transaction will be limited.

Evan Calio - Morgan Stanley, Research Division

Great. And maybe at the risk of a similar response, on potential MLP-able assets, I'm not asking in EBITDA figures, but can you discuss any potential assets outside the Bakken, which is clear that may qualify, Gulf of Mexico, for instance, with Tubular Bells platform investment or anything that's outside of the Bakken would be helpful.

John P. Rielly

So our clear focus right now is focusing on our Bakken midstream assets, and that's where our efforts are going right now. And we're still on track I think on the guidance that we've been saying. So by 2015, we look to have a monetization event relating to those Bakken midstream assets. We plan to get SEC filings in place here in the second half of the year for that. Over time, yes, we have other midstream assets in our portfolio that could ultimately be dropped into that. But that will be at a later point.

Evan Calio - Morgan Stanley, Research Division

Great. Maybe lastly, if I could. Just on Tioga. Can you just remind us of third-party volumes we should expect there before you fully fill the plant just so I kind of can understand that?

Gregory P. Hill

Yes. So I could give you a sense of current volumes right now, Evan. Right now, the plant end-up rates are about 120 million to 140 million cubic feet a day. And roughly 70% of that is Hess-operated production and third is -- and 30% is third party. So obviously as we ramp our production up, our volumes will go up. But our plan is to fill that plant to capacity of 250 million cubic feet a day as rapidly as we can. And then we're also looking at ways to de-bottleneck that facility to further increase the capacity to 300 million cubic feet or higher.

Operator

Our next question will come from the line of Ed Westlake from Crédit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

Yes. Just a very quick follow on from Evan's conversation on retail, and again you may not give this. But you had I think $13 million in the downstream in the first quarter. Do you have a number for what was sort of retail-only EBITDA within that?

John P. Rielly

[indiscernible] of the divestiture process.

Edward Westlake - Crédit Suisse AG, Research Division

Understood. Okay. A question for Greg then on the down spacing. We've been tracking some of the other sort of down spacing tests in the industry, and some of them started a little bit earlier. So we've got a bit more data. We find that the EURs are in the sort of 400 MBOE range, i.e., slightly lower than where the sort of original wells would be. But obviously, you get a saving in terms of the costs. So I'm just getting a sense of do you see this playing out as sort of just an area where you can add inventory, but the returns will fall? Or is this an area where you think you can actually sort of sustain the current levels of returns. And if that's the case, do you see yourself throwing more rigs at the play once you've got this down spacing test, your own tests finished? Any color there would be helpful.

Gregory P. Hill

Okay, great. Thanks, Ed. I think first of all, just to say it's early days for us. We've got 17 well pads planned with these 13 wells per DSU. So that's 7 and 6. 7 in the Middle Bakken and 6 in the Three Forks. Early field results, although limited, are very encouraging. We're seeing very little interference in those wells. So I think there's a good chance that if that continues, these will be very, very high return wells just like the current wells are. We're also doing 2 well pads that have 17 per DSU. So that's a 9 and 8, but those will come a little bit later in the year.

Edward Westlake - Crédit Suisse AG, Research Division

And then maybe in terms of the geology, I mean, how much of your acreage do you think this in the sweet spot for doing the down spacing? Obviously, not all of the acreage has the Middle Bakken and Three Forks potential.

Gregory P. Hill

Yes, I think that depends. That's why we're doing 17 well pads because we're going to try and spread those around the field because obviously in other areas, say, on the anticline where you have a lot of natural fracturing, you might see higher interference in that area of the field. So that's why we're putting these pads all around the field to try and really assess where could we apply this, right?

Operator

Our next question will come from the line of Doug Leggate from BoA.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

I've also got I guess a follow-up first on the Bakken. I guess I would probably slightly disagree with Ed's conclusions there on the down spacing, given what Continental's been doing. But my question to you guys is, you're drilling half your program this year on down spacing tests. So I would -- I guess, Greg, what I'm kind of thinking is you're managing to your inventory in terms of drilling activity. If it turns out that the 7 and 6s work but yet your current plan is 5 and 4s as I understand it, what does it do to your activity level in terms of future planning, future rig activity and ultimately, production targets out of the Bakken?

