Hess' CEO Discusses Q1 2011 Results - Earnings Call Transcript

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 |  About: Hess Corporation (HES)
by: SA Transcripts

Hess (NYSE:HES)

Q1 2011 Earnings Call

April 27, 2011 10:00 am ET

Executives

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

John Hess - Chairman of the Board and Chief Executive Officer

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

Jay Wilson - Vice President of Investor Relations

Analysts

Edward Westlake - Crédit Suisse AG

Mark Gilman - The Benchmark Company, LLC

John Herrlin - Merrill Lynch

Paul Cheng

Pavel Molchanov - Raymond James & Associates, Inc.

Douglas Leggate - BofA Merrill Lynch

Paul Sankey - Deutsche Bank AG

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Hess Corporation Earnings Conference Call. My name is Modesta and I will be your coordinator 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, Investor Relations.

Please proceed, sir.

Jay Wilson

Thank you, Modesta. Good morning everyone, and thank you for participating in our first quarter earnings conference call. 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 security 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. As usual, with me today are John Hess, Chairman of the Board and Chief Executive Officer; Greg Hill, President, Worldwide Exploration and Production; and John Rielly, Senior Vice President and Chief Financial Officer.

I will now turn the call over to John Hess.

John Hess

Thank you, Jay, and welcome to our first quarter conference call. I will make a few brief comments, after which John Rielly will review our financial results.

Net income for the first quarter of 2011 was $929 million, including a $310 million gain on the sale of assets versus $538 million a year ago. Our earnings were positively impacted by higher crude oil selling prices, which more than offset the impact of lower production volumes and higher exploration expense.

Exploration and Production earned $979 million. Crude oil and natural gas production averaged 399,000 barrels of oil equivalent per day, which was 6% below the year-ago quarter. This decrease resulted primarily from the loss of production from Libya and the previously announced sale of mature natural gas assets in the United Kingdom.

In terms of our in 2011 production forecast, we believe the implementation of U.S. and international sanctions make it prudent to assume production from Libya will remain suspended for the balance of the year, resulting in a 20,000-barrel per day reduction in our forecast. In addition, a shut-in well at the outside operated Llano field in the deepwater Gulf of Mexico and PSC effects of related to higher oil prices combine to further reduce our forecast by 10,000 barrels of oil equivalent per day. We now forecast 2011 net production to average between 385,000 and 395,000 barrels of oil equivalent per day, versus our previous forecast of 415,000 to 425,000 of barrels oil equivalent per day.

In North Dakota, net production from the Bakken averaged 25,000 barrels of oil equivalent per day in the first quarter. We are currently operating an 18-rig program and focusing most of our drilling on the acreage we acquired last year from American Oil & Gas and TRZ Energy. In South Texas, we have drilled seven wells in the Eagle Ford. We have completed two of these wells and expect to commence production in the second quarter. In total, we plan to grow about 25 Eagle Ford wells in 2011 and we continue to add acreage in the play.

In France, a political debate regarding hydraulic fracturing has delayed our drilling program in the Paris Basin. We are actively engaged with local and national stakeholders. While we believe it will take time to work through the issues, we are confident that the drilling and completion operations can be done safely and responsibly.

In Australia, appraisal activities are continuing on our 100% owned WA-390-P permit and commercial discussions with potential partners are ongoing. In the Deepwater Gulf of Mexico, we continue to advance our Tubular Bells development, where we are operator and have a 40% working interest. Last week, we signed a letter of award to process production from the field at a third-party owned SPAR facility. Project Sanction is anticipated to occur later this year. We also continue to progress the engineering and design work for the Pony/Knotty Head Field and expect to sanction the project in 2012.

In addition, we have joined the Marine Well Containment Company, and also the Helix Well Containment Group to enable us have access to both oil spill response capabilities to conduct drilling operations in deepwater Gulf of Mexico.

With regard to exploration, we thought it appropriate to provide an update on the Paradise prospect in Ghana. As we have previously commented, we are drilling this prospect in 6,038 feet of water on the deepwater Tano Cape Three points block. Hess is carrying 100% of the well costs and has a 90% working interest. The Ghana National Petroleum Corporation has the remaining 10% interest.

