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Amerada Hess Corporation (NYSE:AHC)

Q1 2006 Earnings Conference Call

April 26th 2006, 10:00 AM.

Executives:

Jay Wilson, Vice President, Investor Relations

John Hess, Chairman, Chief Executive Officer

John Rielly, Senior Vice President, Chief Financial Officer

John O'Connor, President, Worldwide Exploration and Production

Analysts:

Paul Sankey, Deutsche Bank

Doug Leggate, Citigroup

Arjun Murti, Goldman Sachs

Steve Enger, Petrie Parkman & Co.

Mark Flannery, Credit Suisse First Boston

John Herrlin, Merrill Lynch

Jennifer Rowland, JP Morgan

Mark Gilman, Benchmark Company

Josh Levin, Lord Abbett

Nicole Decker, Bear Stearns & Co.

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2006 Amerada Hess 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 conduct a question-and-answer session towards the end of this conference. Operator Instructions I would now like to turn the call over to your host for today, Mr. Jay Wilson, Vice President, Investor Relations. Please proceed sir.

Jay Wilson, Vice President, Investor Relations

Thank you Kelly. Good morning everyone, and thank you for participating in our First Quarter Earnings Conference Call. Our earnings release was issued this morning, and it appears on our website. Also, beginning this quarter, you will find on the website supplemental earnings information which we hope will assist you in comparing our quarterly results to prior periods. 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.

John Hess, Chairman, Chief Executive Officer

Thank you Jay, and welcome to our first quarter conference call. I would like to make a few brief comments, after which John Rielly will then review the financial results for the quarter. Turning to exploration and production, our first quarter results benefited from strong oil prices and reduced hedge positions. Production averaged 361,000 barrels of oil equivalent per day. The increase versus the fourth quarter resulted from the addition of oil production from Libya, the Gulf of Mexico, where volumes are continuing to recover from the effects of the hurricanes, and increased gas sales in the Malaysia-Thailand Joint Development Area.

Our field developments continue to make progress. The most significant of these is the Okume complex in Equatorial Guinea. We recently completed the installation of the two deep-water tension leg platforms and the four shallow water jackets. Development, drilling and installation of the Central Processing Facility topside are scheduled for the second half of this year. First, production is expected in the first quarter of 2007.

In Southeast Asia, we continue to make good progress on the Ujung Pangkah and Phu Horm developments. Ujung Pangkah located in Indonesia. Construction of the onshore gas plant and offshore facilities is well underway. We will begin development drilling in the fourth quarter and anticipate production to commence in the first half of 2007.

Our Phu Horm gas development onshore Thailand is on track to go from projects sanctioned to first production in about 14 months. Gas plant construction is progressing, and the 63-kilometer gas pipeline of the Nam Phong power plant is being laid. Production from Phu Horm is expected to commence in the first quarter of 2007.

In the United Kingdom, commissioning of the onshore gas handling facilities for the Atlantic/Cromarty development is nearing completion. First, gas is expected in May. Regarding our exploration activities, in the deepwater Gulf of Mexico, we are drilling our Pony and Ouachita prospects and have not yet reached the targeted objectives.

The Barossa exploration well on Garden Banks 158 encountered noncommercial quantities of hydrocarbons and was plugged and abandoned. With regard to marketing and refining, the HOVENSA refinery experienced an unplanned shutdown of its Fluid Catalytic Cracking unit which lasted approximately 20 days and also completed its scheduled turnaround of a crude unit and accelerated the turnaround of a vacuum unit scheduled for the second quarter. This work resulted in lower overall throughputs at the refinery and had a negative impact on HOVENSA's financial results in the first quarter.

During April, however, all of these processing units have returned to normal operating levels and are benefiting from the current strong margin environment. In addition, our first quarter marketing results were negatively impacted by warmer than normal weather in the winter and weaker gasoline margins compared to the fourth quarter. I will now turn the call over to John Rielly.

