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Hess (NYSE:HES)

Q2 2011 Earnings Call

July 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

Katherine Minyard

Evan Calio - Morgan Stanley

Mark Gilman - The Benchmark Company, LLC

John Herrlin - Societe Generale Cross Asset Research

Paul Cheng

Faisel Khan - Citigroup Inc

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 Second Quarter 2011 Hess Corporation Earnings 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 second 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 securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements.

With me today are John Hess, Chairman of the Board and Chief Executive Officer; Greg Hill, President, Worldwide Exploration and Production; and John Rielly, Senior Vice President and Chief Financial Officer. I will now turn the call over to John Hess.

John Hess

Thank you, Jay, and welcome to our second quarter conference call. I will make a few brief comments, after which John Rielly will review our financials. Net income for the second quarter of 2011 was $607 million versus $375 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 weaker downstream results. Exploration and Production earned $747 million. Crude oil and natural gas production averaged 372,000 barrels of oil equivalent per day, which was 10% below the year-ago quarter.

Over the past 6 months, we have experienced several setbacks, most of which are short term, that have resulted in production below the year-ago period and our forecast for this year. With regard to the Bakken, harsh winter weather and severe flooding this spring in North Dakota resulted in a backlog of well completions. Net production from the Bakken averaged 25,000 barrels of oil equivalent per day in the second quarter, which was flat with the first quarter. With improved weather conditions and our recent change to a 38-stage frac design, we expect to close the gap against our production plan over the next 6 to 9 months.

As of yesterday, our net Bakken production was 34,000 barrels of oil equivalent per day. In terms of the shut-in Llanos #3 well in the deepwater Gulf of Mexico, the operator plans to perform a workover and restore production in the first quarter of 2012. Regarding Libya, no estimate as to the timing of the resumption of production can be made until the civil war is resolved and stability returns to the country. Lastly, a recent fire at the Valhall field in offshore Norway has shut in a net 30,000 barrels of oil equivalent per day. The government and operator of the field are both conducting an investigation, so that lessons can be learned and a recovery plan can be put in place to restore production.

As a consequence of these various factors, we now forecast 2011 production for our company to average between 375,000 and 385,000 barrels of oil equivalent per day versus our previous forecast of between 385,000 and 395,000 barrels of oil equivalent per day.

With regard to deepwater exploration, we confirmed in May a discovery at our Paradise prospect in Ghana. The well, drilled on our 90% owned Deepwater Tano Cape Three Points block, encountered 490 feet of net pay. Preliminary reservoir formation testing confirms that the fluid types comprise oil and gas condensate. We plan to begin appraisal drilling in early 2012, subject to government approvals and rig availability.

In Indonesia, we spud the Andalan well on the Semai V block on July 12. Hess has 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 later in the third quarter.

This morning, we announced that we, along with our partner, Petroceltic International, signed production sharing contracts with the Kurdistan Regional Government of Iraq for the Dinarta and Shakrok exploration blocks. Hess will have an 80% paying interest and be the operator of the blocks, which have a combined area of more than 670 square miles.

Under the terms of the contract, we will acquire 2D seismic and drill at least one well on each of the blocks over the 3-year license period. Based on the anticipated work programs, Hess' total financial commitment is expected to be approximately $288 million.

Turning to Marketing and Refining, we reported a loss of $39 million for the second quarter of 2011. Financial results at our HOVENSA joint venture refinery were below the year-ago quarter. While the new refinery configuration has started to make a positive contribution to financial performance, it was more than offset by higher fuel costs.

Marketing earnings were above the second quarter last year. Retail marketing benefited from improved margins in May and June. Gasoline volumes on a per site basis were down approximately 2%, and total convenience store sales were down by 4%, both reflecting the weak economy. Our Energy Marketing business delivered strong results, helped by higher year-over-year natural gas and electricity sales volumes.

Capital and exploratory expenditures in the first half of 2011 were approximately $2.7 billion, substantially all of which were related to exploration and production. For the full year 2011, our capital and exploratory expenditures forecast has been increased to $6.2 billion from $5.6 billion. Additional investments in the Bakken and Eagle Ford, as well as the recently announced Kurdistan exploration agreement, account for the increase. We remain committed to sustaining the profitable growth of our reserves and production and ensuring we have the financial strength to fund our future investment opportunities.

I will now call the turn over -- turn the call over to John Rielly.

John Rielly

Thank you, John. Hello, everyone. In my remarks today, I will compare second quarter 2011 results to the first quarter. The corporation generated consolidated net income of $607 million in the second quarter of 2011, compared with net income of $929 million in the first quarter. First quarter 2011 results included an 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.

