Hess Management Discusses Q3 2012 Results - Earnings Call Transcript

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

Hess (NYSE:HES)

Q3 2012 Earnings Call

November 02, 2012 10:00 am ET

Executives

Jay R. Wilson - Vice President of Investor Relations

John B. Hess - Chairman and Chief Executive Officer

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

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

Analysts

Evan Calio - Morgan Stanley, Research Division

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Faisel Khan - Citigroup Inc, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

John P. Herrlin - Societe Generale Cross Asset Research

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

Edward Westlake - Crédit Suisse AG, Research Division

John Malone - Global Hunter Securities, LLC, Research Division

Katherine Lucas Minyard - JP Morgan Chase & Co, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Hess Corporation Third Quarter 2012 Earnings Call. My name is Fab, and I'll be your operator for today. [Operator Instructions] Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Jay Wilson, Vice President of Investor Relations. Please proceed.

Jay R. Wilson

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

Today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements.

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'll now turn the call over to John Hess.

John B. Hess

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

First, I would like to express our deep concern for the people suffering from the devastation caused by Hurricane Sandy. Our company is doing all that we can to help meet the public's energy needs in the wake of this storm. Hess has had a long history of doing whatever it takes to meet the demand for energy during times of crises. We are very proud of and want to thank the Hess employees, who have worked around the clock to quickly open and supply 177 of our 186 Hess stations in New York City, Long Island and New Jersey.

In advance of the hurricane, we arranged to have available 85 electrical generators in the event of lost power. Approximately 80% of the gas stations in the Northeast that were impacted by Hurricane Sandy are still closed due to lack of power. The oil terminals and refineries used to supply them are still not in operation for similar reasons.

Finally, I want to recognize and thank both New York City Mayor, Michael Bloomberg; and New Jersey Governor, Chris Christie, and their staffs for their outstanding leadership during this difficult period.

Now I would like to provide an update on the progress we have made since our July call. As to future funding, we continue to believe that at current oil prices, the gap between operating cash flow and capital expenditures should peak this year at about $3 billion, moderate in 2013 due to lower spending and approach a balance in 2014. We also expect that this deficit will be largely met through asset sales.

Since July, we have announced the sale of our interest in Azerbaijan for $1 billion and the Beryl fields in the United Kingdom for $525 million, which together with previously announced asset sales, bring the year-to-date total to $2.4 billion. We have significant additional divestitures, either underway or in the early planning stages. We expect these sales will be completed by the end of 2013.

As a consequence of our strategic portfolio reshaping, our reserves and production base will be lower than 2012 levels. However, our Exploration and Production assets will be more focused in lower risk and offer higher growth and financial returns.

Next, I would like to discuss our financial and operating performance. Net income for the third quarter of 2012 was $557 million. Excluding nonrecurring items, earnings were $495 million versus $379 million for the third quarter of 2011.

Our earnings were positively impacted by higher crude oil sales volumes and improved Marketing and Refining results and negatively impacted by higher operating costs in Exploration and Production. Exploration and Production reported net income of $608 million. Crude oil and natural gas production averaged 402,000 barrels of oil equivalent per day, a 17% increase over the year ago quarter. This increase was primarily the result of higher production from the Bakken in North Dakota and Libya.

Net production from the Bakken averaged 62,000 barrels of oil equivalent per day in the third quarter, an increase of 94% over the year ago quarter. And we shipped approximately 37,000 barrels per day of crude oil from our Tioga rail-loading facility to higher value markets, improving our price realizations.

In addition, we are currently evaluating the feasibility of building a rail unloading facility at our Port Reading, New Jersey complex to market Bakken crude oil on the East Coast. At the Waha fields in Libya, production averaged 23,000 barrels of oil equivalent per day in the third quarter. The fields were shut-in during the third quarter of 2011 due to civil unrest in the country.

At the Valhall Field in Norway, net production averaged 6,500 barrels of oil equivalent per day in the third quarter. The field was shut in July 29 to complete major field redevelopment work. This work is now expected to be completed in mid-December, after which production will resume.

With regard to exploration, Hess concluded drilling operations on the Almond prospect in Ghana. The well resulted in a discovery encountering approximately 15 net feet of oil pay. We are currently taking a drilling break to incorporate results of the 2012 drilling program into our subsurface models, and we plan to drill 2 additional wells, the first of which should spud later in the fourth quarter.

In the deepwater Gulf of Mexico, we spud the Ness Deep well on Green Canyon 507 on June 12. Ness Deep is a Miocene prospect, in which Hess has a 50% working interest. BHP holds the remaining 50% and is the operator. This well is anticipated to reach total depth during the fourth quarter.

Turning to Marketing and Refining. We reported net income of $53 million for the third quarter of 2012. Refining generated earnings of $18 million compared to a loss of $38 million in last year's third quarter. Marketing earnings were $17 million compared to $41 million in the year ago quarter. Gasoline volumes on a per site basis were down approximately 2%, and total convenience store sales were down nearly 7% versus last year's third quarter, reflecting the continued weak economy. In Energy Marketing, electricity and oil volumes were lower versus last year, while natural gas volumes were higher.