While results are preliminary, intermediate wire line logs indicate that we have thus far encountered 370 feet of net hydrocarbon pay in 2 separate intervals. Our current plan is to drill an additional 1,100 feet to test a third stratigraphic interval, reaching a total depth of approximately 16,400 feet.

In Egypt, drilling of the Cherry prospect in the North Red Sea was recently completed resulting in a dry hole. Hess is operator and has an 80% working interest in the block. We will evaluate the results of the Cherry well to determine future plans for the block. We are currently negotiating an agreement with another operator to farm out the Stena Forth drillship through to October this year.

In Indonesia, we plan to spud the Andalan well on the Semai V block in the second quarter. Hess has a 100% working interest in the block. In Brunei, the operator of Block CA-1, in which Hess has a 13.5% interest, intends to commence exploration drilling in the third quarter.

Turning to Refining and Marketing. We reported net income of $39 million for the first quarter of 2011. Financial results at our HOVENSA joint venture refinery came in slightly better than the year-ago quarter. During the first quarter, HOVENSA completed a reconfiguration of the refinery which reduced distillation capacity to 350,000 barrels per day from 500,000 barrels per day. This action will allow the refinery to produce a greater percentage of higher margin products and reduce operating cost and capital expenditures.

Marketing earnings were lower in the first quarter last year. Retail Marketing faced rising wholesale prices during the first quarter which put pressure on fuel margins. Gasoline volumes on a per-site basis were down approximately 2%, while total convenience store sales were up nearly 1%. Our Energy Marketing business delivered strong operating results, but earnings were lower than last year's first quarter.

Solid operating performance, higher commodity prices and a new 5-year $4 billion revolving credit facility have strengthened our financial position. We remain committed to maintaining a strong balance sheet to fund our future investment opportunities and profitably grow our reserves and production.

I will now turn the call over to John Rielly.

John Rielly

Thanks, John. Hello, everyone. In my remarks today, I will compare first quarter of 2011 results to the fourth quarter of 2010.

The corporation generated consolidated net income of $929 million in the first quarter of 2011, compared with $58 million in the fourth quarter of 2010. Excluding items affecting the comparability of earnings between periods, the corporation had earnings of $619 million in the first quarter of 2011 compared with $398 million in the fourth quarter of 2010.

Turning to Exploration and Production. Exploration and Production operations had income of $979 million in the first quarter of 2011 compared with $420 million in the fourth quarter of 2010. The first quarter of 2011 results included after-tax gain of $310 million related to the sale of the corporation's interest in certain natural gas-producing assets in the United Kingdom North Sea. Fourth quarter 2010 results included an after-tax charge of $51 million from items affecting the comparability of earnings between periods.

Excluding the effect of these items, the changes in the after-tax components of the results are as follows: Higher selling prices increased earnings by $231 million; lower operating costs, principally DD&A increased income by $25 million; higher exploration expense decreased earnings by $48 million; all other items net to a decrease in earnings of $10 million, or an overall increase in first quarter adjusted earnings of $198 million.

Our E&P operations were over-lifted compared with production resulting in increased after-tax income in the quarter of approximately $25 million. The E&P effective income tax rate for the first quarter of 2011 was 42%, excluding items affecting the comparability of earnings between periods.

In March 2011, the government of the United Kingdom proposed increasing the supplementary tax on petroleum operations by an additional 12%. This supplementary tax is expected to be enacted in the third quarter and will be effective from March 24, 2011. As a result, we expect to record a charge in the third quarter that will include a provision representing the incremental tax on earnings from the effective date to the date of enactment and a charge to adjust the deferred tax liability in the U.K.

Turning to Marketing and Refining. Marketing and Refining operations generated income of $39 million in the first quarter of 2011 compared with a loss of $261 million in the fourth quarter of 2010.

Fourth quarter 2010 results included an after-tax impairment charge of $289 million to reduce the carrying value of our equity investment in HOVENSA. Refining losses were $48 million in the first quarter of 2011 compared with $19 million in the fourth quarter of 2010, excluding the impact of the impairment. The corporation's losses from its equity investment in HOVENSA were $48 million in the first quarter of 2011 compared with $30 million in the fourth quarter of last year, excluding the impairment.