John Rielly, Senior Vice President, Chief Financial Officer

Thank you John. Hello, everyone. In my remarks today, I will compare first quarter 2006 results to the fourth quarter of 2005. Net income for the first quarter of 2006 was $695 million compared with $452 million in the fourth quarter of 2005. As indicated in the press release, first quarter earnings include a net gain of $186 million from the sale of certain producing properties in the Permian Basin.

Turning to exploration and production, income from exploration and production operations was $706 million in the first quarter of 2006, including the gain from the sale of the Permian assets. Income from exploration and production operations was $298 million in the fourth quarter of 2005, including a gain from asset sales of $30 million and an after-tax charge of $12 million from Hurricane related costs.

Excluding these items, E&P earnings were $520 million in the first quarter of 2006 compared with $280 million in the fourth quarter of 2005. The after-tax components of the increase are as follows: Higher average crude oil selling prices increased earnings by $247 million. Lower average natural gas selling prices decreased earnings by $14 million. All other items net to an increase in earnings of $7 million for an overall increase in first quarter adjusted income of $240 million.

In the first quarter of 2006, the Corporation, with its Oasis Group partners, re-entered its former oil and gas production operations in Libya. Our share of Libyan production for the first quarter was 23,000 barrels of crude oil per day. However, we did not have a lifting in the first quarter. Our first lifting of Libyan crude oil will occur in May.

The effective income tax rate on exploration and production earnings in the first quarter of 2006, excluding the gain on asset sale was 42%. The effective income tax rate will increase in future quarters when we have sales of our Libyan production and when the additional 10% supplementary tax in the United Kingdom is enacted. We continue to estimate that the annual E&T effective income tax rate will be in the 50% range.

The after-tax impact of crude oil hedges reduced first quarter 2006 earnings by $65 million compared with a cost of $268 million in the fourth quarter. Outstanding hedges on the remainder of 2006 production amount to 30,000 barrels per day. The press release provides details on future production that is hedged and the related contract prices. The after-tax deferred hedge loss included in accumulated other comprehensive income at March 31, 2006 amounted to $1.5 billion.

Turning to marketing and refining. Marketing and refining earnings were $49 million in the first quarter of 2006 compared with $229 million in the fourth quarter of 2005. Fourth quarter earnings included an after-tax benefit from the liquidation of LIFO inventories of $25 million and an after-tax charge of $8 million from the Calpine bankruptcy.

Refining earnings were $21 million in the first quarter of 2006 compared with $83 million in the fourth quarter of 2005. The Corporation's share of HOVENSA's results after income taxes, was a loss of $1 million in the first quarter of 2006 compared with income of $41 million in the fourth quarter of 2005. In the first quarter of 2006, earnings from HOVENSA were adversely impacted by the unscheduled shut down and maintenance of the Fluid Catalytic Cracking unit which lasted for approximately 20 days. Our share of the estimated opportunity cost from the shutdown of the FCC, due to loss margin and incremental repair cost, amounted to approximately $20 million.

During the first quarter, the Corporation received a distribution from HOVENSA of $200 million. Port Reading earnings amounted to $19 million in the first quarter compared with $38 million in the fourth quarter due to lower margins. After-tax interest income on the PDVSA note amounted to $3 million in both the first and fourth quarters. The balance of the PDVSA note at March 31st was $182 million and principal and interest payments are current.

Marketing operations had income of $12 million in the first quarter of 2006. Excluding the LIFO gain and bankruptcy charge, marketing operations had income of $114 million in the fourth quarter of 2005. The change is due to lower margins in energy marketing operations due to a warmer than normal winter and losses in retail operations due to the higher costs of supply. After-tax trading income amounted to $16 million in the first quarter of 2006 compared with $15 million in the fourth quarter of 2005.

