NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of P
resentation
The financial statements included in this report reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of our consolidated financial position at June 30, 2017 and December 31, 2016, the consolidated results of operations for the three months and six months ended June 30, 2017 and 2016, and consolidated cash flows for the six months ended June 30, 2017 and 2016. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.
The financial statements were prepared in accordance with the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain notes or other financial information that are normally required by generally accepted accounting principles (GAAP) in the United States have been condensed or omitted from these interim financial statements. These statements, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016.
On January 1, 2017, the Corporation’s interests in a Permian Basin gas plant in West Texas and related CO
2
assets, and water handling assets in North Dakota were transferred from the Exploration and Production (E&P) segment to the Midstream segment as a result of organizational changes to the management of these assets. These assets are wholly-owned by the Corporation and are not included in our Hess Infrastructure Partners joint venture. Prior period information has been recast to conform to the current period presentation. See
Note 10
,
Segment Information
. In the second quarter of 2017, we announced the sale of our enhanced oil recovery assets in the Permian basin, including the gas plant in West Texas and related CO
2
assets. See
Note 12,
Subsequent Event
.
In the first quarter of 2017, we adopted Accounting Standards Update (ASU) 2016-16,
Income Taxes – Intra-Entity Transfer of Assets Other than Inventory
. This ASU requires the recognition of income tax consequences from intra-entity transfer of assets other than inventory when the transfer occurs. The adoption of this standard was applied on a modified retrospective basis through a cumulative effect adjustment as of January 1, 2017, that resulted in a decrease to
Retained earnings
and a decrease to
Deferred income taxes
, included in non-current assets, of $37 million.
In the first quarter of 2017, we adopted ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting.
This ASU makes changes to various provisions associated with share-based accounting, including provisions affecting the accounting for income taxes, the accounting for forfeitures, the presentation of the statements of cash flow, and the consideration of net settlement provisions on the balance sheet classification of the share-based award. As part of the adoption of this ASU, we elected to account for forfeitures of share-based awards in the period when they occur. The effect of this election was applied on a modified retrospective basis through a cumulative effect adjustment as of January 1, 2017, that resulted in a decrease to
Retained earnings
and an increase to
Capital in excess of par value
of $2 million. The cumulative effect adjustment to deferred tax assets for excess tax benefits not previously recognized as of the beginning of the period was offset by a corresponding change in valuation allowance, resulting in no cumulative effect adjustment to
Retained earnings
. Further, as part of the adoption of this ASU, we have applied its provisions affecting excess tax benefits on a prospective basis in the statement of income and the statement of cash flows, effective January 1, 2017.
New Accounting Pronouncements:
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09,
Revenue from Contracts with Customers
, as a new Accounting Standards Codification (ASC) Topic, ASC 606. This ASU is effective for us beginning in the first quarter of 2018. We have developed a project plan for the implementation of ASC 606 in the first quarter of 2018. As of June 30, 2017, our analysis of contracts with customers against the requirements of the standard is largely complete. Based on our assessment to date, we have not identified any changes to the timing of revenue recognition based on the requirements of ASC 606 that would have a material impact on our consolidated financial statements. We plan to adopt ASC 606 using the modified retrospective method that requires application of the new standard prospectively from the date of adoption with a cumulative effect adjustment, if any, recorded to Retained earnings as of January 1, 2018.
In February 2016, the FASB issued ASU 2016-02,
Leases
, as a new ASC Topic, ASC 842. The new standard will require assets and liabilities to be reported on the balance sheet for all leases with lease terms greater than one year, including leases currently treated as operating leases under the existing standard. This ASU is effective for us beginning in the first quarter of 2019, with early adoption permitted. We are currently assessing the impact of the ASU on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses
. This ASU makes changes to the impairment model for trade receivables, net investments in leases, debt securities, loans and certain other instruments. The standard requires the use of a forward-looking "expected loss" model compared to the current "incurred loss" model. This
7
PART I
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FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ASU is effective for us beginning in the first quarter of 2020, with early adoption permitted from the first quarter of 2019. We are currently assessing the impact of the ASU
on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations – Clarifying the Definition of a Business
. This ASU provides a screen that excludes an integrated set of activities and assets from the definition of a business if the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets. This ASU also clarifies that an integrated set of activities and assets must include (at a minimum), an input and a substantive process that together significantly contribute to the ability to create output to be considered a business. This ASU is effective for us beginning in the first quarter of 2018, with early application permitted. Application of this ASU is on a prospective basis only when adopted.