Fort Redding reported earnings of $2 million in the first quarter of 2011, down from $11 million in the fourth quarter of 2010. Marketing earnings were $68 million in the first quarter of 2011 compared with $37 million in the fourth quarter of 2010. Trading activities generated income of $19 million in the first quarter of 2011, compared with $10 million in the fourth quarter of 2010.

Turning to Corporate and Interest. Net Corporate expenses were $28 million in the first quarter of 2011 compared with $43 million in the fourth quarter of 2010. After-tax interest expense was $61 million in the first quarter of 2011 compared with $58 million in the fourth quarter of 2010.

Turning to cash flow. Net cash provided by operating activities in the first quarter, including a decrease of $325 million from changes in working capital was $1,135,000,000. Capital expenditures were $1,082,000,000. Proceeds from the sale of the United Kingdom gas producing assets were $359 million. All other items amounted to a decrease in cash of $52 million resulting in a net increase in cash and cash equivalents in the first quarter of $360 million.

We had $1,968,000,000 of cash and cash equivalents at March 31, 2011, and $1,608,000,000 at December 31, 2010. Our available revolving credit capacity was $3 billion at March 31, 2011.

In April, we established the new five-year revolving credit agreement, which increased our credit facility to $4 billion. Total debt was $5,552,000,000 at March 31, 2011, and $5,583,000,000 at December 31, 2010.

The corporation's debt to capitalization ratio at March 31, 2011, was 23.5% compared with 24.9% at the end of 2010.

I would like to update our 2011 guidance for certain metrics in light of recent events, including the suspension of Libyan production. The anticipated loss of Libyan production for the remainder of 2011 will raise our unit costs and lower our effective tax rate, but it is not expected to have a significant adverse impact to net income and cash flow. Our new guidance for unit costs for the full year is $33.50 to $35.50 per barrel, up from our previous guidance of $29.50 to $31.50 per barrel.

E&P cash operating costs are now expected to be in the range of $18 to $19 per barrel. And depreciation, depletion and amortization expenses are expected to be in the range of $15.50 to $16.50 per barrel. The higher unit costs are due to the expected loss of low-cost Libyan barrels, but also include the effect of increases in commodity price-driven production taxes in other geographical areas.

Our new guidance for our 2011 E&P effective tax rate is 38% to 42%, down from our previous guidance of 45% to 49%. The lower tax rate guidance reflects the absence of Libyan production, taxed at an effective rate of 93.5%. And the effect of the proposed higher U.K. supplementary tax on oil and gas operations.

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

Question-and-Answer Session

Operator

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

Douglas Leggate - BofA Merrill Lynch

Thank you. I've got a couple of questions, if I can, obviously, the first one on the great news you've had in Ghana, but also Egypt. Is it possible to just give us a little bit of an update on the prognosis of these two areas, and specifically in Ghana? Obviously, or at least I believe, this is not a stratigraphic play, could you talk there for about the potential scale of the opportunity of the structural -- is it a channel sign? What are we talking about in terms of potential pre-drill prospects [ph] now that you're actually halfway through this thing. Any update would be appreciated. And I have a follow-up.

Gregory Hill

Thanks, Doug. This is Greg Hill. First thing I want to do is just emphasize what John said. The results are preliminary on the well. Your next steps are to finish drilling the well, then evaluate all the data out of the well. So that includes wire line logs, MDT sample pods, et cetera, and then work with the government on the next step. So, Doug, it's just too early to speculate on how big what not. The thing I will say is it was a structural play, I mean that was the location that we picked, it was the structural play.

Douglas Leggate - BofA Merrill Lynch

Can you tell us what the hydrocarbons you referred to are? Are you talking liquids?

John Hess

We don't know yet, Doug. We're just getting -- we're just literally pulling the sample pods last night.

Douglas Leggate - BofA Merrill Lynch

Okay so it's that recent. What about Egypt, Greg? You've obviously pushed the rig out, it looks like till September, you've got a lot of prospects there. Anything you can tell us there or is this still too early?

