Hess 2014 Annual Report Download - page 38

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Hess Corporation is a global Exploration and Production (E&P) company that develops, produces, purchases, transports
and sells crude oil, natural gas liquids, and natural gas with production operations primarily in the United States (U.S.),
Denmark, Equatorial Guinea, the joint development area of Malaysia/Thailand (JDA), Malaysia, and Norway.
Transformation to a Pure Play Exploration and Production Company
In the first quarter of 2013, the Corporation announced several initiatives to continue its transformation into a more
focused pure play E&P company. These initiatives represented the culmination of a multi-year strategic transformation
designed to deliver long-term, cash generative growth and increase returns to stockholders by focusing on lower risk, higher
growth unconventional assets, exploiting existing discoveries by leveraging offshore drilling and project development
capabilities, and executing a smaller, more targeted exploratory program.
As part of its transformation, the Corporation sold during the period of 2012 through 2014 mature or lower margin E&P
assets in Azerbaijan, Indonesia, Norway, Russia, Thailand, the United Kingdom North Sea (UK), and certain interests
onshore in the U.S. In addition, the transformation plan included fully exiting the Corporation’s Marketing and Refining
(M&R) business, including its terminal, retail, energy marketing and energy trading operations, as well as the permanent
shutdown of refining operations at its Port Reading facility. HOVENSA L.L.C. (HOVENSA), a 50/50 joint venture between
the Corporation’s subsidiary, Hess Oil Virgin Islands Corp. (HOVIC), and a subsidiary of Petroleos de Venezuela S.A.
(PDVSA), had previously shut down its U.S. Virgin Islands refinery in January 2012 and continued operating solely as an oil
storage terminal through the first quarter of 2015. See Item 3. Legal Proceedings. As of December 31, 2014, all
downstream businesses were sold or shutdown except for the energy trading joint venture, HETCO, which was sold in
February 2015, and HOVENSA, which will be shut down in the first quarter of 2015.
Proceeds from sales of assets in E&P and M&R during the period of 2012 through 2014 totaling $13.4 billion were used
primarily to reinvest in the E&P business, repay debt, repurchase the Corporation’s common stock, and increase cash
balances. In 2013, the Corporation’s board of directors authorized a plan to repurchase up to $4 billion of the Corporation’s
outstanding common stock, and subsequently in 2014 increased the authorized repurchase plan to $6.5 billion. Through
December 31, 2014, the Corporation has repurchased a total of approximately $5.26 billion of outstanding common stock.
Response to the Fourth Quarter 2014 Decline in Crude Oil Prices
Brent crude oil and West Texas Intermediate crude oil prices declined approximately 40 percent in the fourth quarter of
2014 to end the year at $57 per barrel and $53 per barrel, respectively. The Corporation has responded by reducing its
planned 2015 capital and exploratory program to $4.7 billion, down 16 percent from $5.6 billion in 2014. As part of the 2015
capital program, the Corporation expects to spend $1.8 billion in the Bakken shale play compared with $2.2 billion in 2014,
and reflects reducing the rig count from seventeen rigs in 2014 to an average of 9.5 rigs in 2015. The Corporation plans to
actively pursue other cost savings, including cost reductions from service providers, and significantly moderate the pace of
share repurchases in 2015 to preserve liquidity in the current oil price environment.
Consolidated Net Income
Net income was $2,317 million in 2014 compared with $5,052 million in 2013 and $2,025 million in 2012. Diluted
earnings per share were $7.53 in 2014 compared with $14.82 in 2013 and $5.95 in 2012. Excluding items affecting
comparability, net income was $1,308 million in 2014, $1,892 million in 2013, and $1,998 million in 2012. See the table of
items affecting comparability of earnings between periods on page 26.
Exploration and Production
The Corporation’s total proved reserves were 1,431 million barrels of oil equivalent (boe) at December 31, 2014 compared
with 1,437 million boe at December 31, 2013 and 1,553 million boe at December 31, 2012. Proved reserves related to assets
sold were 77 million boe in 2014, 140 million boe in 2013 and 83 million boe in 2012.
E&P earnings were $2,098 million in 2014, $4,303 million in 2013 and $2,212 million in 2012. Excluding items affecting
comparability of earnings between periods on page 31, E&P net income was $1,556 million, $2,192 million and
$2,256 million for 2014, 2013 and 2012, respectively. Average realized crude oil selling prices including the impact of