Turning to corporate. Net corporate expenses amounted to $23 million in the first quarter of 2006. Net corporate expenses were $41 million in the fourth quarter of 2005, including an after-tax charge of $19 million for premium on bond repurchases. Before discussing cash flow, I want to mention the new accounting standard for stock compensation.

Effective January 1, 2006, the Corporation adopted the provisions of statement of financial accounting standards number 123(NYSE:R) accounting for stock compensation. The effective expensing stock options in the first quarter of 2006 was $6 million before income taxes and $4 million after income taxes or $0.04 per diluted share. The expected full-year effect of expensing stock options is $30 million before income taxes and $20 million after income taxes.

Turning to cash flow. Net cash provided by operating activities in the first quarter, including an increase of $143 million from changes in working capital, was $1,198,000,000. The principle use of cash was capital expenditures of $1,336,000,000. Proceeds from the Permian Basin asset sale and other items amounted to a net increase in cash of $327 million resulting in an overall net increase in cash and cash equivalents in the first quarter of $189 million.

At March 31, 2006, we had $504 million of cash and cash equivalents. Our available revolving credit capacity was $1,950,000,000 at quarter end. The Corporation's debt to capitalization ratio at March 31, 2006 was 35.8% compared with 37.6% at the end of 2005. Total debt was $3,775,000,000 at March 31, 2006 and $3,785,000,000 at December 31, 2005. The Corporation has long-term debt maturities of $16 million over the remainder of 2006 and $27 million in 2007. 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

Thank you. Operator Instructions Your first question comes from the line of Paul Sankey of Deutsche Bank.

Q - Paul Sankey

Hi, good morning gentlemen.

A - John Hess

Good morning.

Q - Paul Sankey

The progress at Pony and Ouachita I think is a bit behind the schedule that you had originally set. Could you just talk a little bit about why that is and what the current expected TD date is? Thanks.

A - John Hess

Sure, Paul. Let me take a crack at that. Two different issues involved here. Let me start with Pony. In Pony, we are using a rig that came to the Gulf of Mexico, and we're very happy to have it from Southeast Asia. In Southeast Asia was operating at a much more benign environment and a much less challenging drilling issues. And while we have had absolutely no subsurface challenges of any note in getting the well to its current total depth of just over 27,000 feet, had it as you note just 32,000 feet, we had a combination of mechanical problems with the equipments together with loop currents at the location. So, that's what has accounted for the somewhat delay in reaching TD on this well. And we are currently have a case in point and will progress from here hopefully in an orderly manner. (multiple speakers) the drilling equipment has worked extremely well. We are very pleased with the performance of the rig, we and our partners. On the other hand, we have encountered substantial pressure regime changes down hole in the well which have caused us to have to attempt a number of sidetracks. Right now, we're preparing to execute sidetrack number two. So, in the one case mechanical issues which we think we have a grip of, in the other case, we are experiencing down hole pressure regimes, which by the way are not unique to this location, but where industry drilling these deep wells sub salt in the Gulf of Mexico has had similar challenges in the past.

Q - Paul Sankey

So the TD schedule now, John, looks like for both?

A - John Hess

Given the challenge of these wells, these are industry-leading depths and weight that the rigs have got to sustain. I think it's prudent frankly not to give forecasts. But unfortunately you, like us, will have to be patient until we get the results of the wells, and then we will announce them.

Q - Paul Sankey

Okay. If I could slip to a slightly wild-card question, the Lyondell-Citgo refinery for sale, I just wonder if you had any interest in expanding your refining capacity. And that’s all I've got. Thanks.

A - John Rielly

We're not going to comment on anything specific in terms of what’s going on in the market. Our priorities are to grow E&P and that’s where the major focus of our investment is and then selectively grow our marketing activities and marketing refining.

Q - Paul Sankey

I’ll leave it there. Thanks.

Operator

Your next question comes from the line of Doug Leggate of Citigroup.

Q - Doug Leggate

Thank you. Good morning.