Turning to Exploration and Production. Exploration and Production had income of $747 million in the second quarter of 2011, compared with income of $979 million in the first quarter. First quarter results included the after-tax gain of $310 million related to the previously mentioned asset sales.

Excluding this item, the changes in the after-tax components of the earnings are as follows: Higher selling prices increased earnings by $165 million. Lower sales volumes decreased earnings by $63 million. Lower exploration expense increased earnings by $32 million. Higher operating costs decreased income by $52 million. All other items net to a decrease in earnings of $4 million, for an overall increase in second quarter adjusted earnings of $78 million.

Our E&P operations were overlifted in the quarter compared with production, resulting in increased after-tax income of approximately $20 million. The E&P effective income tax rate for the second quarter of 2011 was 38%. In July 2011, the United Kingdom enacted an additional 12% supplementary tax on petroleum operations with an effective date of March 24, 2011. As a result, we expect to record a charge of approximately $50 million in the third quarter. This charge includes a provision of approximately $20 million, representing the incremental tax on earnings from the effective date to the end of the second quarter and a charge of approximately $30 million to increase our deferred tax liability in the United Kingdom.

For the full year of 2011, we expect our normalized E&P effective tax rate will be in the range of 38% to 42%. The forecast includes the impact of the additional 12% supplementary tax on 2011 earnings and is based on the assumption that our Libyan production will be shut in for the remainder of the year.

Turning to Marketing and Refining. Marketing and Refining generated a loss of $39 million in the second quarter of 2011, compared with income of $39 million in the first quarter. Refining operations incurred a loss of $44 million in the second quarter of 2011, compared with a loss of $48 million in the first quarter. The corporation's losses from its equity investment in HOVENSA were $49 million in the second quarter of 2011, compared with $48 million in the first quarter.

The corporation's share of HOVENSA's results included income from LIFO inventory liquidations of approximately $14 million in the second quarter of 2011 and $40 million in the first quarter of 2011. The inventory liquidations were initiated as a result of the reconfiguration of the refinery. Port Redding recorded earnings of $5 million in the second quarter of 2011, up from $2 million in the first quarter. Marketing earnings were $28 million in the second quarter of 2011, compared with $68 million in the first quarter, principally reflecting seasonally lower margins and sales volumes in Energy Marketing, partially offset by improved retail gasoline margins.

Trading activities generated a loss of $23 million in the second quarter of 2011, compared with income of $19 million in the first quarter.

Turning to corporate and interest. Net corporate expenses were $42 million in the second quarter of 2011, compared with $28 million in the first quarter, reflecting higher insurance and employee-related costs. After-tax interest expense was $59 million in the second quarter of 2011, compared with $61 million in the first quarter.

Turning to cash flow. Net cash provided by operating activities in the second quarter, including an increase of $308 million from changes in working capital, was $1,689,000,000. Capital expenditures were $1,375,000,000. All other items amounted to a decrease in cash of $88 million, resulting in a net increase in cash and cash equivalents in the second quarter of $226 million. We had $2,194,000,000 of cash and cash equivalents at June 30, 2011, and $1,608,000,000 at December 31, 2010.

In April, we entered into a new 5-year revolving credit agreement, which increased the capacity under our credit facility to $4 billion from $3 billion. Total debt was $5,541,000,000 at June 30, 2011, and $5,583,000,000 at December 31, 2010. The corporation's debt to capitalization ratio at June 30, 2011, was 22.7% compared with 24.9% at the end of 2010.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ed Westlake with Crédit Suisse.

Edward Westlake - Crédit Suisse AG

The first question, I guess, is on Ghana. I mean, you said appraisal is going to start in the first half of 2012. Could you be a little bit more specific around some of the other prospects? Is that rig going to go and appraise Paradise, beach, Hickory?

John Hess

I mean, we are working those appraisal plans as we speak. And we'll have to get the approval of the government, so we haven't finalized the exact well sequence. We're going to do that in the coming quarter and then get the government to buy into that as well.

Edward Westlake - Crédit Suisse AG

And so just as a follow-on in terms of when you'd expect to get the government's buy in. It would be sort of Q4 event, do you think?

John Hess

Yes, most likely.

Edward Westlake - Crédit Suisse AG

And then on the split between oil and gas condensate, obviously, in the prepared remarks you've said it's both, but do you have a rough split as we sit here today from what you've analyzed in terms of Paradise, in terms of how much is -- of the 490 feet or however you want to explain it is oil and how much is gas condensate?

John Hess

No, I'm not ready to do that yet, Ed. We're still waiting on a number of samples to get back from the lab. So it's just a little bit too early to be doing that, and we only have one well, of course, at this point.

Edward Westlake - Crédit Suisse AG

And so when do you think you might be able to give some of that information? Would we have to wait until after the appraisal is drilled in early 2012?