Gregory P. Hill

Well, I think as we've said, Doug, our current plan, which is 5 and 4 has 150,000-barrel-a-day target or peak in 2018 with 1.1 million barrels -- or billion barrels recoverable. Obviously, if we go to 7 and 6, that number's -- all those numbers are going to go up because the number of operated drilling locations will go up as well. And so I think you can do the math and figure out that things will go higher. Now what we haven't done yet is determine what rig pace, if this is successful, what rig pace will we prosecute on that acreage. We'll make that decision at the end of this year, and that'll be part of our business planning as we go forward in 2015 plus.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Great. My follow-up I guess is kind of related because it relates to the strength of your cash flow. And, John Hess, I guess the philosophical question here is you've got midstream spending in Tubular Bells that kind of falls off this year. It seems that on a pre-working capital basis, your run rate is about $5.6 billion streets [ph] below that, and you haven't even have the growth in the second half of the year. So it's kind of looking like the cash flow is very, very strong. You're selling more assets, your buybacks clearly look like that's conservative. So can you prioritize for us the use of cash as you look beyond perhaps the current year, given all of those moving parts?

John B. Hess

Sure. Well, the first priority will be to invest for future growth with our balanced approach among unconventionals exploitation and exploration to underpin the 5% to 8% average growth rate going through to 2017 and obviously, want to position beyond that. Obviously, as we move out and our lower risk cash-generative growth increases, there will be more money to consider then besides which we put in investing for growth to increase cash returns to shareholders. So when we get there, obviously, that'll be a priority as well.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

So when would you anticipate making a decision on the buyback authorization because that looks like you're going to chew through the $4 billion in fairly short order.

John B. Hess

Doug, that decision will be made when the ultimate decision is made for do we spin or sell our Retail business. And then the $4 billion share buyback authorization, that's when we would be focused on do we increase it or not.

Operator

Our next question will come from the line of Guy Baber from Simmons & Company.

Guy A. Baber - Simmons & Company International, Research Division

Guy Baber with Simmons. I had a question on the offshore portfolio, but you guys obviously had a very strong offshore production this quarter at both Valhall and then despite some downtime early in the quarter, it looks like Gulf of Mexico did pretty well also. So I was just hoping you could provide some incremental detail around the strong Gulf of Mexico output, specifically what drove that? How sustainable might that be as we think about the rest of the year? And has production, in fact, been better than what you expected internally? And then at Valhall, can you just talk a little bit about confidence and the sustainability of some of the improvement, the uptime and reliability of that asset, just given its importance to your overall outlook?

Gregory P. Hill

Yes. Let me talk about Valhall first, and then I'll go to the Gulf of Mexico. So in Valhall, we've established regular executive level engagements with BP management all the way up to Bob Dudley. And we're actively progressing an agreed plan between our 2 companies. And we're encouraged by the progress that BP is making. In Q1, we saw 2 producers brought online following workovers, and facilities reliability has been considerably improved. So they've worked through a number of the issues. After the redevelopment start up, it was dragging the right reliability down. So we're cautiously optimistic that, that can be sustained, the higher reliability, because it's brand-new kit, it's brand-new equipment out on the platform. Regarding the Gulf of Mexico, the big increase, of course, quarter-on-quarter was at Llano followed by Conger. Now that was, if you recall, Shell had a pipeline go down for 22 days in December. That all came back in January. The Llano contributions actually from the Llano 4 well, that was brought on very late in November. So that's a sustainable volume going forward. And as we mentioned, Valhall was at 37. So that's good performance from Valhall as well.

Guy A. Baber - Simmons & Company International, Research Division

Okay, great. And then I had a follow-up just on -- I just wanted to run through the 2Q production guidance again. I think you mentioned it would be flat effectively quarter-on-quarter. But you do have a pretty significant ramp-up in the Bakken at 15,000 barrels a day. I apologize if I missed this, but did you mention any major turnaround activity for 2Q that would be offsetting? Or is there just an element of conservatism embedded in the guidance?