A - John Rielly

Good morning, Doug.

Q - Doug Leggate

Couple of questions for me as well. I think we're all aware of obviously the exploration activity in the Gulf, but could you update us perhaps on the major wells drilling at site of North America? And I am particularly interested in Pangkah. I seem to remember, John O'Connor, that there was some discussion of an oil rig there, that changed the potential development plans so maybe some update there. And my second question is on costs. While you didn't have the liftings from Libya, I guess I was certainly expecting unit costs to come down a little bit with the contribution from Libya. Can you clarify whether or not the costs are from Libya are already included given that you haven't got the revenues? And if not, could you update the cost guidance please, John Rielly?

A - John Rielly

Okay, I'll start with the cost question, and then I will hand it over to John O'Connor. Yes, we did not -- while we had the production from Libya in our production numbers, we did not have a lift so the revenue associated with that lift or the income is not in our results in the first quarter. However, what we do do is to reflect the appropriate unit costs, we do include the unit costs in the income statement. So, the Libyan production costs, the Libyan DD&A are in our numbers for the first quarter. And that was part of our guidance for the full year where we said our overall unit costs without exploration would be between $17 and $19. Our cash costs were going to be between $9 and $10. So, for the first quarter we were actually right within our guidance there for the cash costs and slightly below on the DD&A, but we still think for the full year, we will be at the $17 to $19. John.

A - John O'Connor

A couple of other updates, Doug. First of all, Tubular Bells appraisal well has spurt, so that’s, I know it is counter to what you're asking me but I think it’s a significant event so we might as well share it with you. In the international arena, some interesting wells going down. None of them really impact exploration but nonetheless we expect to have resources. In Denmark, at the north end of the South Arne field, we are conducting some positive drilling to see if there is an extension of that field, and we're sort of encourage what we're seeing so far. In Indonesia, we are involved in drilling another exploitation well, which is expanding the limits of the Jambi Merang gas prospect. And again, we've had very encouraging results from that particular well. We continue to have two rigs active in the Joint Development Area between Thailand and Malaysia. Again, exploitation type drilling where we expect to see a resource there. You have asked about Pangkah, the oil rig. We basically have the results of the two wells that we had drilled to give us confidence of the subsurface characteristics of this oil leg. And we're confident enough now that we're working and engineering -- we and our partner -- working up an engineering proposal for that development, and I would expect by the end of the year we will have obtained final investment decision and sanction to proceed with that.

Q - Doug Leggate

John, any progress on in Egypt in terms of getting for securing a rig?

A - John O'Connor

No, actually that is a misleading sort of an answer, Doug, frankly. What we are currently doing is working with partners to evaluate a number of different options for development. And quite honestly, how we proceed between the development and the multiple exploration plays which are on the block is something that affects the Salzera (phonetic) mines right now. The probability is that we’ll go for a development plan first and secure a rig to execute that, and subsequently, we will look for a rig that is appropriate for exploration. But I caution that this is still very much a work-in-progress. We are getting our arms around the challenge of operating in West Med, had meetings with partners, had meetings with the government authorities in country and right now we have a team very actively putting together a number of options for that development stream.

Q - Doug Leggate

That's it for me. Thank you.

A - John O'Connor

Thanks Doug.

Operator

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

Q - Arjun Murti

Thank you. Just a few unrelated questions. Any update on the timing of sanctioning the Shenzi development? Two, can you provide just an update on how Russia is progressing? I think you expanded your position there in the fourth quarter. Just curious how production has progressed and what your plans are. And then third, what was the Gulf of Mexico volume impact in 1Q and what might be able to come back on over the remainder of this year? Thank you.