Gregory Hill

Yes, I think on Egypt the prospect that we were targeting was oil in the Cretaceous and Nubian sandstone within a three-way closure. And that's a complex wristed system there. And frankly, the Nubian was just not present in the well. So while we experienced some gas shows through the Miocene, it was noncommercial. I think given this, Doug, we'll take a step back, we'll study all our results from the well and then figure out next step for the block, because there are a lot of additional prospects on the block. John mentioned in his remarks, the plan is to farm out the rig to another operator. So she'll be heading out of the Northern Red Sea.

Douglas Leggate - BofA Merrill Lynch

Great stuff. And my follow-up is really just on the unconventionals in the U.S. Bakken and Eagle Ford, I guess Eagle Ford specifically, the seven wells, can you give us any kind of indication as to the results you've had there? And in the Bakken, to interpret John's comments correctly, are we now basically off the geological program for the time being in order to look up each TTA [ph]. Or a little bit of color there and maybe on production guidance in the Bakken for this year will be appreciated. And I'll leave it there.

John Hess

Okay. So let me talk to the Bakken first. So the Bakken is proceeding as planned. As John mentioned, we have an 18-rig program. We expect to average 40,000 barrels a day this year. And as John did mention in his opening remarks, the primary objective is HBB to get that new acreage help by production. So therefore, for the next 18 months, Doug, our program is going to be primarily single laterals with those 18 rigs. Your question on the Eagle Ford, we got seven wells down. We're pleased with the results. We have a couple wells completed. They won't be on production until early May. So we don't have any production results yet, but the logs are encouraging.

Operator

Your next question comes from the line of Paul Sankey with Deutsche Bank.

Paul Sankey - Deutsche Bank AG

With the changes that we've seen in the U.K. and Libya, and even I guess you could say Ghana, could you talk a little bit about your CapEx for the year, which I think is running behind guidance? I'm really thinking of any potential shifts that you might be considering and where you spend and how much you spend? Thanks.

John Rielly

It's still a little early in the year. I mean, as you could see, you're saying -- running behind guidance but it's really kind of in accordance with our plan. And there were some ramping up as we go through the year. So typically as usual, we'll update guidance on our next quarter conference call.

Paul Sankey - Deutsche Bank AG

Fair enough. And is there any more on the sales of disposals? Can you give an indication of what you may be doing in terms of the portfolio over the rest of the year? You've been very active, obviously, over the past year or so. I just wondered if there will be a continuation that kind of activity? Or are you thinking you're settling into the acid-base you've got?

John Rielly

What we'll do, Paul is -- I mean it's a typical portfolio pruning [ph], we'll look at what assets that may fit with other's portfolio as compared to ours. The things that you may have heard or have been announced in the marketplace besides our U.K. gas assets down the first quarter is we have come to an agreement on Cook and McCour [ph] in the U.K. And also we have a small interest in the Snorfield [ph], which we've also come to an agreement on selling. At this point right now, that's all we have on our plate.

Paul Sankey - Deutsche Bank AG

And then finally for me just to be very near term. When can we expect something from Ghana news flow-wise, I'm thinking of when you hit TV and all the rest of it? Thanks.

Gregory Hill

Yes, thanks, Paul. We've got about 1,100 feet to drill to TD. So we're currently at about 15 3, we're going down to 16 4. We've got at least another two weeks of drilling and logging to go before we'll be at bottom.

Operator

Your next question comes from the line of Paul Cheng with Barclays Capital.

Paul Cheng

Thank you. Just have several quick question. John, when you're talking about -- I know that it's a little bit early, you're not going to give that new budget number, but what is the budget number for Libya for region only?

John Rielly

The amount of capital in Libya really is just not that significant that we have been planning in the budget. So again, there will be ins and outs in our CapEx budget program, but Libya was not a big piece of it.

Paul Cheng

So when you say not a big piece, it's less than a $100 million, less than $200 million, any rough number?

John Rielly

It's less than $100 million.

Paul Cheng

Less than $100 million. Okay. And then for Greg. Greg, the Eagle Ford, you said you finished, or you drilled seven well. I know that you don't have the data because none of them are in the production, but can you give us that -- what is your target estimate for those well? And ultimately, where you think that you can get to in terms of the cost per well, the type of resource per well? And if there's any IPO or any kind of data that you can help us.