John P. Rielly

Yes. So let me just kind of walk you through the math. Thanks for the question. So if you look at 297, which was the first quarter 2014 pro forma production, you can add about 18, which is Bakken and some minor growth in South Arne. And then you have to back off about 11,000 to 12,000 barrels a day due to the planned downtime in JDA. So we're taking that JDA facility down in June to do some tie-ins for the booster compression. So that's where you get the offset of the growth in the Bakken and the small amount in South Arne. And then there's some other very small differences. That gets you to around 300, which is the upper end of the guidance on the 2Q 2014 pro forma.

Operator

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

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

Yes. I guess could we talk a little bit more about the Utica just in terms of -- it's a reasonable increase, the number of wells. There've been a number of other players in this space taking write-downs and backing away. Could you just sort of walk us through what -- obviously, we have the details here in the presentation, but kind of walk us through what you're seeing terms of liquids production there. Are you seeing anything in the way of oil strictly condensate? And then the process of moving that out of there at this point.

John B. Hess

Yes. So let me just put some context on it first. So we're continuing to delineate the play and improve our understanding of our core JD [ph] acreage position. So we're very encouraged by our findings to date, which show that the majority of our -- that 43,000 core net acres that we have in the JD [ph] is located in the play's wet gas sweet spot. Now, recall we have a very high net revenue interest here, about 95%, which really turbocharges the economics. And that acreage is largely held pipe [ph] production are owned in fee. And so then if you look at where we're at in the appraisal process though, we've drilled to date, so this is an inception-to-date, we've drilled about 42 wells. However, we've only tested about 15 so far. So we're still pretty early. But the well results are very encouraging. And if you average all those well results in that kind of wet gas area, it's about 1,800 barrel equivalents per day, and it'll be liquids rates that we quoted in our remarks in the opening. So very high liquids rates, very good rates. So we remain encouraged.

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

Okay. And then in terms of where the I guess the liquid, the condensate side of that is moving. I mean, I know it's not huge numbers just yet, but no, is it staying local or are you having to shift it somewhere else?

John B. Hess

Yes. No, I mean, it's being moved to various markets, right?

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

Okay. And then my last question on the exploration side or I guess now it's moved to appraisal in Ghana, got the appraisal wells. As I understood it from previous discussions, there may be some additional agreements to go with the Ghana government. Any update of where we are there or how should we think about the timeline of Ghana, assuming a reasonable success rate out of the appraisal program?

Gregory P. Hill

Yes. I think as we said in our opening remarks, the rig is going to show up mid-May, and then we'll prosecute the appraisal program. So by year end, we should have a good understanding of what we have in the appraisal program in Ghana.

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

And then beyond that, I mean, is it a negotiation with the Ghana government -- how should we think about the process working from that point?

Gregory P. Hill

Well, after that, you have to file a development plan with the government assuming that you go forward. And yes, there will be some negotiation in that development plan, but that would be the next step. So that would be a 2015 item that we'd get our development program through the government.

Operator

Our next question will come from the line of Paul Cheng from Barclays.

Paul Y. Cheng - Barclays Capital, Research Division

Maybe, to Greg, the first one on Ghana. You're talking about farmdown your partner going to pay a disproportion on the appraisal program. Can you give us some idea that what is up to?

Gregory P. Hill

We can't yet. That's confidential, commercially confidential with the partner.

Paul Y. Cheng - Barclays Capital, Research Division

I see. So you can't disclose who is the partner also I presume.

Gregory P. Hill

No, we can't, not yet.

Paul Y. Cheng - Barclays Capital, Research Division

Not yet. In the -- I think that when you're talking about Valhall for the full year, talking about 30, 35. Since the first quarter, you did 37. If that means that we have some major downtime in the second or third quarter? It doesn't look like it's second. So should we assume that third quarter, they're going to have some meaningful maintenance downtime?

Gregory P. Hill

Yes. There will be some seasonal downtime in the North Sea every year in that third quarter. And then you'll have some normal decline at Valhall as well.