A - John O'Connor

Let me start with the last one first, and then I will probably forget the first two, Arjun. But the last one right now was about 5.5 thousand barrels a day, continues to be shot in versus pre-hurricane production levels in the Gulf of Mexico. And that is split about equally between the Garden Banks area of operations and then the shallow water production from state leases and Main Pass, Breton Sound area. We think we’ll see the 2.5 thousand barrels a day from the deepwater production of the Garden Banks area next month. It is questionable whether or not we will retain title to all of the production in the Main Pass, Breton Sound area. We will bring back some of that production but it is not going to make a significant impact. Of the 2.5 thousand barrels a day that is shot in there perhaps we’ll get back 1000, and as you may know, we are looking at exiting some of our assets on the Gulf Coast and in the state leases offshore.

Q - Arjun Murti

Shenzi update?

A - John O'Connor

Shenzi, the plan of development was approved by the partners in the first quarter, and development activities have already begun. Long lead items have been ordered for that development.

Q - Arjun Murti

Will you be able to book reserves this year then?

A - John O'Connor

Yes, very definitely. As to Russia, production in the first quarter averaged about 16,000 barrels a day. So, we did complete that modest corporate acquisition in the fourth quarter. And we continue to be very pleased frankly, with progress of operations there. We consolidated the acquired entity. We have everybody moving in the same direction, and our operations are profitable, and we look to see organic growth from our assets in Russia as we go forward.

Q - Arjun Murti

Do you expect to need some sort of integration there, or are you happy being a pure E&P in Russia?

A - John O’Connor

I understand what’s behind the question, but we are very definitely going to stay a pure E&P play there.

Q - Arjun Murti

Thank you very much.

A - John O’Connor

Okay.

Operator

Your next question comes from the line of Steve Enger of Petrie Parkman.

Q - Steve Enger

Good morning.

A - John Hess

Good morning.

Q - Steve Enger

A couple of questions, John, on the Libyan production impact or actually sales impact, with that lifting this quarter how do you see that going over the balance of the year as you I guess get sales ultimately closer to production? What’s that lifting likely to be? You think there will just be one in the second quarter?

A - John Rielly

Yeah, there could be two, but there may be just one lift. And I guess what we're doing is forecasting for the rest of the year in general, when we're looking at that effective tax rate is that we will catch up on our production and match the liftings to production. But you don't know. We are still early days when the transition of getting back into Oasis. So, it’s really difficult for us to tell you exactly how the liftings will play out for the rest of the year.

Q - Steve Enger

Sure.

A - John Hess

I'm pretty sure we had two liftings nominated and accepted for our selling our share of production in May, so, the transition from the Libyan National Oil Company running it 100% and selling all the oil is now going to where each partner gets their piece of the oil so they can sell it on their own. So, that is in process, so we should get our normal share of the 8% of production throughout the rest of the year.

Q - Steve Enger

Okay, thanks. And then another question on production, looking at 2007 with the significant projects starting up at Okume Pangkah and Phu Horm, what’s your current view of the impact of those projects on 2007 production?

A - John O’Connor

Steve, first of all, it’s way premature and we don't forecast following twelve-month production at this early stage. As a matter of fact, my expectation is that on the next conference call at midyear, we will give you an update on the outlook for 2006. But what I would tell you is that we have strategically projected production to continue on an upward trajectory in the range of 3% to 5% a year. It is not going to be that every year; some years it will be higher, some years lower but that is the sort of trajectory you should think about.

Q - Steve Enger

Right, okay, specifically on Okume, John, how quick a ramp up to peak rate would you expect?

A - John O’Connor

That’s a very good question, Steve. As John said in his opening remarks, we have two drilling rigs coming into the fields in the August-September time. One tender-assisted rig to work off of the TLPs, and the jack up to drill for the conventional bottom-founded jackets. How many wells we get completed by the end of the year, guess four, and I would think we will see the ramp up then from January through the end of the first quarter from something perhaps around 25,000, 30,000 barrels a day initially, heading up to 35,000, 40,000 barrels a day gross by the end of the first quarter. And we will just have to suck it and see quite frankly because it has been some time before we've -- since we've had some drilling in the general Okume Complex area. And I think at this stage it will be wise just to see -- let's see what happens as we drill the well. But I would caution that it is a fairly large complex development. So far, we're very pleased with the progress. It is on time. It is on budget. A lot of moving parts are coming together exactly as planned and predicted. So, at this stage rather than giving any portion I would like to see how we go but we are in position to see a reasonable ramp up of production during the first four to five months, I'd say.

