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Hess Corporation (HES)

Q1 2007 Earnings Call

April 25, 2007 10:00 am ET

Executives

John Hess - Chairman & CEO

John Rielly - SVP & CFO

John O'Connor - President Worldwide Exploration and Production

Jay Wilson - VP of IR

Analysts

Paul Sankey - Deutsche Bank

Doug Leggate - Citigroup

Arjun Murti - Goldman Sachs

John Herrlin - Merrill Lynch

Nikki Decker - Bear Stearns

Mark Gilman - The Benchmark Company

Bernie Picchi - Wall Street Access

Paul Cheng - Lehman Brothers

Presentation

Operator

Good day, ladies and gentlemen and welcome to the First-Quarter 2007 Hess Corporation Earnings Conference Call. My name is Kelly and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Jay Wilson, Vice President Investor Relations. Please proceed, sir.

Jay Wilson

Thank you, Kelly and 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 materially from those expressed or implied in such statements.

As usual with me today are John Hess, Chairman of the Board and Chief Executive Officer; John O'Connor, 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.

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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. Our first-quarter 2007 Exploration and Production financial results were lower than the year-ago quarter as the result of weaker commodity prices and higher production costs, which were partially offset by higher production volumes.

First-quarter 2007 oil and natural gas production averaged 382,000 barrels of oil equivalent per day, which was about 6% above the year-ago period. Our full-year 2007 production forecast remains 370,000 to 380,000 barrels of oil equivalent per day.

Looking at the balance of the year, worldwide production is anticipated to average in the range of 350,000 to 360,000 barrels of oil equivalent per day for the second and third quarters and then to increase to more than 400,000 barrels of oil equivalent per day for the fourth quarter.

Our worldwide oil and natural gas production in 2007 is expected to be affected by several factors. Reductions in the second and third quarters will result from the sale of our interest in the Scott and Telford fields in the U.K. North Sea, a decision to reduce natural gas sales from the Cromarty field during the second and third quarters in response to market conditions in the United Kingdom.

The scheduled maintenance of our North Sea facilities and a 40-day planned shutdown at the Malaysia Thailand joint development area during the third quarter, to install facilities required for phase 2 development.

Growth during the year will come from the ramp-up in production from the Okume Complex in Equatorial Guinea throughout the year. The start-up of natural gas production from the Pangkah field in Indonesia in May and the commencement of production from the Genghis Kahn field in the deepwater Gulf of Mexico in the third quarter.

Our field developments continue to make good progress. In the deepwater Gulf of Mexico, our Shenzi development in which Hess a 28% interest, remains on schedule for initial production in mid-2009.

The CR Luigs drillship is on location drilling development wells and all major contracts have been awarded. Construction of the tension leg platform and top sides is underway and is on schedule and on budget.

The focus of our exploration drilling program this year will be appraisal drilling in the deepwater Gulf of Mexico and the commencement of exploration drilling in Australia in the fourth quarter. In the deepwater Gulf of Mexico, appraisal drilling at our Pony discovery in which we have a 100% interest is continuing. The results of the Pony number two well are expected by the end of the second quarter.

In addition, appraisal activities at the Tubular Bells discovery in which Hess has a 20% working interest will include a number three well, which is expected to spud in the fourth quarter of 2007. As a result of the success of the number two well and sidetrack, we have increased the gross reserve estimate to 200 million to 400 million barrels.

Lastly, in the first quarter, we acquired a 100% interest in an exploration license in the Carnarvon basin offshore West Australia. During the fourth quarter of 2007 and extending into early 2008, we will acquire 3-D seismic over the entire 780,000 acre block and drill four exploration wells.

With regard to Marketing and Refining, our first-quarter 2007 financial results strengthened versus the year-ago quarter. In refining, our results benefited from strong margins in operations, especially at our HOVENSA joint venture. In energy marketing, increased natural gas sales and higher margins contributed to improved financial performance.

Lastly, in retail marketing, our business benefited from increased convenient store sales and higher gasoline margins compared to a year ago, but was negatively impacted by rising wholesale gasoline prices throughout the quarter.

I will now turn the call over to John Rielly.