Gregory Hill

Yes, Paul, again, it's still pretty early in the Eagle Ford. So until we get the wells on production and CIP rates and all that, I can't really talk about resource estimates. I will say again, the logs have been very encouraging. And as far as the wells we have drilled, they've cost us on average about $10 million including hookup costs. That's a round number for what they're going to cost.

Paul Cheng

Okay. And that so far from what you see, have you seen anything significantly different than what the other industry data out there in the Eagle Ford area?

Gregory Hill

No, Paul, it's pretty much come in as prognosed.

Paul Cheng

Okay. And this is for John. For Energy Marketing, if my recollection or calculation is correct, in the first quarter last year, you're probably making maybe about $100 million $120 million. And it does looks like that is much lower in this quarter. Wondering that if any rough number that you can share? And also given how cold it was in the first quarter, so it seems to be a little bit surprising that you didn't make at least similar to what it was in the first quarter of last year. Any light insight that you can help us?

John Rielly

The insight I can give you is really in the first quarter of last year. There were some very good spot margin opportunities kind of that we had with Energy Marketing. And so we were able to take advantage of certain activities there in the first quarter of last year. And we're kind of unique to that quarter versus this quarter. As John has mentioned, it was a solid operating performance from Energy Marketing, pretty much in line what we're looking at. But we had just some higher margin in the first quarter of last year.

Gregory Hill

Yes, I would compliment that. Just -- you're absolutely right. From a degree day perspective, our sales were very comparable on gas, good electric margins as well, and oil held its own. Even though more of it was gas-driven. So I'd say on an operating basis, you're 100% right. It was very comparable. There are just a few the accounting adjustments on timing in there that mismatched the, if you will, economic results with the accounting results. That happens from quarter-to-quarter. But operationally, it was very comparable to the year ago.

Paul Cheng

John, can you share with us that how much is Energy Marketing make last year as a whole?

John Hess

No, we don't breakout individually within the segment, Paul.

Paul Cheng

Okay. And then final question for Greg. That I know as early as, now they're trying to just finish the Paradise well drilling. Any idea that the mixed well, just the current thinking, is more now going to do an appraisal well first? Or what are you going to drill for the new prospect?

Gregory Hill

It's too early to say, Paul. I mean, obviously, our plans have to be worked with the government. So we'll be in conversations with the government over the next month, month and a half to figure out next steps.

Operator

Your next question comes from the line of Mark Gilman with Benchmark Company.

Mark Gilman - The Benchmark Company, LLC

I guess I had a couple of things. Greg, can you talk about the specific horizons which you encountered in the Ghana well?

Gregory Hill

Yes, the two horizons that we did in Ghana that John mentioned in his opening remarks over the Turonian and the Cenomanian. And then we're deepening ourselves to try and tap into the Albian below that.

Mark Gilman - The Benchmark Company, LLC

Okay. Just shifting to the Bakken for a second. Is there anything that you might be able to share with us in terms of recent drilling results on the new acreage blocks? And how it might compare to the work you've done in the area up to this point?

Gregory Hill

Yes, Mark, surprised to say that the wells that we have drilled on the new acreage have met or exceeded our expectations. Just let me give you an update, just on kind of the costs in the Bakken right now. Single laterals are about $7.5 million. EURs are averaging about 550,000 barrels per lateral. And our 30-day average IP rates are averaging between 700 and 750 barrels a day per lateral. So those are from 18 to 22 stage frac wells.

Mark Gilman - The Benchmark Company, LLC

And you've seen similar results on the American acreage?

Gregory Hill

Yes, similar or better.

Mark Gilman - The Benchmark Company, LLC

Okay. John Rielly, I'm a little bit puzzled, I guess, by the tax rate guidance which you suggested in light of the mix. It just seems a little bit low with the Norwegian effective rates being as high as they are. The obvious increase in the waiting as a result of recent portfolio transactions, as well as the 12.5% increase on the U.K. side. Can you help me understand that a little bit?

John Rielly

Mark, I think you said it, it does come down the mix. So while we do operate in some higher tax rate regimes, as you mentioned, we do also operate a number of regimes that the tax rates below our overall effective rate. And so basically without Libya, which was driving that rate up, our tax rate comes down.