Q - Steve Enger

Okay, that helps. And then just one quick one on Ouachita, can you say approximately what depth you are at with that sidetrack?

A - John O’Connor

Yeah, roughly speaking we're just dressing off the top of the cement job at about 5.5 thousand feet right now.

Q - Steve Enger

Thank you.

Operator

Your next question comes from Mark Flannery of Credit Suisse.

Q - Mark Flannery

I've just got a couple of small ones. John O'Connor, did you learn anything from Barossa? Is there anything that we should be aware of there or apart from the fact that they were noncommercial quantities?

A - John O’Connor

The stock answer, Mark, would be that we always learn something when we've invested in the subsurface. I think we certainly did. In this particular case, we were drilling essentially a bright spot on the flanks of the salts entity and drilling right along the side of that. So I think we did learn something with respect to seismic signals in that staffing, so yes, we have learned from that.

Q - Mark Flannery

And an unrelated question. There is a lot of CapEx pressures, or cost pressures in the industry, we're seeing some other people raising CapEx, some increases are fairly aggressive. Are you happy with your current CapEx number? Do you think you may have to revisit that in the middle of the year?

A - John O’Connor

Good question. And again it is early days. We are only at the end of the first quarter, but the point of fact, we have gone over all of the elements of our program just last week. And at this stage, forecast would be pretty much in the ballpark of what we have budgeted for this year. So, at this stage we are comfortable that the number is a good number.

Q - Mark Flannery

Great. Thank you.

Operator

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

Q - John Herrlin

Yeah, hi just some quick ones. The Libyan production, what kind of differential will you have of mark accrued? What are you anticipating?

A - John Rielly

We haven't made our first sale yet, so after we make our sales in May, we will be happy to share that with you.

Q - John Herrlin

Okay. That's fine. You know have or you know own West Med, you're considering a range of different scenarios in terms of development. Do you have any sense or can you give any sense of what ballpark gross development costs might be?

A - John O’Connor

No, that would be taking the stealing the thunder from the guys who are working on it. My expectation is they will pleasantly surprise me at the cost-effectiveness of the solution they hopefully will come up with. But to be more specific, I think this is something that is going to be worked through the year, and I don't look to see final numbers until the fourth quarter of this year. So, hopefully something that will be attractive and that would be sanctioned around the turn of the year, whether it is fourth quarter this year, first quarter next year remains to be seen.

Q - John Herrlin

Okay. That's fine. Last one for me, retail gasoline prices are up. Are you seeing any diminishment of sales at your stations?

A - John O’Connor

We are not seeing any major impact on demand for our sites. As you know, we price lower than our competition. And as a consequence, I think we have a little more stable consumer base. As John Rielly noted, first quarter retail did lose money. So, we are not able to recapture the increase in wholesale prices at the pump. It is just the nature of where the market is right now but we are not seeing a major change of demand.

Q - John Herrlin

Okay, thank you. That's it for me.

Operator

Your next question comes from the line of Jennifer Rowland of JP Morgan.

Q - Jennifer Rowland

Thanks, just two unrelated questions. First, on back to the exploration program in the Gulf of Mexico, Turtle Lake was one that you had talked about for potentially mid this year. Is that something that would be pushed off until later in the year given some of the delays you're seeing in your current prospects in the Gulf or from rig availability?

A - John O’Connor

Good catch, Jennifer. Yes, Turtle Lake is actually the way we are currently looking at it, probably going to drift into the early part of 2007.