Paul Y. Cheng - Barclays Capital, Research Division

I see. And maybe this is for John Rielly. John, when I'm looking at the first quarter exploration expense, I know that this is close to impossible item to be really precisely predict. But should we view that as somewhat of a normalized run rate going forward because that is much lower than what we typically experience or that normally expected from the company over the last several years.

John P. Rielly

So in the first quarter, right, there was very limited dry hole expense in there. The only thing that was in there was the noncommercial portion of the Kurdistan well, the Triassic section. So there was only a $10 million dry hole in there. So from outside of that, you could call it typical type of run rate there, but we are drilling. There's going to be exploration drilling. It's continuing in Kurdistan. It's continuing in Ghana. So just like you said, Paul, it's very difficult to predict exactly what the expense is going to be. Clearly, our expenditures are staying around that $550 million level that we said for the full year, and it will just depend on the success of the wells.

Paul Y. Cheng - Barclays Capital, Research Division

And I think previously that the assumption is that you guys will decide on whether it's a spin or a sell sometime in the second quarter. Are we still looking at the same timeline or now that timeline may have changed a little bit?

John B. Hess

No, I think what we would rather do is we're well advanced in the divestiture process, and we'll make the announcement when we're ready to make the announcement.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And for -- 2 final question for John Rielly. On the -- when you're talking about the DD&A going up in the second quarter because of higher Bakken production, we look at it and ballpark estimate, it seems to suggest that the Bakken unit DD&A may be around in the $35 pass. Is that on the ballpark correct? So that we can use it to estimate in the future what should we assume the DD&A as Bakken production go up.

John P. Rielly

We haven't been specific on that, Paul, outside of saying that the Bakken DD&A is above our portfolio average, and it is a good bit above the portfolio average. So -- and just to remind you, our cash cost though on the Bakken, outside of like a quarter like this with the gas plant being down, its run rate for the cash costs are in line with our portfolio average or a little bit below. And so again, you've got to look at where we are in the process of developing the Bakken. Obviously, volumes are going to begin here to ramp up. So that volume ramp up will continue to lower our cash cost in the Bakken, as well as we continue to produce out and get more performance history in there, and our DD&A rates will come down over time as well.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. Do you have any idea when that unit DD&A in Bakken will start to trend the other way going down?

John P. Rielly

It'll start just slowly each year. So starting in '15 and '16 again as we begin do that, it'll just start to slowly trend down, and you know where our Bakken D&C costs are getting to and the EURs on the wells. So ultimately, it'll track down to that with the inclusion of infrastructure costs.

Paul Y. Cheng - Barclays Capital, Research Division

Okay, final one. On the gas plant, have you guys -- I mean, I presume you're saying that 70% of the gas is Hess operated, but that 30% is outside. So how the NGL extraction, the economic, is that based on a fee base or that you take the commodity risk by buying the gas and then you get whatever that you can sell for dry gas and NGL? Can you help us understand a little bit on the economic how that work?

John P. Rielly

Sure. So, I mean, again first, we'll do it from the Hess standpoint and then third party. So on the Hess standpoint, obviously, the economics are just taking the liquids out and getting better pricing for the liquids versus the gas or the wet gas running through the system. So that increases our economics, and you'll see the flow-through of that on our NGL production and the prices that we get. So you'll see that in the press release. As far as third party, when they're coming in, all contracts are different. And so you run on percentage of proceeds-type contracts where you'll get a certain portion of the liquids that come out that come to Hess that we then sell and get that revenue, not production, but we get that revenue associated with that. There are other contracts where some is percentage of proceeds, some is fractionation fees. So we'll get it up. You'll see that actually in our revenue line not in our production lines, but just our revenue line for E&P.

Paul Y. Cheng - Barclays Capital, Research Division

And as we're preparing this for a MLP listing next year, is it a -- any particular strategy from the management standpoint that whether you want to move your contract one way or the other to become more fee-based or that you're still okay with more on sort of the take on the commodity progress given that the 2 revenue streams have a very quite different on the multiple.