John Hess

I think we would prefer to wait until the appraisal program to do that.

Edward Westlake - Crédit Suisse AG

Okay. Maybe my second question, and I'll give over to others, is just on the Bakken. You were at 34,000. Where do you expect it to be at the year-end run rate?

John Hess

Ed, we're not going to quote that yet. We're still digging out all the weather and execution issues. So by the end of the year, we're going to give a complete revised outlook for the Bakken, including the 5-year forecast.

Edward Westlake - Crédit Suisse AG

Would you be able to give a range if there's some uncertainty, or just no number?

John Hess

No, I think we've said our forecast for the year-end exit rate is between 30,000 and 35,000 barrels a day in 2011. The average -- that's a full year average.

Operator

Your next question comes from the line of Doug Leggate with Merrill Lynch.

Douglas Leggate - BofA Merrill Lynch

Can I try a couple, please? I guess as you kick off with the Bakken. It sounds like things have rebounded pretty hard here, but could you give us an idea, when are you going to give us a proper update on the potential capacity of -- production capacity of the entire asset? Let me explain where I'm going with this. You're running 18 rigs with more, I guess, more aggressive completion designs. My understanding is the IP rates from the American and the Tracker acreage are even better than your legacy assets, but you still haven't addressed 80,000 barrels a day within 5 years. So if you could really just give us some idea when you're going to talk about that and where you could likely get to. And I've got a follow-up, please.

Gregory Hill

As we said in the past, we intend to provide an update just as soon as we drill enough additional wells and gather additional data on the acquired acreage. As John mentioned in his opening remarks or as a result of the severe weather in the first half of 2011, we're a few months behind schedule on gathering that data. So we'll be in a position to provide a revised forecast before the end of the year. And as you mentioned in your question, the last thing I would say is that the IP rates from the wells drilled today down on the acquired acreage have met or exceeded our expectations.

Douglas Leggate - BofA Merrill Lynch

Okay. So basically -- is it fair to say that 80,000 barrels a day is probably out of date?

Gregory Hill

Oh yes, Doug, obviously, with the acquisitions, that's a low number.

Douglas Leggate - BofA Merrill Lynch

Okay. My follow-up, if I could maybe squeeze a couple on here back to back, but the Valhall, clearly, you have 64%, I guess, more or less. Is there any likely change of operatorship here in light of what's happened? I know it's probably a little unfair to point a finger at this point, but if you could give a prognosis as to when you would expect that to come back. And finally, if Greg is able to, an update perhaps on the Eagle Ford and perhaps some commentary, Greg, about your recent entry into California and to what I understand is the lower Monterey, that would be great.

Gregory Hill

Let me take those one at a time, Doug. So on Valhall, as John said, the investigation's ongoing and until complete, it's going to be inappropriate to speculate as to the timing of the restart, until we understand all the root causes. And as you can appreciate, I think, both us and BP, safety is our #1 priority here. So beyond that, we'd refer you to the operator. Regarding your question about operatorship of Valhall, our strategy is to work with BP, work with the operator to get that facility to capacity within 5 years. So that's our strategy, to work with BP on doing that. Your second question relating to the Eagle Ford, I believe, let me just give you an update on the Eagle Ford. As you know, we've been building a position there in the Eagle Ford and currently have about 107,000 net acres. We plan to drill between 25 and 30 wells in 2011. We've -- 15 wells have been drilled so far, and 3 wells have been completed and brought on production. And these 3 wells have delivered, on average, 30-day IP rates of approximately 650-barrel of oil equivalents per day of which 80% was liquids. So although it's still early days, the initial results from the wells drilled in the Eagle Ford are encouraging. On the Monterey, as we've mentioned before, we are building an unconventional position in opportunities both in the U.S. and in internationally. And at the appropriate time, we'll provide information about any new areas or opportunities that we're entering.

Douglas Leggate - BofA Merrill Lynch

Greg, may I push you on the counties in the Eagle Ford? Are you prepared to give us that information yet? Or still...

Gregory Hill

No, Doug, I'm not. Things are still very competitive down there. We're just really trying to consolidate our position at this point, and so we prefer not to disclose where our acreage is yet.

Operator

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

Paul Sankey - Deutsche Bank AG

On Ghana, would it be fair to characterize that as a major oil discovery that you are delighted with?

Gregory Hill

I would say it's fair to characterize it as a major hydrocarbon discovery.

Paul Sankey - Deutsche Bank AG

And you're delighted?

Gregory Hill

We're pleased with the initial results and the test of the well, but we've got to go into appraisal mode to figure out exactly what we have. There's a lot of potential on the block. We've got several wells to drill yet to assess the block.