Mark Gilman - The Benchmark Company, LLC

So there's nothing else, it's just a mix?

John Rielly

It's just mix. Correct.

Mark Gilman - The Benchmark Company, LLC

Finally, for John Hess. John, can we at all look at the first quarter HOVENSA results as substantially reflecting the benefits of the reconfiguration? Or should we look at it as a transition quarter? I guess I'm trying to figure out whether or not on a variable cost basis, HOVENSA is or is not profitable in an environment similar to the first quarter.

John Hess

No. I would say look forward to the next quarter. There were a couple of issues. We had a distillate desulfurizer that had a fire. That was out of capacity. We had one or two problems with sulfur units. So we also had the transition of the reductions in workforce and capital programs going forward. So hopefully starting in the second quarter, we'll be smoother sailing.

Mark Gilman - The Benchmark Company, LLC

One final one for me. It looks like you might have sold some retail stations in the first quarter, was that true? And was there any significant gain or proceeds associated with it?

John Hess

Those are a couple of marginal stations. And just like in Exploration and Production, we upgrade our portfolio from time to time. There's some pruning going on in our Retail business and that's the normal course of activity.

Mark Gilman - The Benchmark Company, LLC

If I can sneak in one on the lifting. Can you give me an idea, John Rielly, where the lifting variants occurred and what the volume element was?

John Rielly

Sure. So I'm just taking Libya out of the picture. We were over-lifted by approximately 1 million barrels in the first quarter. And the primary contributors were the U.K., Norway and Denmark.

Operator

Your next question comes from the line of Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc.

Thanks. Just two quick ones. First on Andalan, it seems to be a little bit delayed in terms of spudding, can you talk about that?

John Rielly

Yes. Thanks for that Pavel. The rig is showing up late for Murphy. So that's the only issue. We are just waiting on the rig for Murphy. In May, early June is our projected date at this point.

Pavel Molchanov - Raymond James & Associates, Inc.

Okay, great. And then on Libya, do you have a sense of the physical state of your assets? Is there any physical damage that you're aware of or is it just a matter of getting the people back to work as soon as the situation stabilizes?

Gregory Hill

No. We really have no information where we could give you a meaningful update at this time. And that's, I think, pretty understandable given the civil strife that's going on there.

Operator

Your next question today comes from the line of Edward Westlake with Crédit Suisse.

Edward Westlake - Crédit Suisse AG

For Ghana. I've got two questions for Ghana, if I may. The first one is, can you give us any feeling for the aerial expanse of the actual structure that you're drilling? Obviously, in the next field block you've got structures that Teak [ph] is 20 kilometers but Mahogany is 120, and Twin [ph] is even bigger. That would be very helpful.

Gregory Hill

Thanks, Ed. No, we just can't yet. It's just, again, it's too preliminary to be talking about size. On Ghana obviously, that'll part of any evaluation program or appraisal program which we'll have to discuss with the government before we proceed.

Edward Westlake - Crédit Suisse AG

My follow-up on Ghana is I think you just said Greg that you're aiming tap into the Albian below, obviously the Albian's been very productive in Brazil. So am I interpreting your comments correctly that you actually get some understanding of that reservoir as well in this well?

Gregory Hill

Yes, that's the sedimentary section of the Albian. There's a carbonate section below that, which we don't plan to drill into at this point.

Edward Westlake - Crédit Suisse AG

I'm presuming your comment about needing to work to the government as to when you could drill the carbonate section, also applies?

Gregory Hill

Yes, absolutely.

Edward Westlake - Crédit Suisse AG

Okay. Can I just switch to another country, Australia. Obviously you've had lots of discoveries in your appraising. There's been a shift in sentiment towards it being more of a sellers market in LNG. Woodside I think are making some positive comments about your gas out there and contributing to Pluto. At this stage, is it possible to talk about reserve estimates and any estimated timing on when you might contribute into a Pluto L&G expansion?