John P. Rielly

You are absolutely right, Paul. So the economics that I just talked about and the commodity exposure is what Hess will maintain and continue to maintain post an MLP-type transaction. The MLP revenue will be solely fee-based. So the MLP will charge. Even though the contracts will work for Hess, and Hess will maintain all the commodity exposure, the MLP will not have that commodity exposure. It will just be fee-based.

Operator

[Operator Instructions] Our next question will come from the line of Paul Sankey from Wolfe Research.

Paul I. Sankey - Wolfe Research, LLC

There's been a tremendous number of moving parts here. Could I just ask you, and forgive me if you've already said some of these things, but could you just repeat what your full year CapEx expectation is for 2014? And to any extent that you can look forward beyond 2014 as to what you think the run rate for the company will be, could you additionally talk about where you think the optimum level of leverage is in terms of debt, debt to capital, et cetera? Whether that's changed over time or whether there's a number that we can just think of? And then could you just talk a little bit about the mechanics of the buyback, which is to say, whether it's just a rated buyback, an opportunistic buyback, anything you could add.

John P. Rielly

Sure. So first with the E&P capital guidance, it is $5.8 billion. That is still the number. And obviously, we'll track it as we go throughout the year. I think the next thing you said -- asked was about our leverage or our debt cap type.

Paul I. Sankey - Wolfe Research, LLC

Well, sorry to interrupt. I just wondered whether there was any sort of indication of what CapEx should be.

John P. Rielly

Sorry, Paul, yes. So on a go-forward basis, I mean, the guidance that we have been saying is that post 2014 with our capital expenditure profile, we will be free cash flow positive. So we really don't go out and give long-term guidance on where that capital level is, but it's going to be in a range like that of the $5.8 billion, but we're not going to be specific on that right now. The leverage target is not a change for us. The way we think about it is we want to maintain a solid investment-grade credit rating, and so any leverage metrics that we look at are to continue to achieve that solid investment grade, which is BBB+ at least. And then I think the last question...

Paul I. Sankey - Wolfe Research, LLC

Dividend. And I guess I didn't throw in dividends, but I will now, so dividend and buyback. The buyback was just whether there's -- it's a rated kind of ongoing or on opportunistic-type approach. And then any comments you can make on where the dividend might go from here in terms of the big increase you had last year, and what you aspire to do with that going forward?

John P. Rielly

And so what we're going to continue as you've seen with our stock buyback, we have a disciplined approach to the buyback, and that is depending on market conditions. And we plan to continue that disciplined approach. I think as John Hess said earlier, we will update post the announcement of the retail transaction, whether it's a spin or it's a sale on where our authorization is for the stock buyback. So we're going to continue that way. And then as far as dividends go, as you know, we did increase the dividend last year. And John had mentioned that as we look at our free cash flow going forward and we have excess free cash flow as production increases, we will be looking at additional current returns to shareholders at that time.

Paul I. Sankey - Wolfe Research, LLC

Great. And then another long-term one, and I'll leave it there. You've learned a lot obviously from a very aggressive process of restructuring. Are we now looking at a terminal point for Hess? Do you have an idea of what the optimal balance of the assets and overall company will be or can we see this as an ongoing under revision-type process?

John B. Hess

As you know, Paul, with the completion of our Thailand sale, we've pretty much completed our portfolio restructuring that we announced a year ago on March 4. Retail and Hetco are the only 2 remaining for this year, and they're well underway. Obviously, let's not forget the Bakken infrastructure. That will be a monetization event next year above and beyond anything that we're doing this year. But with the transformation to a pure-play E&P substantially completed, our focus going forward is going to be on operations, driving our lower-risk cash-generative growth and sustainable returns from our portfolio. And any further portfolio reshaping would just be part of the normal course of business operations.

Operator

Our next question will come from the line of Jeffrey Campbell [ph].

Unknown Analyst

I wanted to ask you going back to the Bakken and the stack test that you're doing, do you model the Three Forks as 4 discrete zones as do some producers in the play or do you think of it in another way? And having said that, what portion of the Three Forks are you landing in the stack zone tests that are upcoming?