John Rielly

Thank you, John. Hello, everyone. In my remarks today, I will compare first-quarter 2007 results to the fourth quarter of 2006. Net income for the first quarter of 2007 was $370 million compared with $359 million in the fourth quarter of 2006.

Turning to Exploration and Production, income from Exploration and Production operations in the first quarter of 2007 was $340 million compared with $350 million in the fourth quarter of 2006. The after-tax components of the decrease are as follows.

Lower crude oil and natural gas sales volumes decreased earnings by $36 million. Lower operating costs, primarily exploration expenses, increased income by $37 million. All other items net to a decrease in earnings of $11 million for an overall decrease in first-quarter income of $10 million.

Our E&P operations were under lifted in the first quarter resulting in decreased income in the quarter of approximately $10 million. The Exploration and Production effective income tax rate for the first quarter of 2007 was 51%. The E&P effective income tax rate for the full year of 2007 is expected to be in a range of 52% to 56%.

Turning to Marketing and Refining. Marketing and Refining earnings were $101 million in the first quarter of 2007 compared with $67 million in the fourth quarter of 2006. Refining earnings were $54 million in the first quarter of 2007 compared with $45 million in the fourth quarter. The Corporation's share of HOVENSA's income after, income taxes was $35 million in the first quarter, compared with $17 million in the fourth quarter, primarily due to higher refining margins.

During the first quarter, the Corporation received a distribution from HOVENSA of $50 million. Port Reading earnings amounted to $17 million in the first quarter of 2007 compared with $23 million in the fourth quarter.

Port Reading operations were interrupted for approximately one week as a result of a small fire during the first quarter of 2007. The balance of the PDVSA note at March 31 was $122 million in principal and interest payments are current.

Marketing operations had income of $43 million in the first quarter of 2007 compared with income of $17 million in the fourth quarter reflecting increased margins. After-tax trading income amounted to $4 million in the first quarter of 2007 compared with $5 million in the fourth quarter.

Turning to corporate, net corporate expenses amounted to $31 million in the first quarter of 2007 compared with $27 million in the fourth quarter. Net corporate expenses for the year 2007 are expected to be in the range of $115 million to $125 million.

After-tax interest expense was $40 million in the first quarter compared with $31 million in the fourth quarter. The increase in the first quarter was primarily due to lower capitalized interest. After-tax interest in 2007 is expected to be in the range of $170 million to $180 million.

Turning to an accounting change. The Corporation adopted a required accounting change effective January 1, 2007 related to refinery turnarounds at HOVENSA and Port Reading. The cost of refinery turnarounds are now being expensed as incurred instead of being accrued in advance.

The Corporation's reported prior-year earnings have been retrospectively adjusted for this accounting change. The impact in the first quarter of 2007 was not material. The impact in future periods will only be material when significant turnaround activity is taking place.

In the second quarter of 2007, the Coker at HOVENSA will be down approximately 35 days for its first turnaround since commencement of operations in August 2002. Certain related processing units will also be included in the turnaround. The expensing of the turnaround costs will reduce Marketing and Refining net income by approximately $25 million. In addition, refinery utilization will be impacted.

Coker utilization in the second quarter is anticipated to be approximately 55%. Crude runs at HOVENSA are expected to be 425,000 barrels per day in the second quarter, approximately 85% of capacity. The FCC unit is not affected by this turnaround, and is expected to operate normally at approximately 135,000 to 140,000 barrels per day.

Turning to cash flow. Net cash provided by operating activities in the first quarter, including a decrease of $65 million from changes in working capital, was $639 million. The principal use of cash was capital expenditures of $1.106 billion. Borrowings increased during the quarter by $369 million. All other items amounted to a decrease in cash flow of $36 million resulting in a net decrease in cash and cash equivalents in the first quarter of $134 million.

At March 31, 2007, we had $249 million of cash and cash equivalents. Our available revolving credit capacity was $2.477 billion at quarter-end. The Corporation's debt to capitalization ratio at March 31, 2007 was 32.5% compared with 31.6% at the end of 2006. Total debt was $4.141 billion at March 31, 2007 and $3.772 billion at December 31, 2006. The corporation has long-term debt maturities of $16 million during the remainder of 2007 and $28 million in 2008.