Paul Sankey - Deutsche Bank AG

Yes, Greg, could you talk a little bit more about the geology and obviously, the neighborhood. There's other major stuff there that we all know about that's being developed. How do you see it fitting in?

Gregory Hill

Well, I think as we said on the call last time, we did see a major Cenomanian section, opens up a new play concept in that part of the world, and in addition to that, we see a deeper structure below that. So there's multiple play types on the block, which is why our appraisal program really needs to look at all those different opportunities and assess what we have there, but there's multiple opportunities.

Paul Sankey - Deutsche Bank AG

So the best guess would be you'll be appraising throughout 2012.

Gregory Hill

We will and of course, we haven't drilled that deeper prospect yet, but that's the plans in 2012, to tap into that as well.

Paul Sankey - Deutsche Bank AG

I understand. What is the latest on Pony, please?

Gregory Hill

Pony, again, just not much to update from the last call. The partnership is working on the joint operating agreements, continue to do that. We hope to sanction Pony in 2012. So the partners have signed a letter of agreement. It's a confidentiality agreement, and just we're working on all the various agreements as well. But again, we are targeting 2012 for sanction, first production likely to occur approximately 4 years after that.

Paul Sankey - Deutsche Bank AG

And the facts of the Valhall case, I believe it was a compressor fire that burned -- and forgive me; this information was given to me on the day of the fire, so that's why I wanted to update it. It was a compressor fire that burned for about half an hour and that the prognosis may be that allowing for the regulator and all the other uncertainties, this may not be a long-term outage.

Gregory Hill

Again, Paul, it's hard to say because the investigation report's not complete. So until we understand all the root cause -- and you're right, it was a vent line on the compressor that was the source of the fire. And again, beyond that, we'd refer you to the operator, but we're waiting just like everyone for the outcome of the report to see what next steps are.

Operator

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

Evan Calio - Morgan Stanley

On the Bakken, I was hoping for an update on your unit train associated trans-loading capacity. I mean, how should we think about the planned unit train, kind of 1 to 9 with up to, I think, it was max 120,000 barrels a day of capacity? I know you initially built 50,000 to 55,000 into St. James. I guess I'm just wondering is whether you see an ability to bring on all capacity that would exceed your evacuation needs that could provide you a nice arbitrage if there's a LLS [ph] Bakken kind of differential in 2012 that, actually, we expect there to be.

Gregory Hill

If could just kind of review again what our export capacity is out of the Bakken. So existing infrastructure and agreements with Tesoro are for 30,000 barrels a day, and that's sufficient in the immediate term. We've also secured pipeline and rail options to export the balance of our production as the production begins to ramp up in the longer term. The first piece of that is Enbridge, which is 30,000 to 40,000 barrels a day capacity on that, and then rail, as you mentioned, is our flex. And we have the -- we will have the capacity to go all the way up to 150,000 barrels a day. That facility will be done in the first quarter of 2012. So really, we've got plenty of capacity to get our crude to whatever markets we choose. Right now, we've got crude slated to go to St. James refinery.

Evan Calio - Morgan Stanley

Right. And the unit trains, I mean, all 9 unit trains will be delivered by -- in the first quarter of 2012.

Gregory Hill

Yes, so we have 9 train sets that are currently being constructed right now, and that's good for about 55,000 barrels a day from those 9 train sets. We'll add additional trains as needed to match our capacity.

Evan Calio - Morgan Stanley

Okay. What's the current time from order to delivery on the rail side, the train sets that you're seeing now, we've been hearing like almost a year now?

Gregory Hill

Well, we got in early on the queue. We did see that coming, so we secured those train sets, so we don't see any bottlenecks for us yet.

Evan Calio - Morgan Stanley

Right, but you see -- I mean, you'll have excess capacity. If you potentially could arbitrage other people's barrels. That’s something that would really make sense to you, right?

John Hess

Our first priority is going to be taking care of our own production because of the timing difference next year. When Enbridge will come on, the majority of the excess crude that we have after Tesoro will go on the trains. So our first priority is to take care of our own production. If there are other business opportunities after that, that's something we'll consider, but that's certainly a second priority at this time.

Evan Calio - Morgan Stanley

That's wonderful. One more question if I may, and maybe I missed it on Ghana. Did you just say how many rigs you'll have there in early 2012?

Gregory Hill

No, we haven't yet, because we just haven't finished our -- the wells we're going to drill or the appraisal program, the order of the wells, how many wells. Again, that's something we have to discuss with the government before we can talk about it publicly.

Evan Calio - Morgan Stanley

But ideally, there could be multiple rigs there, would be pretty reasonable, obviously, conditional on government acquiescence, et cetera.