Q - Jennifer Rowland

Okay, and my second question is do you have any planned maintenance at HOVENSA for the rest of the year?

A - John Hess

Nothing major. Most of the work for this year is behind us now.

Q - Jennifer Rowland

Okay. Thank you.

Operator

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

Q - Mark Gilman

Good morning guys. I had a couple things. John Rielly, I just want to make sure I understand what you said previously regarding the Libyan accounting issues. Am I to understand that the first quarter results reflect both operating and DD&A costs for Libya but no revenues such that we've got a mismatch?

A - John Rielly

No, you got the first part of it as is what I said, I guess I could have been clear. What happens when you don't have a lift or you have an under lift will keep the cost of that production -- because we did incur the costs of the production, and we will reflect that in the income statement. So, when anybody is looking at what our unit costs are for that quarter, it appropriately reflects the cost of production. Then what we will do is in another part of the income statement is there is no revenues, is we just backout those costs and put it to inventory. So, we inventory the barrels from our under lift position and reflected on the balance sheet.

Q - Mark Gilman

Okay, and John, where in from a segment standpoint is the stock option expense going to hit? Is that going to be in the segments or in corporate?

A - John Rielly

It is spread, so it is in all three -- corporate, M&R and E&P.

Q - Mark Gilman

Okay. Could you give me an update where things stand with respect to the possible divestiture of stocks versus volumes?

A - John O’Connor

We are at the very early stages of the process, Mark, so in terms of modeling I really wouldn't look to see if assuming we get an acceptable offer, anything really much close before the beginning of the fourth quarter, and that is at this stage as I said early in the process but no sooner than this.

Q - Mark Gilman

John, what is the production number on those two at this point running?

A - John O’Connor

7,000 barrels a day I believe, Mark.

Q - Mark Gilman

Combined?

A - John O’Connor

Yes.

Q - Mark Gilman

John O'Connor, anything from a drilling standpoint planned on South Belud, Malaysia?

A - John O’Connor

Again, we definitely would like to get back on that and we have got it in our program, we thought we would get to it the fourth quarter this year but again because of rig availability, Mark, we now are looking at the first quarter of '07.

Q - Mark Gilman

And that’s strictly a rig availability issue?

A - John O'Connor

Yes.

Q - Mark Gilman

I need some help with respect to what appear to be some decline rates reflected in the results. Looking at Europe first, subtraction kind of says to me that the UK must have really plummeted in terms of liquid volumes in the first quarter. Was there any maintenance activity that contributed to that, or are we just seeing an acceleration in the decline rate?

A - John O'Connor

Yeah, it's not an acceleration in the decline rate at all. As a matter of fact, quarter-on-quarter over the 12 months, we calculated decline rate there to be about 6.5%, Mark. All of the rest of it is actually due to operational issues across a variety of fields in the North Sea. Waha for example was shut in while work was done on other downstream gathering systems that didn't affect the field. We have had individual well problems on a variety of fields but these are all operational do not speak to the subsurface in there. The declines we are seeing from these mostly smaller mature fields, not from the big fields in the North Sea, about 6.5% we estimate on the portfolio.

Q - Mark Gilman

That applies to the gas as well, John?

A - John O'Connor

Yes, it does. Yeah.

Q - Mark Gilman

Okay, and it looks to me as if Siba has potentially falling off a little bit in the first quarter. Is that accurate, and if so, has it entered a decline?

A - John O'Connor

No, it hasn't. Again, we've had modest operational issues to do with the sub sea pumps, Mark. Some we've had pump failures on and we haven't gotten the ability to replace them. So, this again is a mechanical issue, not a subsurface issue. I don't expect to see Siba coming off that for a number of years yet.

Q - Mark Gilman

Okay, just one final one. The first quarter tax rate in the foreign side, John Rielly even taking into consideration the Libyan impact, it looks a little bit lower than what it has been running in the past. Any reasoning there?