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) And our first question comes from the line of Paul Sankey of Deutsche Bank.

Paul Sankey - Deutsche Bank

Hi, everybody. Good morning. Just an overall question really. Your earnings in the upstream are down quite heavily year-on-year even though your volumes are up and beyond what might be expected from the move in the oil price, which was relatively, well it was down 8%, but your earnings were down more like 30%. Could you just talk a little bit about the dynamics of what is going on there and how we should look at this going forward? Thanks a lot.

John Rielly

If you are looking first quarter '06 to first quarter '07, Paul.

Paul Sankey - Deutsche Bank

Yes.

John Rielly

Yes, I mean the difference; the primary drivers are price and cost. Approximately $90 million of the earnings decrease is due to the weaker commodity prices and approximately $100 million are due to higher unit costs, which we had forecast during the year.

Now obviously the volume increases that we had, that did increase earnings by approximately $35 million and there were small tax changes between the year in the U.K. and Algeria, which brought down some of the earnings. Again, you had the supplemental tax in the U.K. and the additional exceptional profit tax in Algeria.

Now quarter-to-quarter, again, the earnings were relatively flat. We are picking up some of the industry increases in unit costs that we talked about, but our actual unit costs for the first quarter were below our forecast for the year.

Paul Sankey - Deutsche Bank

Right. So you're telling me that it is somewhat misleading to look at the year-over-year. I guess it is very notable also that your volume mix has changed on a year-over-year basis.

John Rielly

Exactly.

Paul Sankey - Deutsche Bank

But if we were to look quarter-to-quarter, we could continue to model out if you like the more stable picture that we are getting there?

John Rielly

Yes. That is correct.

Paul Sankey - Deutsche Bank

Now the unit costs that are nevertheless up sequentially, are they moderating or can you just give us a bit more guidance there as to how we look forward therefore? Thanks.

John Rielly

Sure. I mean again if you -- quarter-to-quarter from first quarter '06 to first quarter '07 are up, but, again, if you were just looking in sequential quarters, our unit costs in the fourth quarter, this is excluding exploration expenses, was $21.91 in the fourth quarter. In the first quarter of '07, they were $20.71. So there has been some moderation in the cost.

Now again overall, we are sticking with our guidance for the year, which has our cash cost at about $12 to $13 for the year and our DD&A at $10 to $11 for the year. Again, as John Hess had mentioned earlier, we have some production volumes that are down in the second and third quarter. We have some maintenance costs that come in, but our unit costs should be in that $22 to $24 for the year.

Paul Sankey - Deutsche Bank

That's very helpful. Thank you, gentlemen.

John Rielly

You are welcome.

Operator

Your next question comes from Doug Leggate of Citigroup.

Doug Leggate - Citigroup

Thank you. Good morning, everybody. I guess, John, if I could, John Rielly, if I could just follow up on Paul's question there. Arguably the mix change is a big driver of how your unit costs are going to play out this year and given that the production guidance is down in Q2, Q3, could you maybe walk us through how you expect the costs to look maybe more on a quarterly basis this year?

And then as we move into 2008, clearly you have got quite a lot of what we expect anyway to be lower cost projects at full production rates, Okume and Phu Horm and so on. What would you expect unit costs to do? Maybe it's a little early to talk about this, but what would you expect the trend to be in '08 over '07? Then I have a follow-up.

John Rielly

Sure. I mean everyone knows the trend right now in the industry has been that costs have been going up approximately 15% a year. We saw that in 2006 and then when we gave guidance on our first quarter when we were doing the fourth-quarter conference call, we expected a 15% type increase in this year.

So with our guidance for the year of $22 to $24, we don't see that really being that much different quarter-on-quarter. Again, you have got a little bit higher in the second and third quarters because you will have the maintenance, you will have work overcosts and a little lower volume.