Gregory Hill

Yes, just too early to speculate because, again, we just don't have the appraisal grant lined out yet, but 1, maybe 2 rigs is kind of directionally what we're thinking.

Operator

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

Mark Gilman - The Benchmark Company, LLC

I have a couple of things. John, can you give me an idea how that $600 million in additional capital budget this year is going to be allocated in terms of the areas you cited?

John Rielly

Sure. I mean, we'll give you on a general basis, Mark. What we're doing is in the Bakken, I think, as John and both Greg had talked about, that we have increased activity there. We're moving to a 38-stage frac design. We are increasing the number of frac crews, and we're also increasing our commitment to nonoperated JV drilling in the Bakken. And then in the Eagle Ford, we've also moved to a 15- to 21-stage frac design. We've also increased the number of wells from our original budget, and we've acquired additional acreage, I think, as Greg had mentioned. Then with Kurdistan, the financial commitment that John Hess mentioned, a good part of that is coming in 2011 as well, so that's basically how it's allocated.

Mark Gilman - The Benchmark Company, LLC

Okay. Regarding Kurdistan, is the front-end payment, which if you could say what it is, please do, included in the $288 million?

John Rielly

It is included in the $288 million, but it's sensitive information. We're not going to go into the specifics of that.

Mark Gilman - The Benchmark Company, LLC

Okay. Although you're reluctant to talk about the location of the Eagle Ford acreage, can you give me a rough idea what the average cost of entry has been?

Gregory Hill

No, Mark, we're still -- I mean, we're acquiring acreage, right? But average about 3,000 or so. That would be the early entry cost for us.

Mark Gilman - The Benchmark Company, LLC

About 3,000, Greg?

Gregory Hill

Yes.

Mark Gilman - The Benchmark Company, LLC

Okay. If I could just shift to Ghana for a sec, did you test for the Campanian at all in the Paradise well?

Gregory Hill

No, we did not.

Mark Gilman - The Benchmark Company, LLC

So you did not expect it to be productive.

Gregory Hill

No, we didn't -- that was not our objective. The Campanian was not our objective in that block and that well.

Mark Gilman - The Benchmark Company, LLC

Okay. Can you give me an idea of how the -- what that pay distribution is between the Cenomanian and the Turonian?

Gregory Hill

We're not going to give that out yet, Mark. We're just -- again, we're just in the middle of trying to figure out our appraisal program, and we're just not going to give a lot of details, because we've got a lot of details to work with the government.

Mark Gilman - The Benchmark Company, LLC

Okay. For John Hess, regarding the HOVENSA reconfiguration. John, I guess I'm struggling a little bit in terms of trying to get a handle on the ultimate economic contribution. You referenced in your remarks the negative impact of the offsetting increase in fuel cost year-over-year. Can you put a number on that for me?

John Hess

No, but I will say this. The reconfiguration allows us to both improve our margin per barrel and lower our operating cost and capital expenditures and also improve our liquidity position by decreasing inventory. So overall, the reconfiguration is economically and financially a strengthening move. I will also say, notwithstanding the fact that because of the higher oil prices in the second quarter, a lot of that benefit was given back because of a higher fuel cost. But I think the important thing to note is currently, HOVENSA is profitable.

Mark Gilman - The Benchmark Company, LLC

Okay. And John, when you say that, as we speak today moment in time, all the benefits of the reconfiguration have been recognized as of today.

John Hess

Well, on a going forward basis, yes. We should be getting more of a recurring benefit from that.

Mark Gilman - The Benchmark Company, LLC

Okay. And just the final thing for me, a capital cost number for the rail project, all in.

John Rielly

Mark, we don't give that kind of granularity on the specifics. So I mean, you know we're spending in the Bakken, obviously, a significant amount on infrastructure and drilling. So we're not going to go into specifics on that.

Mark Gilman - The Benchmark Company, LLC

Any idea what you expect the transportation costs with appropriate return to be at St. James?

John Hess

Mark, we don't go into those numbers.

Operator

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

Paul Cheng

Greg, in Ghana, I know you don't have a lot of information yet, but can you tell us how many prospects surrounding Paradise that you have already identified, that you plan to drill over the next 20 months?

Gregory Hill

Yes, but we've got a number of prospects, and the reason I'm being a little bit sensitive about this is we've got a lot of work to do and negotiation with the government. So I really don't want to go public on a lot of things until we're through our negotiation with the government or what appraisal program end, but suffice to say that there is a number of prospects on the block.

Paul Cheng

It seems that you initially announced the discovery in May. Should we -- or in late April. So should we assume that by May of 2013, whatever you then declare commercial will need to return to the government? So you basically will have 20 months there or 22 months there for you to finish all the drilling.