In summary, we are confident that our strategic portfolio reshaping, unlocking value from asset sales and redeploying the proceeds into lower risk, higher-return investments will deliver improved financial performance and create long-term value for our shareholders.

I will now turn the call over to John Rielly.

John P. Rielly

Thank you, John. Hello, everyone. In my remarks today, I will compare third quarter 2012 results to the second quarter. The corporation generated consolidated net income of $557 million in the third quarter of 2012 compared with $549 million in the second quarter. Excluding items affecting comparability of earnings between periods, the corporation had earnings of $495 million in the third quarter compared with $585 million in the previous quarter.

Turning to Exploration and Production. Exploration and Production reported earnings of $608 million in the third quarter of 2012 compared with $644 million in the second quarter. There were several items affecting comparability of Exploration and Production earnings between periods. Excluding these items, Exploration and Production had income of $546 million in the third quarter of 2012 compared with $680 million in the second quarter.

The third quarter results included an after-tax gain of $349 million related to the sale of the corporation's interest in the Schiehallion Field, partly offset by after-tax charges totaling $287 million. These after-tax charges consisted of $116 million for asset impairments resulting from increases to the corporation's estimated abandonment liabilities for nonproducing properties, $56 million to write off the corporation's assets in Peru as a result of a decision to cease further appraisal and development activities and $115 million for a onetime charge resulting from a third quarter change in the United Kingdom's supplementary income tax rate applicable to deductions for dismantlement expenditures.

Second quarter results included an after-tax impairment charge of $36 million. Excluding these items, the changes in after-tax components of the results were as follows: lower sales volumes decreased earnings by $132 million, higher operating costs decreased earnings by $32 million, lower exploration expense increased earnings by $17 million. All other items net to an increase in earnings of $13 million for an overall decrease in third quarter adjusted earnings of $134 million. The E&P effective income tax rate for the third quarter of 2012 was 49%, excluding items affecting comparability of earnings between periods.

Turning to Marketing and Refining. Marketing and Refining generated income of $53 million in the third quarter of 2012 compared with $8 million in the second quarter. Marketing earnings were $17 million in the current quarter and $18 million in the previous quarter. Port Reading refining operations generated income of $18 million in the third quarter of 2012 compared with $8 million in the second quarter, reflecting higher margins. Trading activities generated earnings of $18 million in the third quarter of 2012 compared with a loss of $18 million in the prior quarter.

Turning to Corporate. Net corporate expenses were $38 million in the third quarter of 2012 compared with $39 million in the second quarter. After-tax interest expense was $66 million in the third quarter of 2012 compared with $64 million in the second quarter.

Turning to cash flow. Net cash provided by operating activities in the third quarter, including an increase of $530 million from changes in working capital, was $1,862,000,000. Capital expenditures were $2,160,000,000. Proceeds from the sale of Schiehallion were $524 million. Net debt repayments were $93 million. All other items amounted to a decrease in cash of $14 million, resulting in a net increase in cash and cash equivalents in the third quarter of $119 million.

We had $528 million of cash and cash equivalents at September 30, 2012, and $351 million at December 31, 2011. Total debt was $7,841,000,000 at September 30, 2012, and $6,057,000,000 at December 31, 2011. The corporation's debt-to-capitalization ratio at September 30, 2012, was 27.5% compared with 24.6% at the end of 2011.

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 your first question will come from the line of Evan Calio with Morgan Stanley.

Evan Calio - Morgan Stanley, Research Division

I guess my first question, I appreciate the update on the asset sale process, and I know you're not identifying specific assets. But could you range a proceed estimate or potential production impact for us? And also related, how much lower is 2013 capital spending as a result of the already announced asset sales, which I know had some related CapEx calls on them?

John B. Hess

In terms of our prospective divestitures, obviously, until they're successfully completed, we can't give specific details. We have a number underway right now. And obviously, as soon as the purchase sale agreements are signed and completed, we'll get that information out in a very timely manner. In terms of the asset sales that have occurred, John Rielly will be happy to give you some perspective.

John P. Rielly

Yes. So including the ones we've announced and the ones we've completed, which are Barrow, Schiehallion, Snohvit, ACG and Bittern, the 2013 production impact from these sales is estimated to be approximately 30,000 barrels a day. Our capital expenditures are estimated to be reduced by approximately $500 million, resulting from those sales. And our net cash flow will be reduced at an estimate of approximately $200 million from the sales.

Evan Calio - Morgan Stanley, Research Division

Great, that's helpful. My second question would be, if you could just kind of walk us through your North Sea production in the quarter. I know you talked a little bit in the opening comments. But is it a bigger portion of the bead and how should we think about that going forward? Because production, overall, looks like it's trending at the higher end of your guidance.