Gregory P. Hill

Yes. So we have put wells in the second bench of the Three Forks, as well as the first bench of the Three Forks. So we do see some -- we do see some potential in the deeper benches of the Three Forks. Now as I've said before, ultimately, the decisions kind of come down to economics. So does the incremental recovery from putting a well in each bench justify the cost of doing that well? Or can a single well access the majority of the reserves anyway? So that's really going to be the question that we're doing. So we're planning our test to help us answer that question. Regarding the Three Forks in general, we estimate that 60% to 65% of our acreage, core acres will be perspective for the Three Forks.

Unknown Analyst

Okay, great. That's helpful. Turning to the Utica quickly. Just I looked at the first quarter '14 well announcement from your partner, and I was just wondering bearing in mind that these wells are line constrained, do you -- would you qualify the performance of the first quarter '14 wells as on average with your other wells that you've published results on accounting of line constraint?

Gregory P. Hill

Yes, again, I think we're continuing to delineate the play, and it wouldn't -- I wouldn't want to say that those wells were the same as other wells. Because again in our delineation, we're finding some variation in those well rates. And so no, I wouldn't say those are typical results.

Unknown Analyst

Okay. And the last one that I'll -- well, actually, I wanted to ask one of you a quick question quickly. Can you give us any idea of what your current well costs are and what those might look like a year from now?

Gregory P. Hill

Yes, so the -- we're still in the appraisal mode. Therefore, the cost of our wells are still pretty high as we're gathering extensive core log and technical data and plus, we continue to experiment with lateral lengths, stage counts and frac size to really try and figure out what is the optimum development plan here. But what I will say is over the past 12 months, we've achieved about a 50% reduction in per foot drilling costs and a 30% reduction in per stage completion costs. So on a per foot and per stage basis, we're seeing the same things happen that happened in the Bakken as we gain efficiencies in our drilling and completion cost, and we expect that trend will continue.

Unknown Analyst

And those efficiencies that you're getting, are you already drilling on pads or are these still standalone wells as you're seeing these efficiencies on?

Gregory P. Hill

We are. We're drilling on some pads. We've got 3 rigs operating, and some of those are on pads.

Unknown Analyst

So is it fair to qualify the reductions that you just identified as being somewhat pad-related? Or is it -- should we think of it another way at this point?

Gregory P. Hill

No, it's both pad related and efficiency related.

Unknown Analyst

Okay, great. And the last question I want to ask was a little bit more high level. As you're preparing to examine the production and continue drilling in Kurdistan, what's your current take of the progression to be able to export Kurdistan product over the next 12 to 18 months?

Gregory P. Hill

Yes, I think we're continuing to develop our commercial strategy on Kurdistan as we speak.

John B. Hess

Greg and I were in Kurdistan about a month ago, and leave it to the Kurdish government to give you updates on their export plans. But the physical capacity is there to export to Turkey, and we're pretty confident that if we have a commercial discovery that can be developed, we'll be in a position to be able to export the oil.

Operator

And our final question will come from the line of Pavel Molchanov from Raymond James.

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

First, back to the Utica. You've been saying over the past year that the earliest full-scale development could begin is the first half of 2015. Any changes to that timetable?

Gregory P. Hill

No. I think that's our strategy now is to figure out what the full-scale development plan will be in 2015. And that's why we're still experimenting a lot with lateral lengths and frac stages and profit loading and all those things you do to try and figure out what the optimum is.

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

Okay. And then on exploration expense, I mean, obviously, you can't really guide to it. But in Q1, the $119 million was the lowest quarterly number in 3, 4 years minimum. That's not going to be the norm going forward, that run rate is it?

John P. Rielly

No. I had mentioned it earlier. It's because we had a very limited dry hole expense in there. The only -- it was about $10 million related to the lower Triassic section of the Kurdistan well. And so that's the only dry hole expense in there. We obviously are drilling in Kurdistan, and the next well is about to spud. And then we've got drilling in Ghana. So it's very difficult to predict, but yes, it should be higher.

Operator

Thank you, ladies and gentlemen. That concludes today's presentation. You may now disconnect. Have a great day.

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