Gregory Hill

Yes, we've got basically our second license period. We have a of couple years to get some drilling done on the block, and then we're into another phase of development after that.

Paul Cheng

Okay. In Indonesia, have you guys got the rig from the Murphy again, so that the rig is still drilling over there?

Gregory Hill

Yes, we did get the rig from Murphy. We spudded the well on July 12 on that Semai block. Just to update on drilling, we're currently drilling at 9,750 feet with the TD expected to be approximately 20,000 feet on that well.

Paul Cheng

Okay. And so you have another 10,000 feet to go. So it looks like that you probably have another 60, 70 days.

Gregory Hill

Yes, at least, drilling takes longer the deeper you go, so yes.

Paul Cheng

Okay. In Eagle Ford, I know, Greg, you don't want to give too much information yet, but you talked about the IP. Can you tell us that what is the development cost and also on the 3 producing well, what's the EUR that you're expecting? And also in terms of the time that now you're doing -- in terms of the drilling time plus completion that everywhere that how long it take.

Gregory Hill

Yes, so let me just start with the EURs. Paul, we just don't have enough production under our belt to quote an EUR. Yet again, we've only got 3 wells on production, and they're in their very early production phase. So I can't quote you an EUR yet. The well costs are about $10 million each. We expect that cost to come down with time because, again, we're early in the learning curve. That's with a 15- to 21-stage frac design in those wells.

Paul Cheng

Okay. And out of the 25, 30 wells you plan for this year, how many of them will be complete and in production before the year end?

Gregory Hill

Well, we're still working all that out, Paul. That's why we gave you a range of 25 to 30 wells. We're continuing to delineate the acreage, so some of those will be exploration wells. Some of them might be vertical wells. Others will be horizontal wells for completion. So that's why we gave you a range of 25 to 30 wells.

Paul Cheng

And have you -- Greg, have you encountered any hurdle in terms of water or manpower in Eagle Ford?

Gregory Hill

No. Our partners in -- our partner in the Eagle Ford has been successful in acquiring the equipment and services that we need in a very tight market.

Paul Cheng

Okay. And in Bakken, can you tell us that what is the current development cost, the EUR, the IP and the drilling time and the completion time?

Gregory Hill

Yes, I mean, as John mentioned, we've gone to a 38-stage frac design in the Bakken. So that's a combination design where we have 22 sliding sleeve and 16 plug and perf stages to get to that 38 stages. We've actually completed 9 wells with that 38-fracture stage design. The initial results are encouraging. Average IPs are exceeding 1,000 barrels a day for the 30-day IPs. Now we're still assuming EURs of about 550,000 barrels per well. Again, we want to get more production data before we update any of our EURs, and the cost of those 38-stage wells is about $10 million. So with that much higher IP and early time production, obviously, the economics are very attractive. And then, we are working on a 38-stage sliding sleeve design, which then has the potential to reduce those costs even further and the time required to complete the well.

Paul Cheng

And when are these? What, about 40, 45 days, including drilling and the completion.

Gregory Hill

We're drilling wells -- average drilling on these wells is about 34 days. So with the plug and perf, you can add another 7 days or so to completion.

Paul Cheng

Okay. And in the 2011 production guidance that, what's the assumption of the Waha production order, the Valhall downtime, in the 375 to 385?

John Rielly

So as Greg had mentioned, we don't have a firm date when Valhall's coming back, so -- but Waha, first of all, is not in the production at all. It's shot in -- it's shut in for the rest of the year in the assumptions. Valhall, we have some downtime associated with that in there. And then obviously, as John Hess mentioned, with the Llano 3 well. It'd down for the full year, and then we've got the reduced production from the Bakken. So we think we've captured all those items in that.

Paul Cheng

No. But, John, I understand that we don't have a firm -- but I'm just asking that in that production guidance, can you share with us that what is the assumption of Valhall in that production number or even a range.

John Hess

Yes, Valhall is going to be shorter term in nature as was discussed earlier. It's not going to be for the whole year. I mean that much we feel pretty good about saying. Now how long it's going to be, that's in the hands of the government and the operator, and we've got to give them a chance to figure that out. We were just in Norway last week, so we got a pretty good update on that.

Paul Cheng

Okay. A final one. On the Upstream Magazine (sic) [Upstream Newspaper] recently that they're talking about a development project in the South Malaysia, that you guys in. Can you give us any update?

Gregory Hill

Yes. We don't really want to talk about the specifics of that. But we are in detailed and advanced discussions with our partner, PETRONAS, to expand upon our successful relationship and our position in Malaysia.

Operator

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

Pavel Molchanov - Raymond James & Associates, Inc.