John P. Rielly

The third quarter, I mean we had -- it was good production across the portfolio. So we had Valhall that was down for the majority of the quarter in the North Sea. But in general, the assets performed very well. I don't know if you were particularly asking about in the North Sea. So Schiehallion and Bittern actually closed right after the quarter end. So the impact in the fourth quarter from Schiehallion and Bittern will be about 11,000 barrels a day. That's what they produced in the third quarter.

Operator

Your next question will come from the line of Arjun Murti with Goldman Sachs.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Do you have any update on where you are in terms of Bakken well costs, and how you think they're trending over the next year or so?

John B. Hess

Yes, thanks, Arjun. Let me provide some additional comments on the Bakken first, and I'll get right to your question. As John indicated in his opening remarks, our third quarter production averaged about 62,000 barrels of oil equivalent per day, which was up 13% from the second quarter and 94% from the third quarter of 2011. Now we still expect production guidance for 2012 for the Bakken to average between 54,000 and 58,000 barrels of oil equivalent per day. Getting to your question, now that we're largely through HBP drilling, our main focus is on capital efficiency. And as a result, we've reduced average drilling complete cost to $9.5 million in the third quarter. That's reference to $13.4 million in the first quarter. The 29% reduction was primarily driven by the switch to providing fleet completion designs, which was used in nearly all of our wells in the third quarter. Looking forward in the fourth quarter, our HBP drilling will be substantially completed, and therefore, we expect to see further decreases in our average well costs as we transition to pad drilling. And currently, 15 of our 16 rigs are operating in pad drilling mode. The switch to pad drilling is going to allow us to further improve our capital efficiency and optimize the pace of development. Our approach is going to be to sequentially drill a number of wells on a pad using a walking rig; then once drilling operations are finished, we will move completion crews in to then sequentially fracture the wells. Now this will lead to the temporary flattening of the production profile until mid-2013, at which steady-state operations will allow us to resume our upward growth trajectory. So the production curve in 2013 will be a bit back-end loaded. Now we believe that this lean manufacturing approach will result in significant efficiency gains and cost savings and further improve our returns in the Bakken.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

That's very helpful and thorough answer, Greg. Are you still planning in doing the dual laterals? The $9.5 million, I'm pretty sure, is a single lateral well cost there.

Gregory P. Hill

It is. It is a single well cost. We're experimenting with co-planar dual laterals, but it's just a pilot. That's it.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

I see. So your base case plant is now single laterals, maybe similar to what other operators up there are doing. And $9.5 million is the starting point, you expect it to come down, that's how we should be thinking about it this?

Gregory P. Hill

It is, yes.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Any updates to then kind of individual well recovery rates and some of the type curve stuff you've talked about? Or can we take the dual lateral stuff you've given before and kind of divide those by 2?

Gregory P. Hill

No, I think the 30-day average IPs from this new sliding sleeve design, which is 25 to 34 stage, are slightly lower, they're 800 to 900 barrels equivalent per day. I think with regard to EURs, we continue to think that 500 to 600 is a good average used for the entire acreage position. However, as we focus on higher quality parts of the play in 2013, we expect EURs in the Middle Bakken to be closer to 600,000 to 700,000 barrels.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

That's great. Just a final question. I think John had alluded to some of the asset sales you've done and are planning. Do you have an updated total asset sales target you're working towards? I think you're already on track to well exceed your original guidance.

John B. Hess

As we said, Arjun, the number this year on prices is about $3 billion funding deficit. Next year, there'll be a significant decrease in that number. We'll be able to give more guidance on it on the next call as we talk about next year's capital and exploratory expense budget. But we're going to be reducing our CapEx and exploratory expenditures for next year significantly. So when we can announce that at the end of the year, we will. The deficit will be reduced accordingly, assuming current oil prices. And then we think by 2014, we'll be more in balance between operating cash flow and CapEx. So in terms of what it means in terms of asset sales, that's going to be much more a function of the sales we have underway and in early stages of planning and getting them executed. So more definition than that, I just can't give you right now. I can give you the contextual perspective, but I can't give you the specific answer until those sales are done.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

But do you think about your asset sales as a funding gap issue, or is that we need to high grade and clean up the portfolio-type consideration?

John B. Hess

We're focusing our strategy to invest for future growth, focusing on lower risk, higher-return investments, obviously, led by the Bakken, but also the North Malay Basin and some of the focused exploration that we're doing because so much is to meet the upfront investment we need for the Bakken. It's just time for us to fund that with the assets that are either lower interest or more capital intensive, and so it's both to upgrade our portfolio, to have higher profitability and be more focused, but also to meet the funding needs that we have.

Operator

Your next question will come from the line of Robert Kessler with Tudor, Pickering, Holt.