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other – Simplifying the Test for Goodwill Impairment
. This ASU modifies the concept of goodwill impairment from a condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of the reporting unit exceeds its fair value. Thus, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value. The impairment charge would be limited by the amount of goodwill allocated to the reporting unit. This ASU removes the requirement to determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. This ASU is effective for us beginning in the first quarter of 2020, with early adoption permitted. We are currently assessing the impact of the ASU on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07,
Compensation – Retirement Benefits
. This ASU requires that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. This ASU is effective for us beginning in the first quarter of 2018, with early application permitted. We are currently assessing the impact of the ASU on our consolidated financial statements.
2. Inventories
Inventories consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In millions)
|
|
Crude oil and natural gas liquids
|
|
$
|
134
|
|
|
$
|
77
|
|
Materials and supplies
|
|
|
242
|
|
|
|
246
|
|
Total Inventories
|
|
$
|
376
|
|
|
$
|
323
|
|
3. Property, Plant and Equipment
Assets Held for Sale:
At June 30, 2017, assets classified as “held for sale” totaled $340 million related to our enhanced oil recovery assets in the Permian Basin that were comprised primarily of net property, plant and equipment and allocated goodwill of $25 million. In addition, associated liabilities amounting to $13 million were reported in
Accrued liabilities
in the
Consolidated Balance Sheet
. See
Note 12, Subsequent Event
. At December 31, 2016, we classified as held for sale certain non-core acreage, onshore United States amounting to $106 million.
Capitalized Exploratory Well Costs:
The following table discloses the net changes in capitalized exploratory well costs pending determination of proved reserves during the six months ended June 30, 2017 (in millions):
Balance at January 1, 2017
|
|
$
|
597
|
|
Additions to capitalized exploratory well costs pending the determination of proved reserves
|
|
|
55
|
|
Reclassifications to wells, facilities and equipment based on the determination of proved reserves
|
|
|
(165
|
)
|
Balance at June 30, 2017
|
|
$
|
487
|
|
Reclassifications to wells, facilities and equipment based on the determination of proved reserves resulted from sanction of the first phase of development for the Liza Field, offshore Guyana.
Capitalized exploratory well costs capitalized for greater than one year following completion of drilling were $415 million at June 30, 2017 and primarily related to:
Ghana:
Approximately 65% of the capitalized well costs in excess of one year relates to our Deepwater Tano/Cape Three Points license (Hess 50%), offshore Ghana.
The government of Côte d’Ivoire has challenged the maritime border between it
8
PART I
-
FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
and the country of Ghana, which includes a portion of our Deepwater Tano/Cape Three Points license. We are unable to proceed with development of this license until there is a resolution of th
is matter, which may also impact our ability to develop the license. The International Tribunal for Law of the Sea is expected to render a final ruling on the maritime border dispute in September 2017. Under terms of our license and subject to resolution
of the border dispute, we have declared commerciality for four discoveries, including the Pecan Field in March 2016, which would be the primary development hub for the block. Following a favorable outcome of the border dispute, we will have ten months to
submit a plan of development to the Ghanaian government. Front-end engineering studies and other development planning is progressing.
Gulf of Mexico:
Approximately 25% of the capitalized well costs in excess of one year relates to an appraisal well in the northern portion of the Shenzi Field (Hess 28%) in the Gulf of Mexico, where hydrocarbons were encountered in the fourth quarter of 2015. The operator is evaluating plans for developing this area of the field.
JDA:
Approximately 10% of the capitalized well costs in excess of one year relates to the JDA in the Gulf of Thailand (Hess 50%) where hydrocarbons were encountered in three successful exploration wells drilled in the western part of Block A-18. The operator is currently evaluating results and formulating future drilling plans in the area.
4. Goodwill
The changes in the carrying amount of goodwill were as follows (in millions):
|
|
Exploration and Production
|
|
|
Midstream
|
|
|
Total
|
|
Balance at January 1, 2017
|
|
$
|
—
|
|
|
$
|
375
|
|
|
$
|
375
|
|
Asset held for sale
|
|
|
—
|
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Balance at June 30, 2017
|
|
$
|
—
|
|
|
$
|
350
|
|
|
$
|
350
|
|
In the second quarter of 2017, we transferred $25 million of goodwill related to our Midstream segment assets in the Permian Basin to
Assets held for sale
in the
Consolidated Balance Sheet
. See
Note 12, Subsequent Event
.