So again, what we have when you're looking at our costs from a DD&A standpoint, we have some new fields coming on. When you are talking about Okume, when you are talking about Pangkah, we had Atlantic/Cromarty coming on. Those fields, the initial development costs end up being amortized over a lower reserve base at the initial part of production. So the DD&A costs associated with those fields are a little higher. But again, that's all been part of our forecast in the $22 to $24. And then the only other aspect with Okume is you have to remember that does have some purchase price allocated to it as well, so the DD&A for Okume is higher than the average for our portfolio.

So again looking forward, $22 to $24 is the guidance. You could use that for a range, a little higher maybe in the second and third and then in the fourth quarter when production comes up, it will be down a little bit lower.

Doug Leggate - Citigroup

Is it fair, John, to expect that those numbers should commensurately fall then as we go into '08?

John Rielly

Again, with the way the costs are going in the industry, I wouldn't want to forecast this at that point and later on in the year, we can let you know where we see that going.

Doug Leggate - Citigroup

I guess I was thinking more about DD&A as you got the full production over the -- to amortize the costs over some of these new projects.

John Rielly

Yes. As I mean in general, as additional reserves are brought on, that will lower the rate.

Doug Leggate - Citigroup

My follow-up was really just an update on the appraisal drilling. I think you have already given us a touch on Tubular Bells and Pony, but I am really thinking about what the signals are for potential project sanctions this year. West Med for example, Pangkah oil, I'm not sure if you booked that or not, the residual oil was on and so on. I think there is a few things that are potentially coming up, so maybe I guess appraisals and projects sanction outlook for 2007. That's it for me. Thanks.

John O'Connor

Doug, I think you're, as you said, you are pretty much towed into the appraisal. When we talk about the appraisal program, it's big dollars, but it's relatively modest activity and it is primarily focused around Tubular Bells and Pony. Pony is going to continue to be the focus of the spend.

As I said I think on the last call, it is going to require a lot of patience because these are deep wells and it's going to take some time until we have additional information for you.

In terms of project sanctions, we are moving forward to obtain full partner approval to sanction the tertiary CO2 plug in the residual oil zone of Permian Seminole unit and we expect that that will get sanctioned certainly probably in the first half of this year.

Other sanctions coming forward are possibly Jambi Merang in Indonesia, in South Sumatra. We are currently negotiating a memorandum of understanding for gas sales agreement for the gas associated with that and once we have contractual agreements in place, we will very likely move forward with sanctioning of that project.

In terms of West Med, we made a lot of progress there both on the commercial and the technical fronts. And we are working with partners to bring that to sanction as soon as possible. The earliest possible sanction looking at it from this point of view recognizing everything that remains to be done to ensure we have a solid attractive project would look to sanction around the end of the year, either in the fourth quarter of this year or the first quarter of next year.

Doug Leggate - Citigroup

Okay. So it's a little early to talk about reserves, but if all went well, I would assume another fairly big year for reserve replacement, John, is that fair?

John O'Connor

You are absolutely right. It is very early to forecast it and probably in the third quarter, I would be in a much better position, Doug, to satisfy that question.

Doug Leggate - Citigroup

Fair enough. Thanks very much.

John O'Connor

Sure.

Operator

Your next question comes from line of Arjun Murti of Goldman Sachs.

Arjun Murti - Goldman Sachs

Thank you. Just in terms of Tubular Bells, it sounds like you are drilling the Number 3 well there. Can you just talk about what is the key things you still need to understand about that reservoir before potentially moving forward to development and what kind of additional steps might be needed after the Number 3 well? Thank you.

John O'Connor

As you know, Arjun, we had both a straight hole and a sidetrack drill at the Number 2 location. In both cases, I think the results were extremely positive. We also recognized from the original wildcat that there are deeper, higher pressured sands, which may be a viable development target in conjunction with the main normally pressured sands that we have talked about thus far.

And we really need to see those sand to come up with the optimal development. So on the presumption that the Number 3 well actually reaches and validates the existence of the deeper, higher pressured sands that should give us the information we need to move the project to sanction.

Arjun Murti - Goldman Sachs

That's great. That's probably an early next decade kind of start-up in terms of timeframe potentially?

John O'Connor

Yes, I think that is right. Obviously, BP, our operator of the project with 50%, Chevron of 30% and we have 20%, so I think that it will get into the queue of projects for all the partners and that will dictate where it goes.