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

A couple of questions for me. First, I was wondering if you could give me some more detail on the Port Reading rail receipt terminal capacity, expected CapEx, timing of first receipts of production if you've gotten that far along in your plan and then maybe how much it would cost to move a unit of production from the Bakken to that facility.

John B. Hess

Yes, a very fair question. We certainly have strategic geography available to us, I think, for a very attractive investment. Having said that, we're in the early stages of doing a feasibility study. So to give you more definition would be premature.

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Understood. Well, it sounded very interesting, and good luck with that. Other question on Llano. I think you've received the Atwood Condor rig and are doing some development drilling there. I think you've got maybe 3 wells planned. Is that right? And what are you thinking as far as capital investment there and future production given the development drilling at Llano?

John B. Hess

We're still finalizing our drilling plans for Llano on a go-forward basis, but there are some targets in the Llano area that we're very interested in.

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

So you would consider this more exploration or delineation-type drilling than development at this point?

Gregory P. Hill

Yes, it's basically just in-field drilling, more delineation than it is exploration.

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Any kind of predrill prospect size you could throw out there?

Gregory P. Hill

No, not yet because we haven't finalized the sequence.

Operator

Your next question will come from the line of Doug Leggate, Bank of America Merrill Lynch.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

I don't want to push too hard on the asset sales, but John, forgive me for this, but order of magnitude, you've announced I think about $2.5 billion, $2.4 billion so far. The asset sales still to go relative to that scale, is it similar size, much less, much more? How would you characterize it?

John B. Hess

Doug, fair question, and again I don't want to get ahead of our results. As soon as the asset sales are completed, we'll give you the details on them. Having said that, the intent is to meet the funding gap and also put some excess cash on the balance sheet. So that's the direction we're going. We have enough sales underway to help us get there, and we also have some other divestitures on top of that. So we should meet the funding gap and have some cash excess to boot.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

This is really -- there's a bit of a portfolio high grading going on in the background then, basically.

John B. Hess

Absolutely.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Okay. So a little follow-up to that. I think you said, certainly, to us in the past that net debt to cap target, somewhere closer to 20%. Is that still a good number?

John B. Hess

Yes, I don't want to just focus on that. Obviously, it'll be closer to where our debt cap was before we started the scaled-up investment program in the Bakken and have the higher capital exploratory program that we have this year. Another focus that we have though, Doug, is to really get our debt back to the levels that it was before the investment program, which is the equivalent of, let's say, about $6 billion because of some capitalized leases that we're going to have. The equivalent number, going forward, will be probably closer to $6.7 billion, but it's also a focus to keep our strong investment grade rating, so we can have the balance sheet to fund through the cycle and take the volatility of oil prices at the same time.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Got it. Just 2 very quick follow-ups then if I may. On the spending obviously, you've got a lot of infrastructure spending going. Your asset sales, I believe you've said in the past, that you expect to have everything announced pretty much by the end of the second quarter, albeit they may not be completed by the end of the year. But then after that, I think the discussion moves on to how else you can unlock value. And I think you're on record talking about potential for an MLP. I'm wondering if you could just give us some color as to what kind of assets in your portfolio would qualify. And final one for me is just an update on any hedging thoughts into these strong oil prices, and I'll leave it at that.

John B. Hess

Yes, a couple of perspectives on the funding gap. The majority of the sales will be some of our E&P assets as part of the portfolio high-grading that we're going through, which are either lower working interest, mature assets, maybe CapEx associated with them that we feel don't generate the returns that we'd like to see, maybe lower margin. It's a combination of all these factors that go in to our portfolio model to figure out what are the assets that we have for sale. And as I said, a number underway on the E&P side, as well as there are a number in early planning stages. So I'd say that's the first part. I also think that when you think about MLPs, the strategic infrastructure we have in North Dakota, having control of that adds a lot of value to our production, both on the oil side, and ultimately, the Tioga Gas Plant side for extracting liquids out of the natural gas we're going to have there, because Bakken associated gas is very rich in content of NGLs and LPGs. So that's not something that we would be interested in MLP-ing. There are some other assets that we have in the portfolio that we might think about MLP-ing, but our first priority right now is not that. The first priority is to address the E&P assets that we think don't fit us as much strategically. So we can really slim down and upgrade our portfolio on the E&P side.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Great. And on hedging, John?

John B. Hess

Yes, on hedging. As we look forward, we think our balance sheet is in much better shape right now. So we can afford more price risk. So our intention is to take it. Having said that, if there are opportunities during the year where we think we can lock in some good prices just for next year, and basically, protect our cash flows, it's certainly something that has been and will continue to be given full consideration.

Operator

The next question will come from the line of Faisel Khan with Citigroup.

Faisel Khan - Citigroup Inc, Research Division

It's Faisel from Citi. We've seen a number of companies announce restructurings of their integrated sort of strategy as integrated oil companies, whether it's Murphy or Marathon or some other companies. I'm just wondering, can you discuss what the strategic rationale is for remaining sort of an integrated company, or is there a possibility that you could separate the retail and refining business, whatever's left of it, into a separate entity given that those assets trade higher multiples than where upstream assets trade today. And I have a follow-up after that.