A - John Rielly

Mark, no, I mean if you look at last year where we came in last year, we are running at basically the same rate because now we didn't have a Libyan lift, so we didn't have the higher tax rate associated with Libya. And the UK supplemental tax has not been enacted and we are still expecting that in the second or third quarter. So, no, it’s -- there's nothing unusual in there. You always have the normal production mix which is why we always try to talk about an annual rate because you can have little changes from quarter-to-quarter but nothing unusual.

Q - Mark Gilman

Okay, when the UK thing goes into effect, that is retroactive?

A - John Rielly

Yes, it is. Goes back to January first, so we will have one at the -- I think we mentioned a non-cash deferred tax, one time hit when that comes in between $40 and $50 million. And then there will be a retroactive piece that will be charged depending on when this happens, either in the second or third quarter.

Q - Mark Gilman

Okay, guys. Thanks an awful lot.

A - John Rielly

Sure.

Operator

Your next question comes from Josh Levin of Lord Abbett.

Q - Josh Levin

Good morning. Can you update us on your discussions or progress with Moody's with regards to obtaining investment-grade rating?

A - John Rielly

Yes, we continue to have discussions with all the rating agencies and with Moody's. The conversations are positive, as you would expect as our operations have been improving and our income and our financial position with our balance sheet has been improving. So, the conversations are positive. However, the decision is up to Moody's. I can't give you a time frame on when they would move up their rating. So, again, we just continue to have positive discussions with them.

Q - Josh Levin

Okay. Thank you very much.

Operator

Operator instructions And your next question comes from the line of Nicole Decker of Bear Stearns.

Q - Nicole Decker

Good morning. On the wells that you are drilling in the Gulf of Mexico, I know you are drilling Pony yourself. My sense is that prolonged drilling period is having a material impact on the costs of those wells. Can you comment on that?

A - John O'Connor

Well, any time that planned duration of reaching your objective in a drilling well is prolonged, then you are incurring day costs for both the rig and support of spread. For the sake of clarity, Pony is 100% our well and therefore impacts us significantly. Ouachita by contrast, we have two partners who are paying a disproportionate amount of the costs of the well. So, while in an absolute sense, anything beyond planned time is going to costs more. In the case of the Ouachita well, we are somewhat sheltered from the full effect of that.

Q - Nicole Decker

Have you disclosed estimated drilling costs originally at Pony?

A - John O'Connor

I don't believe we have.

Q - Nicole Decker

Okay. Turtle Lake, is there a resource estimate on that prospect?

A - John O'Connor

Turtle Lake is operated by Chevron. And I think it will be better Nikki, to address the question to the operator quite frankly, I wouldn't like to get ahead of our partners there.

Q - Nicole Decker

Okay. Just finally the Venezuelan government is taking a stronger stand apparently on the markets they want to serve, any indication from your partner that production at HOVENSA may ultimately be destined for a different market?

A - John Hess

No, I think I would ask that question of the Venezuelans not as answer it for them, but our relationship with them continues to be excellent. They are honoring their supply and financial commitments, and basically are being a reliable partner in our dealings with them. So, while some of the issues that are occurring in country are what they are, remember our investment with them is offshore in the Virgin Islands. So it is really in a different perspective.

Q - Nicole Decker

Well, my concern really is for you. Have there been any assurances from your partner if I could ask in a different way, that the marketing side of that operation will not change?

A - John Hess

We have not seen any changes in their marketing of the products from that refinery.

Q - Nicole Decker

Okay. Thank you.

Operator

There are no further questions at this time. I will now turn the call back over to Jay Wilson for closing remarks.

Jay Wilson, Vice President Investor Relations

Thank you Kelly, and thank you everyone for participating in the call. And thank you again for your interest in our company.

Operator

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

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Source: Amerada Hess Corporation Q1 2006 Earnings Conference Call Transcript (AHC)
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