I do know, however, that within the operator's organization, this project is already with their development group. So I would think that once we get the results from the Number 3 well, we will be well-positioned to move it on to first production.

Arjun Murti - Goldman Sachs

That's great. And just one more. Atlantic/Cromarty, are you shutting all of that down for 2Q, 3Q or is it some variation in some different time period?

John O'Connor

Yes. We, using short hand, we call it Atlantic/Cromarty, but it is actually two fields, Atlantic and Cromarty. We have 90% of Cromarty and BG have the other 10% and in the Atlantic, the situation is roughly reversed.

So the position right now is that we and BG have shut in Cromarty completely for Q2 and Q3. We will pick it up again in Q4 as Nat gas prices firm up in the winter season in the U.K. At this time, Atlantic remains on production, so we are getting our equity share of that.

Arjun Murti - Goldman Sachs

Thank you very much.

John O'Connor

You are welcome.

Operator

Your next question comes from line of John Herrlin of Merrill Lynch.

John Herrlin, Merrill Lynch

Yes, hi, just three quick ones. For the North Sea maintenance that you're going to do, how long will that last, the maintenance program?

John O'Connor

John, it is pretty much 30 days for each of the key assets that we have in the North Sea. They are currently timed to start in June and I would just add to John Hess' comments earlier with respect to quarterly forecasting.

Because the timing of these turnarounds can move around a bit, it is conceivable that the turnaround could bulk up into the third quarter, so we might have a second quarter that would look much like the first quarter, but then take a deeper cut in the third quarter. It's impossible to say with certainty at this stage.

Currently what we have done is project them in as the operators have told us. These are all outside operated properties by the way. So they are all timed to start in June and in each case, last for about four weeks.

John Herrlin, Merrill Lynch

Okay. With Pony, John, can you give us any more color on it? Have you had any drilling difficulties like with the sidetrack well or is everything going smoothly? What can you say?

John O'Connor

I can tell you because Scout Check I'm sure will tell you anyway that we are about 22,500 feet currently. The top of the objective section is just under 27,000 feet. We have encountered some drilling difficulties.

We are still in the original hole. It is basically served to slow us up rather than to cause us to deviate, but we are encountering some drilling difficulties and the next week will tell whether we can successfully overcome them.

John Herrlin, Merrill Lynch

Okay. The last one for me is the Carnarvon basin. Are we talking oil or natural gas prospects?

John O'Connor

Carnarvon is a very, very rich natural gas play. Significant quantities of gas is being discovered there and strategically it is of interest to us as a gas opportunity.

John Herrlin, Merrill Lynch

That's it for me. Thank you.

John O'Connor

Thank you.

Operator

Your next question comes from line of Nikki Decker of Bear Stearns.

Nikki Decker - Bear Stearns

Good morning.

John O'Connor

Good morning.

Nikki Decker - Bear Stearns

My questions are on the downstream if I could. First of all, how do you plan to handle the turnaround at HOVENSA? Can you change the feedstock slate to maintain your yields or do you expect a significant impact on product yields out of that as you perform maintenance?

And secondly would be on your gasoline sales. They looked a little light in the first quarter. Maybe you could comment on that. Is it a demand issue or perhaps a timing issue? Thank you.

John Hess

Hi, good questions. First, on the turnaround at HOVENSA, this will be our first turnaround of the coker and the associated crude and downstream units that are integrated with the coker. So it is more an impact on the heavy crude that we will be running that for a 30-plus day period.

When the turnaround is going on, we won't be running. So the heavy light spread is where the profits will be impacted, but we will still be running our cracker at full capacity 130,000 to 140,000 barrels a day. So the impact on our gasoline yields should be not that material from normal state.

In terms of our gas stations, our same-store sales in terms of gasoline, first quarter this year versus first quarter last year are down about 2%. We were actually running ahead January and February year-on-year, month-to-month same period about 2%, but March is where the real fall-off was.

And I think that is more a timing thing that last year March was so strong given the market and this year was not as strong. So I wouldn't read too much into the gasoline decrease quarter this year versus quarter last year.