John B. Hess

Very, very fair question. First of all, I have a lot of respect for these companies. We're not Murphy, we're not ConocoPhillips, and we're not Marathon. With the close of HOVENSA refinery, we've completed our transition to being a predominantly exploration, production company. Exploration production's over 90% of our capital employed; and marketing is, basically, the balance. Our energy marketing and retail marketing businesses remain a long-term strategic part of our portfolio that generate attractive returns, build upon our strong brand and offer selective growth opportunities. As I mentioned before, in terms of the portfolio reshaping that we're doing, the more material opportunities to meet our funding gap and to focus our portfolio to generate higher returns are on the E&P assets that do not meet our strategic criteria.

Faisel Khan - Citigroup Inc, Research Division

Okay. But I mean how -- if these other assets, like retail and refining and logistics trade at higher multiples than upstream, how do you extract that value at the current...

John B. Hess

Well, we're really not in the refining business anymore. We just have the Port Reading cat cracker that's just a unique niche investment that we have that generated good returns in the third quarter. We'll keep running it as long as it makes good returns, number one. So the focus is marketing, which is really different part of the portfolio. And as I said before, it generates attractive returns, builds upon our strong brand and does offer some selective growth. So we're very happy having it in the portfolio, and it is a strategic part of the portfolio.

Faisel Khan - Citigroup Inc, Research Division

Okay, fair enough. And just on exploration expense, I think you guys discussed how this was an expense number that was probably going to trend down over time. It looks like it gapped up a little bit in the third quarter, and we're still trending around almost $800 million, $900 million to $1 billion a year in exploration expense. What kind of -- where is this going to trend over time? It's still a very large number given the size of your company.

John P. Rielly

In that exploration expense number, I had mentioned the Peru asset write-off. That's where the pretax portion of that write-off is. So in that exploration expense number on a pretax basis is $86 million related to Peru. So that's why that number is a little higher this quarter.

Faisel Khan - Citigroup Inc, Research Division

So where did this number trend over time? And can you give us some concrete examples of how the activity levels have actually wound down a bit?

John B. Hess

Yes, year versus year, if you take the Peru out, obviously, it's trending down this year. But when we announce our budget next year, you'll see another material change to the downside. So as we announce our budget, you'll see more specifics on exploration expense and expenditures coming down. As Greg has said before, going forward, we're going to have a much more focused exploration program and less exposure to exploration as well. We're still going to be in the exploration business, but it'll be a lower dollar number.

Operator

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

Paul Y. Cheng - Barclays Capital, Research Division

The first question is for John Rielly. John, just want to understand, despite that very popular people on -- in the industry, people is spinning off their retail and all that. But is it true that, I mean, for in your case, that you -- the retail actually help you to utilize your IDC deduction? Without the retail operation, you actually are going to leave money on the table?

John P. Rielly

No, not specifically related to that, but we don't -- I mean, as John said, Retail and Energy Marketing are going to be a core part of our portfolio, and that will not impact our ability to take the 100% IDC write-off.

Paul Y. Cheng - Barclays Capital, Research Division

No, no, I'm saying that, I mean that your IDC anyway, that you're generating so much even if you just deduct say, 50% or 75%, yet without the retail earning, you may not be able to fully utilize it.

John P. Rielly

I mean, absolutely. Anything that generates U.S. earnings, we can use the IDC write-off for. So because we have this additional write-off, as we can continue to generate more and more income in the U.S., could be on the downstream side, could be on the upstream side, makes those IDC write-offs much more valuable, correct.

Paul Y. Cheng - Barclays Capital, Research Division

So from that standpoint maybe that's the one strategic reason you may not want to spin off then?

John P. Rielly

Yes. I mean, again, as we overall look at that and look at the deductions that we have associated with that, and just as John said, I mean, when we look at it and put that portfolio together -- and I'm going to call it a risk-adjusted basis, it improves our overall portfolio returns on a risk-adjusted basis.

Paul Y. Cheng - Barclays Capital, Research Division

On the second one that I just spoke, Greg. Greg, in Bakken, what is your current game plan for the number of rigs? I mean, you're going to focus on the capital efficiency. Does that mean that you're going to move down from the 18 rig into a lower number, say, by the end of the year into the next year? Or how should we look at it?

Gregory P. Hill

Yes. So, Paul, just to clarify, we have 16 rigs currently operating in the Bakken, 15 in pad drilling mode. I think as John has said and I've said before, as we focus on capital efficiency, we may moderate the pace slightly. But it won't be a major downward reduction in pace in the Bakken.

Paul Y. Cheng - Barclays Capital, Research Division

So we should still be looking at, at least, in the 14, 15 rigs?