First on Ghana, recognizing that the timeline depends on government approval and other factors, assuming everything went perfectly, when could be the first year that you would expect to see production from Ghana?

Gregory Hill

Guys, it's just too early to speculate. Again, we've got to get through our appraisal program and understand what we have before we can start planning a development.

Pavel Molchanov - Raymond James & Associates, Inc.

Okay. Fair enough. Second one on the Paris Basin, have you guys kind of written that off completely? Or do you still see some hope for that play longer term?

Gregory Hill

Yes, on the Paris Basin, while the new law prohibits hydraulic fracturing, it does allow for an annual review of the subject. And so our plan is to proceed with drilling some conventional vertical wells in 2010, understand what we have. And while we believe it's going to take time to work through the issues with the French government, we're confident that the drilling and completion operations can be done safely and responsibly. And so we're going to remain actively engaged with local and national stakeholders to progress the appraisal of the licenses with our partner, Toreador.

Pavel Molchanov - Raymond James & Associates, Inc.

How many conventional wells do you plan to drill that are this year?

Gregory Hill

We plan to try and drill 6.

Pavel Molchanov - Raymond James & Associates, Inc.

Okay. With one rig?

Gregory Hill

Yes.

Operator

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

John Herrlin - Societe Generale Cross Asset Research

A bunch of quick ones. With Ghana, you have a very high working interest. Would it be something that you would consider selling down?

Gregory Hill

Yes, I think we've said before that we look at partnering on a case-by-case basis. And we would -- if we could get an appropriate deal, we'd be interested in farming the interest down there.

John Herrlin - Societe Generale Cross Asset Research

Have you had any inquiries thus far?

Gregory Hill

Yes, we have. We've had a number.

John Herrlin - Societe Generale Cross Asset Research

Okay. Regarding the deeper target in Ghana, are we talking of pre-salt-type target?

Gregory Hill

No, it's just a very large structure, below the clastics.

John Herrlin - Societe Generale Cross Asset Research

Okay. Tubular Bells still on sanction for 2011?

Gregory Hill

Yes, it is. I mean the partner group has every intention to sanction that project by the end of the year.

John Herrlin - Societe Generale Cross Asset Research

Great. Australia, nothing was mentioned. Anything going on there?

Gregory Hill

Nothing really to update. I mean, our appraisal program is ongoing. We've so far flow tested 4 wells with results coming in as expected. We did get hurt a little bit by the heavy cyclone activity earlier this year, so that's resulted in some delays to our appraisal program. Commercial negotiations are progressing with the same potential liquefaction partners. That's Chevron, Woodside and the Northwest Shelf partnership, and we'll announce further details once we get that appraisal drilling done and finalize the liquefaction route.

John Herrlin - Societe Generale Cross Asset Research

Okay. Great. With the Eagle Ford, over-pressurized area pretty much, is that fair to say?

Gregory Hill

Again, I don't want to get into too many details on the Eagle Ford yet, because we only have 3 wells on production.

John Herrlin - Societe Generale Cross Asset Research

Okay. It was worth a shot. Refining, why stay with it? We're seeing a lot of disintegration of late. Do you feel that you've got the cost down now with HOVENSA, John?

John Hess

Yes, it's a good question. Obviously, there have been some restructuring moves by other companies, and as you know, John, we've done a lot of work over the last 10 years to restructure our own company significantly to where we are E&P led. 88% of our capital employed is E&P with only 12% of the Marketing and Refining. And of that number, 10% is marketing and 2% is refining. So in terms of how we shape our portfolio, we feel good about where we are now. There is always room for improvement. And in terms of doing things to improve the portfolio further in terms of refining, we have and will continue to consider our strategic options, obviously, in the current environment of the refining business. We have limited options right now, even though we'll consider them. And we also have a joint venture partner that we would need to consult in any decision that we would make. So the real thing is we're trying to reconfigure the refinery to improve its financial performance with the hand that we have, run it reliably and safely and get a better return out of what we have.

John Herrlin - Societe Generale Cross Asset Research

Last one for me. Given the discussion on the Bakken marketing, should we expect a holiday train versus a truck?

John Hess

It's a good idea, and we'll take it under consideration. And I appreciate your thoughtfulness.

Operator

Your next question today comes from the line of Faisel Khan with Citigroup.

Faisel Khan - Citigroup Inc

On your CapEx in the Bakken, how much would you say -- what percentage of your CapEx is related to kind of midstream and logistics operations, the processing and evacuating your crude out of the basin?

Gregory Hill

So just from a general standpoint, the projects that we have that I'll call our midstream and transportation is approximately $400 million of our capital in the Bakken.

Faisel Khan - Citigroup Inc

And that's for the entire 5-year plan you guys laid out.

Gregory Hill

No, it's basically this year and into next year. Right.