Gregory Hill

Yes, thanks, Ed. Just give to you an update on the Australia. We've completed and praised the work on three wells now. And we're drilling a fourth appraisal well. And we've had good results of the appraisal program so far. So what I mean by that, no contaminants in the gas and good flow rates from the wells. And in parallel, of course, as I've discussed before, we've got negotiations with several potential liquefaction partners and we've made no decisions on where that gas is going to go yet because we're still in the midst of all the commercial discussions. And once we complete the appraisal drilling and finalize the liquefaction route, then we'll announce further details.

Edward Westlake - Crédit Suisse AG

Great. And any sort of timing do you think on that? Or it's just too early to say?

Gregory Hill

It's too early to say. Appraisal will take us through this year because we've had weather impacts due to cyclones. It's been a tough cyclone year down there.

Operator

[Operator Instructions] Your next question today comes from the line of John Herrlin with Société Générale.

John Herrlin - Merrill Lynch

Three quick ones. With Ghana, Greg, can you address the trap morphology set of structurals. Is it the combination trap or are there stratigraphic elements? Could you describe it a little more?

John Rielly

Yes, we think it's primarily a structural trap at this point.

John Herrlin - Merrill Lynch

Does that mean a four-way? A three-way?

Gregory Hill

Three-way.

John Herrlin - Merrill Lynch

Okay, fine. For John Rielly , how much of the deferred tax charge are you going to take in the third quarter? Any ballpark?

John Rielly

It's not going to be that material. But we're still working on the numbers, we're looking at the legislation. So we'll update you in the second quarter. From an operational standpoint, the tax is included in that tax rate guidance that I gave you.

John Herrlin - Merrill Lynch

Assumed. Great. Last one for me is on the Bakken. You're very active. Any equipment issues? And also, what are you seeing in terms of your base in differentials on price for the well?

Gregory Hill

Yes, let me talk about the equipment. We're locked and loaded, ready to go. So we've got our 18 rigs secured. Recall, we had the 10 rigs already under a 5-year contract along with associate [ph] crews. We're currently in the tender rounds for the majority of the AOG and tracker rigs. Don't foresee any issues or problems there. In terms of differentials, it was clear booked $3 under WTI. Now $3 over WTI.

Operator

Your next question comes from the line of Mark Gilman with Benchmark Company.

Mark Gilman - The Benchmark Company, LLC

Greg, just another quick one on the Red Sea block, you mentioned a number of prospects, are they of a different play type?

Gregory Hill

No, there's actually two plays there, Mark. One is this Nubian sandstone, the other one is Miocene sandstone. Although, there's two distinct plays, our second well was going to be in that second type of play which was the Miocene play. We've just said, "Let's circle the wagon. Let's understand all the data from the well before we proceed on another well."

Operator

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

Edward Westlake - Crédit Suisse AG

Yes, just a follow-up on the Eagle Ford. I know it's very early but at this point, is it possible to give sort of a rough estimate of where production might be sort of 2013, 2014?

Gregory Hill

Not yet, Ed. I'd like to get a few completions on production before I do that.

Operator

Your next question comes from the line of Paul Cheng with Barclays Capital.

Paul Cheng

Thank you. Greg, in the Bakken, your unit train going to start up in the first quarter. There's some concern, I think, in the industry that whether even if you have the unit train from your end, St. James [ph] the receiving end, whether we'll be able to handle more on the unit ring. Any comment on that? Or that St. James will not be able to handle, you have the west play [ph], now the other destination that your unit train will be able get to?

Gregory Hill

Initially the unit train, the train will go to St. James and we do not --best of my knowledge anticipate any problems on that timing.

Paul Cheng

John, do you think that St. James when you start up you will be able to absorb what -- I mean, your capacity is up to 120,000 barrels per day. Obviously, it's really based on the spread and whether you see economic to do that much. But what is to St. James capacity that you think you would be able to ship to at the maximum?

John Hess

We're going to start in small pieces. So I would rather get a little experience under our belt before we start making estimates for that, Paul. I understand why you're asking, were just happy that we're going to have a third outlet. So we're going to be able to optimize our marketing differentials because of that.

Operator

Ladies and gentlemen, we have reached the end of our Q&A portion of the call, which does conclude today's conference. We thank you for your participation. You may now disconnect. Have a great day.

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