Gregory P. Hill

Yes, we'll announce that as part of our 2013 guidance, but directionally, you're correct.

John B. Hess

But the key is, Paul, as you look at us going forward, the overall capital expenditures for next year will be materially down year versus year because of the improvements in operating efficiency and capital efficiency that Greg and his team have made, even if we run a rig count that's slightly less than this year.

Paul Y. Cheng - Barclays Capital, Research Division

And John and Greg, I mean when I'm looking at the third quarter, your U.S. lifting cost, unit lifting cost is going down. Should we -- base on that and deduct the conclusion that maybe in the Bakken, unit cash operating costs already reach their high watermark, and from this point on, it's going down?

John P. Rielly

We've been getting more and more efficient quarter-by-quarter in the Bakkens. And so right now, our Bakken costs are clearly below our portfolio average. They're slightly below our portfolio average and continuing to improve on our cash cost that way. And again, the more volume that we're getting and the more, again over time, development, that is continuing to trend that way.

Paul Y. Cheng - Barclays Capital, Research Division

John, when you say that below your average portfolio you're talking about average U.S. or average total company?

John P. Rielly

Average total company. And that -- I'm saying that's inclusive of the production taxes that are up there in North Dakota, which are significant.

Paul Y. Cheng - Barclays Capital, Research Division

And how about on the unit DD&A, is it -- can we draw the same conclusion or not really?

John P. Rielly

You can draw the same conclusion that it will be on a declining path. But right now, on the unit DD&A as I had mentioned before, that is above our portfolio average. And again, early on in development of this, the reserve bookings lagged the investment dollars. So again, we've had a lot of infrastructure spend on top of the well cost. You don't get to book those full EURs upfront. But over time, the DD&A rate comes down, and that's what we're expecting to see and should start to see next year as well.

Paul Y. Cheng - Barclays Capital, Research Division

And in the third quarter, I think John has earlier mentioned, you guys did about 37,000 barrel per day of the unit train. Can you share with us then what kind of margin uplift on that 37,000-barrel per day may have been?

John P. Rielly

Yes, I can. So just in general, from our overall North Dakota-type production, so if you take all our production, not just that went by rail, we've got year-to-date about a $6 uplift in our price realizations in North Dakota.

Paul Y. Cheng - Barclays Capital, Research Division

Year-to-date, $6?

John P. Rielly

That's on our overall production, not just the amount that went by rail.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And John, can you give us some maybe, industry estimate or that your number in your retail network, October, the same store sales year-over-year, how is that looking like on the GAAP and inside?

John P. Rielly

For October, given the hurricane, I -- obviously, I don't think it's appropriate to even talk about it right now with all the suffering that's going on in the region that we live in, which has been impacted by the storm. But we're really one of the few operators open with all our stations working, save about 8 or 9 that are closed due to floods. With the generators we have, obviously, we've been open around the clock. Many of our stations have lines of 3 miles long. People have to wait 3 hours. If more operators were in business, obviously, would alleviate a lot of the panic buying that's going on. Having said that, in a number of situations, our gasoline sales are 2 to 3x what the normal amount would be.

Paul Y. Cheng - Barclays Capital, Research Division

And John Rielly, do you have any over-lift or under-lift in the quarter? And also at the end of the third quarter from an inventory standpoint, are you, at this point, normal?

John P. Rielly

There's no material under or over-lift in the quarter. And we are basically balanced here going into the fourth quarter. So we're not seeing any -- as we forecast, any material under or over-lift in the fourth quarter.

Paul Y. Cheng - Barclays Capital, Research Division

A final question is for Greg. Greg, from a strategic standpoint, when you're looking at Australian gas, you basically -- that in that Asia-Pacific just down there that you only have that discovery. So should that be really part of your -- from a capital efficiency and human capital efficiency standpoint, should that be part of your ongoing core operation, or that would be better off that since you make the discovery and just sell it to someone and focus your resources, your manpower, that there may be more concentrated areas?

Gregory P. Hill

Yes, Paul. So I think that the answer depends, obviously, on the commercial arrangements that we can negotiate with the 3 parties, again Chevron, Northwest Shelf and Pluto, Woodside and also the price that we get for that LNG. So the answer is going to depend upon returns and what that investment looks like. And that's how we're going to make the decision. I'm not worried about the capability to execute because it's all offshore drilling and development, which we're very good at.

Paul Y. Cheng - Barclays Capital, Research Division

And when are you going to make the decision? Any timeline you can share?

Gregory P. Hill

Well, I think we're still negotiating with the parties. So we aim to make the decision sometime next year. I think that's all I can say at this point.

Operator

Your next question will come from the line of John Herrlin with Societe Generale.

John P. Herrlin - Societe Generale Cross Asset Research

Most everything's been asked. Regarding the Bakken, Greg, you mentioned that you're having your own improvements in terms of cost optimization, but what about services costs in general? Are you seeing a leg down on completion cost, rigs, et cetera?