And I think part of that can be seen in our convenience store sales, same site sales this quarter versus last quarter last year because they are actually up about 2% year-on-year. So the business is moving ahead well and I wouldn't read into too much the fact that this quarter versus this quarter last year were actually down a little bit in gasoline sales.

Operator

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

Mark Gilman - The Benchmark Company

Guys, good morning. Had a couple things. First, John Rielly, back to this cost issue for a sec. The international DD&A in the first quarter seems abnormally low given the production level. Any comment on that?

John Rielly

No, it just happens to be the mix in the quarter. Again from an overall standpoint, I mean, we just want to stick with that $10 to $11. If you are looking from of saying why it is a little low, we obviously are booking some of the reserve adds at the end of the year with the DD&A in the forecast through the year and then the only other thing is Okume is ramping up.

So when we give our $10 to $11 average for the year, you don't have the full slate of production from Okume at this point.

Mark Gilman - The Benchmark Company

Okay. International tax rate, John, also seems a bit low, particularly in the context of your forecast on E&P for the year. Don't you accrue that tax on a quarterly basis in conjunction with the full-year estimate rather than the expectation that it is going to rise over the course of subsequent quarters?

John Rielly

We book the tax rate based on our sales volumes in the quarter and so why you are seeing a little bit low international tax rate as compared to our forecast is because Libya is underlifted in the first quarter and obviously with the 93% tax rate, that is why our rate is a little down and again, the forecast for the year assumes that we will basically sell approximate amount related to our production and that is why we are in that 52% to 56% range.

Mark Gilman - The Benchmark Company

Okay. And just two for John O'Connor if I could. John, in the 200 to 400 gross on Tubular Bells, is there anything in that for that deeper horizon?

John O’Connor

Great question, Mark, and I should have actually added that in answer to Arjun's question. No, there isn't. That number is just the main pay, the end to Miocene sand. So there are some other bits and bobs around that we have seen in the number two well and hopefully if the deeper test in the number three comes in, that would be additive, Mark.

Mark Gilman - The Benchmark Company

Okay. Fine. And just one more. On this voluntary shut-in in Cromarty, I guess I am not sure I really quite understand the rationale. Is this just a bet on gas prices or you know is the variable cost structure on this platform you know so high as to suggest that this makes sense even in current U.K. gas price environment?

John O’Connor

Well, basically the current spot price, and this gas is sold spot, is 15p/therm. The strip for winter '07,'08 is 38p in Q4 and 48p in Q1, so I just leave you with that information, Mark.

Mark Gilman - The Benchmark Company

Yes, but John, it could be anything else later in the year.

John O’Connor

I agree. I agree.

John Hess

Generally, Mark, as you well know, winter prices tend to be higher than prices in the shoulder months and to maximize value for our shareholders, we think this is a wise decision to make.

Mark Gilman - The Benchmark Company

Okay. Thanks a lot, guys.

Operator

Your next question comes from the line of Bernie Picchi of Wall Street Access.

Bernie Picchi - Wall Street Access

Good morning. Just a follow-up question on John Herrlin's question about the Carnarvon basin. You indicated, John O'Connor, that it of course is a very rich gas basin. To my knowledge, there aren't any examples of independent gas producers selling into other people's LNG operation.

There is no indigenous market for the natural gas other than LNG. Does that imply that you would, therefore, be interested in taking an equity interest in an LNG project?

John O’Connor

Bernie, I would argue that Woodside is an independent, but anyway. If the volumes are there, we certainly have the capability to market the gas internationally. So we are prepared to commercialize a discovery either into the domestic market, but preferably obviously in the international market.

Bernie Picchi - Wall Street Access

And as well, could you just describe for us approximately the kind of calendar timing would be in terms of these four wells that you plan to drill and also do you have the drilling rigs lined up because that is kind of a bottleneck for exploration in the Carnarvon basin I imagine?

John O’Connor

Yes, good question. We are in the last stages of negotiating the acquisition of a rig and upon completion of those negotiations; it will be available to us in October. So we are currently doing all the preparatory work in terms of supply base, well locations, well permitting and so forth and I think you will see us turning to the right in October of this year.