Faisel Khan - Citigroup Inc

And that's just logistics alone.

Gregory Hill

Correct. The logistics midstream, right. Gas plants expansion, those types of things, not the drilling for the Bakken wells.

John Hess

A lot of those logistical expenditures, including the Tioga Gas Plant, are really this year and next year.

Faisel Khan - Citigroup Inc

Okay, so that number kind of floats off next year.

John Hess

Over the next 2 years, exactly.

Faisel Khan - Citigroup Inc

Okay, got you. And if I'm looking at your U.S. total upstream CapEx of kind of $1.3 billion for the year, what percentage of that is associated with the Bakken?

Gregory Hill

The majority of our CapEx right now in the U.S. is focused in the Bakken at this point.

Faisel Khan - Citigroup Inc

Okay, fair enough. And if I'm looking at your refining results -- I think I may have missed this in your prepared remarks, but it sounds like a loss was related to the expenses associated with reconfiguring the plant. So in theory, if I take those expenses out, would the losses have been more narrow or less in nature?

Gregory Hill

No, again, as John has mentioned, so we began to get some of the benefits of reconfiguration just at the tail end of the second quarter. So we're beginning to see in July that we, as John said, we're currently profitable in July. So there were some costs, but the real big thing that we were hit with was the higher fuel costs in the second quarter. So yes, I would say from a reliability and running at the full 350 case, that's where we're going to get the benefit from it, and we'll start to see that in the third quarter.

Faisel Khan - Citigroup Inc

Okay and then last question for me. The trading results, negative $23 million in the quarter. Can you discuss what drove that loss?

John Rielly

No, it is nothing -- we don't get into the individual trading strategies. Again, the trading operations, they've been profitable 13 out of the last 14 years. So again, the first quarter, basically, we had almost $20 million of earnings there with $23 million loss this quarter. So we're around breakeven right now, but we don't get into specifics on the portfolio.

Faisel Khan - Citigroup Inc

Okay. Is that more of a mark-to-market number that was around? Is that why you see the loss from time to time?

John Rielly

The trading is -- the trading activities are mark-to-market.

Operator

Your next question comes from the line of Katherine Minyard with JPMorgan.

Katherine Minyard

Just a couple of quick questions. Can I just clarify one of the responses from Greg Hill on some of the Bakken data? Did you say 550,000 barrels EUR per well? Or is that per lateral?

Gregory Hill

Yes, that's per lateral.

Katherine Minyard

Okay. All right, great. And then just a quick question on marketing. This looks like it's the first profitable second quarter in a number of years. I'm just curious as to whether that's an anomaly. Or is there a business mix shift? Or are we seeing a smoothing of some of the seasonal cyclicality that we've seen over the last several years?

Gregory Hill

No, our Energy Marketing business has been strong and it continues to be strong on a quarter-to-quarter basis. As John mentioned, our natural gas and electricity volumes were up on Energy Marketing. Now as he also did mention, in the quarter, we did benefit from improved retail margins in the quarter. So retail marketing had a strong quarter.

Katherine Minyard

Okay, great. And then just quickly the Gulf of Mexico, any update on the exploration outlook? Any timing that you guys are thinking about as you look at your Gulf of Mexico portfolio?

Gregory Hill

Yes, I think on the Gulf of Mexico, we've applied for a couple of permits in the Gulf of Mexico. That's Nestdeep [ph] and Heron. We've joined, obviously, both the Helix and the Marine Well Containment Company to gain the required spill response capabilities, and we plan to resume exploratory activities in the deepwater as soon as practicable, subject to our receiving permits and rig availability.

Operator

Your next question is a follow-up from the line of Edward Westlake with Crédit Suisse.

Edward Westlake - Crédit Suisse AG

Just a very quick follow-up. Obviously, it's been a volatile year with a number of unforeseen events, a lot of it outside your control. I'm just wondering if there's any update to -- normally you give full year guidance for sort of cash costs, DD&A and total costs.

John Rielly

Yes, well, good question. Thanks for asking that. We are not changing our guidance on our unit costs. So the guidance that I gave out on the prior call, which was for cash costs were $18 to $19 per barrel. We're right now for half of the year at $18.47, so that guidance remains the same. Our DD&A rate for the first half was $15.62 per barrel and our guidance remains $15.50 to $16.50 per barrel.

Operator

Our final question today is a follow-up from the line of Mark Gilman with The Benchmark Company.

Mark Gilman - The Benchmark Company, LLC

John Rielly, what was the volumetric overlift in the second quarter per the earnings impact you cited?

John Rielly

Sure. It was approximately 750,000 barrels and the countries that for the most part contributed to that were the U.K., Norway and Egypt.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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