Gregory P. Hill

I think, in general, relative to last year, our costs are flattish, I would say. Rigs, we're not seeing any significant downward pressure because of the high utilization there. I think we are seeing on the pumping services side, some downward pressure as supply is beginning to outstrip demand, but there's still upward pressure on labor costs in the Bakken. No major, major reductions in sight in the near term.

John P. Herrlin - Societe Generale Cross Asset Research

Okay, that's fine. And then any sort of update on the Gulf of Mexico, or just a lot of discussion, that's it?

Gregory P. Hill

Yes, I think that's pretty much it. As we said, we're drilling Ness Deep with BHP, the operator and our 50% partner. And we anticipate TD-ing that well during the fourth quarter.

Operator

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

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

When I back out your Bakken, the growth in Bakken volumes year-over-year, it looks like the rest of your U.S. liquids production was down. Is that mainly Gulf of Mexico?

John P. Rielly

Yes, that would be Gulf of Mexico. And again, we did have that hurricane impact. So it was about 6,000 barrels a day of an effect in the quarter. And then typically again in the third quarter, we did have some maintenance as well.

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

Okay. And then can you also share the year-over-year change in your Eagle Ford volumes?

John P. Rielly

It's really not material.

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

Not material.

John P. Rielly

No.

Operator

[Operator Instructions] Your next question will come from the line of Edward Westlake with Credit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

Just on the Utica, I guess you've been watching industry trends. It feels gassy to the east, and then there's a productive, I guess, liquids window around Noble, Harrison, Guernsey and some of Belmont. Have you had a chance to sort of update us on how much of your acreage that you acquired last year would be in that core liquids window?

John B. Hess

No, we haven't. And I think really, it's because we're still in the very early stages of appraisal of the Utica, not only us, but also industry. To kind of put that in context, that we have, for us, we only have 3 wells in the Utica versus more than 600 in the Bakken. So and the only extended production data that we have is from that initial North American Coal well in Jefferson County. I should say that well is a good well. It continues to produce at a constant 4 million a day, with a steady tubing pressure with significant surface facility constraints. Beyond that, we have 2 additional wells on our 100% acreage that are drilled that are waiting completion. And then our partner, CONSOL, has announced the results of 2 JV wells, one of which the Noble 1A flowed at a good rate, 9 million cubic feet a day initial rate. But given that very limited well mix, including industry, it's early in the appraisal stage. But I think based on what we've seen so far, and our acreage from a drilling standpoint and the very limited completions that we have, we remain optimistic about our position in the play.

Edward Westlake - Crédit Suisse AG, Research Division

Yes, no, it certainly seems though that the play is developing. Very small one. On the European surprise, I mean, how much was Beryl, because I guess you're selling that. So how much did that produce in the quarter?

Gregory P. Hill

Okay, Beryl, I will get that in one second. Beryl, for the quarter, produced 13,000 barrels a day.

Edward Westlake - Crédit Suisse AG, Research Division

Okay, that's very helpful. And then I guess a general question coming back to CapEx, but not about projections. You spent about $2.5 billion internationally this year through, I guess, the first 9 months. And you gave us some good CapEx associated with some of the asset sales. But I mean is it possible just to give us a reminder of how much you spent, say, by region or assets, so that we can think about where CapEx may go? I'm very conscious that you've kind of finished Valhall and now moving into the drilling phase, there might be some savings there as well.

John P. Rielly

Sure. I mean I can just give you some highlights of the numbers. So Valhall this year was a significant capital requirement. So we are forecasting to spend approximately $750 million at Valhall this year. Also, if you're looking at the North Sea, we have South Arne. We have a development of a northern extension there, so we're spending approximately $200 million at South Arne in the North Sea. Some of the other just, in general, bigger assets. We have the Tubular Bells development that's going on in the U.S., so we expect to spend somewhere around $400 million in the Gulf of Mexico. We have the first of the 3 production wells drilled on that, and we'll continue drilling there next year. So you can expect -- if I was going to give you for next year, that some of the Valhall numbers will come down because of that redevelopment. South Arne will continue to drill, and so there will still be continued capital being spent in South Arne. Then in EG this year, we did pick up our drilling program again. We had kind of taken a hiatus there. We're spending about just under $500 million we forecast to spend in EG this year. So hopefully, that gives you a feel of where we're spending. But Like John Hess said earlier, we do anticipate next year a significant reduction in our overall capital spend.

Edward Westlake - Crédit Suisse AG, Research Division

Yes, that's very helpful. And just then a follow-up that you bring up on EG. Is that sort of a 2-, 3-year program of spending at that level? Just I know that you're trying to some infill drilling to offset decline.

Gregory P. Hill

Yes, that'll be another 2 years or so on EG. We continue to find excellent infill opportunities using 4D seismic with very high return investments.

Operator

Your next question will come from the line of John Malone with Global Hunter Securities.