Bernie Picchi - Wall Street Access

And just one final question, you mentioned in the press release that a portion of the capital costs in the quarter was due to reentry into Libya. Could you quantify that for me a bit and is that just a one-time first-quarter phenomenon? Would that drop off fairly sharply then as we go out into the year?

John Rielly

The comment where we were talking about the reentry into Libya, that related to the 2006 first quarter. So in the $1.181 billion of capital and exploratory expenditures for the first quarter of 2007, there is $371 million that relates to the acquisition of the 28% interest in the Genghis Kahn field, which is the extension of Shenzi.

Bernie Picchi - Wall Street Access

Got it. Thanks.

John Rielly

Sure.

Operator

(Operator Instructions) And your next question comes from the line of Paul Cheng of Lehman Brothers.

Paul Cheng - Lehman Brothers

Hi, good morning, gentlemen. John, earlier you were talking about your March gasoline sales dropped quite substantially in the same store year-over-year. Do you know yet, based on your best knowledge, is it a Hess issue or there is a timing issue that is specific to Hess or that you have seen that for the rest of the industry?

John Hess

Well, I can't speak for the rest of the industry what they did in March, but I can say last year's March I think, Paul, was abnormally high for whatever the economic reasons that drove that and I think we had more of a normal March this year and that was the major driver and the sales for the quarter being down this quarter versus a quarter a year ago.

But I wouldn't read too much into it. It's just a one-month phenomenon. That's why I say I think it is more a timing issue than it is a trend issue.

Paul Cheng - Lehman Brothers

Okay. And maybe this is either for John or for John Rielly. On the Port Reading, you indicate that sequentially the earnings is actually down, but when I am looking at the New York gasoline margins sequentially probably up $4 to $5 per barrel.

And so that even though you are being interrupted for one week, that does not appear to be sufficient to bring the earnings to be down. Is there anything else that we should be aware?

John Rielly

I mean normally Port Reading, you can't make the exact analogy on margins to Port Reading as other refineries, but the real impact is for us when we are looking quarter-on-quarter was the volume decrease due to the small fire. It was the one-week and it wasn't that much of net of a margin impact at Port Reading.

Paul Cheng - Lehman Brothers

So you didn't see the gasoline margin improvement in Port Reading?

John Hess

Well, you have got to remember, Paul, that the feedstock for Port Reading is an intermediate, a cat feed six oil feedstock that has got its price partly tied to gasoline and the heating oil. So as a consequence, some of that margin goes to the feedstock input.

Paul Cheng - Lehman Brothers

Okay. All right. A final one, maybe either for John Reilly or John O'Connor. I know that it's early stage, but, John, if you look at your portfolio in the deepwater Gulf of Mexico over the next say five to six years as they move into the development phase, what is your overview? Is it those projects will be able to develop within $10 per barrel or that is going to be $10 to $15?

John O'Connor

You know that requires a crystal ball that I don't have, Paul. It is next to impossible to say what the development pressures on the industry service sector; suppliers, rig rates, steel mills and so forth are going to cause to happen.

Naturally there will be some sort of balancing out in the market on the back of the run-up in cost that we have seen over the past three years. This is what we would certainly expect, but it would be a brave man who would forecast what the unit development costs are going to be in the Gulf of Mexico five years out.

Paul Cheng - Lehman Brothers

Okay. All right. Very good. Thank you.

John O'Connor

Yes.

John Hess

Thank you.

Operator

And your next question comes from the line of Mark Gilman of The Benchmark Company.

Mark Gilman - The Benchmark Company

John O'Connor, just back to this deeper horizon on Tubular Bells. Is that an Eocene or Paleogene horizon you are talking about?

John O'Connor

No, it is not. It is lower Miocene.

Mark Gilman - The Benchmark Company

Okay. Thanks, John.

John O'Connor

Okay, Mark.

Operator

Okay, folks. There are no further questions at this time.

Jay Wilson

Thank you very much for joining our quarterly call and we look forward to giving you an update on our next one. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.

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Source: Hess Q1 2007 Earnings Call Transcript
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