John Malone - Global Hunter Securities, LLC, Research Division

Just 2 questions. On the Bakken, the 37,000 BOE that you railed, if I heard correctly, that looks like a smaller proportion of the total production in the previous quarters. Is that going to come back up again, is that something specific to Q3? And where do you kind of see the proportion of rail to overall production going forward?

John B. Hess

Yes, on the rail side, that number is maybe at the lower end of what we might have anticipated, in part, because of some of the logistical disruptions from the Gulf Coast hurricane. Having said that, the number now is running closer to 45,000 barrels a day within a range of that number.

John Malone - Global Hunter Securities, LLC, Research Division

Okay. And then just overseas looking at Ghana. When do you think you'll be able to start talking about development options and plans for the discoveries you've made there so far?

Gregory P. Hill

Yes. So on Ghana, while we're encouraged by the results to-date, additional drilling's going to be required before we can really figure out the commerciality of the reserves that we have there. What we can say, we've said in the past, Paradise and Hickory North were predominantly gas-condensate discoveries in the Cenomanian and Beech and Almond were predominantly oil discoveries in Turonian-age reservoir. And as John mentioned in his opening remarks, we plan to drill 2 additional wells in Ghana, starting on the first one later in the fourth quarter.

John Malone - Global Hunter Securities, LLC, Research Division

Okay. And then just one broader one last question. In the past, you talked about production guidance 395 to 4,000 or 5,000 BOEs a day. Obviously, a pretty stellar quarter this quarter has made that attainable. Are you sticking with that guidance, or do you think there's going to be at the high end? Or do you think you could exceed it?

Gregory P. Hill

I think we still feel good about our guidance. In the fourth quarter, we will be impacted by the continued shutdown of Valhall, which will now be shut in until mid-December, and then as John Rielly mentioned, in addition, we completed those Schiehallion and Bittern asset sales. So that's going to reduce our fourth quarter production by about 11,000 barrels a day versus Q3. So we feel pretty good about the guidance still.

Operator

Your next question will come from the line of Kate Minyard with JPMorgan.

Katherine Lucas Minyard - JP Morgan Chase & Co, Research Division

Just a couple of quick questions. Probably the first one is for John Rielly. Can you give us a sense as to the level of capitalized infrastructure so far in the Bakken? And also over what timeframe that's depreciated?

John P. Rielly

So for the Bakken right now, we plan on spending approximately $750 million this year on infrastructure. And again, that's going to be infill pipelines. You've got your gas plant. You've got the rail facility. And obviously, we had spent some of that beforehand. There's various rate years that are used for the DD&A. I'd say you've got a 20- to 25-type year depreciation on those facilities.

Katherine Lucas Minyard - JP Morgan Chase & Co, Research Division

Okay. And then prior to the $750 million in 2012, the total cumulative spending or maybe net infrastructure as of year-end '11 was -- do you have that?

John P. Rielly

So the total that -- I'm going to say pre-2011, and we've got 2012 costs and then we do have some carryover like the gas plant expansion that will be completed next year. We're talking about $1.2 billion worth of infrastructure spend. And that's related to the gas plant field compression, gathering systems, rail, our truck facility, so again all those type of facility investments, so up around $1.2 billion.

Katherine Lucas Minyard - JP Morgan Chase & Co, Research Division

Okay, all right. And then I guess just for John Hess, you've made a couple of comments so far and I think on the prior conference call as well, about the portfolio reconfiguration moving to lower risk but also higher returns. And that's little bit of a more, maybe unusual move just to generate higher returns at lower risk. So how should we be thinking about measuring returns? And over what timeframe do you expect this to manifest in your results?

John B. Hess

Well, it's a work in progress, very fair question. As we reshape the portfolio, the majority of these asset sales will hopefully be completed in 2013, so really sort of the new rebased company would be starting in 2014. And while the production and reserve base will be lower, the unit profitability will be enhanced. So we also think that the reserve life will be enhanced, and the risk profile will be enhanced, so all of those together should be very helpful. And at the same time, we're limiting our exposure and refocusing our exploration efforts as well. So all of these, plus some other moves we're making, should improve our financial performance and make it lower risk and more sustainable. So between now and 2014, work in progress 2014, I think you'll really start to see those results shining, even though I think this quarter's results are an indication of what's to come in the future.

Katherine Lucas Minyard - JP Morgan Chase & Co, Research Division

Okay, all right. And should we look for measuring returns -- return on capital employed fair, or should we be thinking about return on equity? Or how are you guys thinking about it?

John B. Hess

Yes, return on capital employed, but when we invest money, as I've said before, we're looking for a 15% hurdle rate at $100 Brent. We tested at $80 for the cost of capital. And obviously, we want our investments to be better than that. We have to risk adjust it. So we use different criteria depending upon the risk within that framework that I mentioned. But that hopefully will be translated to improved financial performance as these investments bear fruit.

Operator

There are no further questions in the queue. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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