5. Hess Infrastructure Partners LP
We consolidate the activities of Hess Infrastructure Partners LP (HIP), a 50/50 joint venture between Hess Corporation and Global Infrastructure Partners (GIP), which qualifies as a variable interest entity (VIE) under U.S. GAAP. We have concluded that we are the primary beneficiary of the VIE, as defined in the accounting standards, since we have the power, through our 50% ownership, to direct those activities that most significantly impact the economic performance of HIP.
HIP, which owns Bakken midstream assets, is a component of our Midstream segment. At June 30, 2017, HIP liabilities totaling $751 million (December 31, 2016: $841 million) are on a nonrecourse basis to Hess Corporation, while HIP assets available to settle the obligations of HIP include cash and cash equivalents totaling $43 million (December 31, 2016: $2 million) and property, plant and equipment with a carrying value of $2,517 million (December 31, 2016: $2,528 million).
6. Hess Midstream Partners LP – Initial Public Offering
In April 2017, Hess Midstream Partners LP (the “Partnership”), sold 16,997,000 common units representing limited partner interests at a price of $23 per unit in an initial public offering (IPO) for net proceeds of $365.5 million, of which $350 million was distributed 50/50 to Hess Corporation and GIP.
The Partnership owns an approximate 20% controlling interest in the operating companies that comprise our midstream joint venture, while HIP, the 50/50 joint venture between Hess Corporation and GIP, owns the remaining 80%. Hess Corporation and GIP each own a direct 33.75% limited partner interest in the Partnership and a 50% indirect ownership interest through HIP in the Partnership’s general partner, which has a 2% economic interest in the Partnership plus incentive distribution rights. The public unit holders own a 30.5% limited partner interest in the Partnership.
The Partnership has a $300 million 4-year senior secured syndicated revolving credit facility, which became available for utilization at completion of the IPO. The credit facility can be used for borrowings and letters of credit to fund operating activities and capital expenditures of the Partnership. Outstanding borrowings under this credit facility are non-recourse to Hess Corporation. At June 30, 2017, this facility was undrawn.
9
PART I
-
FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. Retirement Plans
Components of net periodic pension cost consisted of the following:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In millions)
|
|
Service cost
|
|
$
|
14
|
|
|
$
|
16
|
|
|
$
|
28
|
|
|
$
|
32
|
|
Interest cost
|
|
|
26
|
|
|
|
28
|
|
|
|
52
|
|
|
|
56
|
|
Expected return on plan assets
|
|
|
(42
|
)
|
|
|
(42
|
)
|
|
|
(83
|
)
|
|
|
(84
|
)
|
Amortization of unrecognized net actuarial losses
|
|
|
16
|
|
|
|
16
|
|
|
|
33
|
|
|
|
32
|
|
Settlement loss
|
|
|
7
|
|
|
|
—
|
|
|
|
7
|
|
|
|
—
|
|
Pension expense
|
|
$
|
21
|
|
|
$
|
18
|
|
|
$
|
37
|
|
|
$
|
36
|
|
In 2017, we expect to contribute $52 million to our funded pension plans. Through June 30, 2017, we have contributed $28 million to these plans.
8. Weighted Average Common Shares
The Net income (loss) and weighted average number of common shares used in the basic and diluted earnings per share computations were as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In millions)
|
|
Net income (loss) attributable to Hess Corporation Common Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(417
|
)
|
|
$
|
(373
|
)
|
|
$
|
(713
|
)
|
|
$
|
(861
|
)
|
Less: Net income (loss) attributable to noncontrolling interests
|
|
|
32
|
|
|
|
19
|
|
|
|
60
|
|
|
|
40
|
|
Less: Preferred stock dividends
|
|
|
11
|
|
|
|
12
|
|
|
|
23
|
|
|
|
18
|
|
Net income (loss) attributable to Hess Corporation Common Stockholders
|
|
$
|
(460
|
)
|
|
$
|
(404
|
)
|
|
$
|
(796
|
)
|
|
$
|
(919
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
314.4
|
|
|
|
313.2
|
|
|
|
314.2
|
|
|
|
306.5
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Performance share units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mandatory Convertible Preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted
|
|
|
314.4
|
|
|
|
313.2
|
|
|
|
314.2
|
|
|
|
306.5
|
|
The following table summarizes the number of antidilutive shares excluded from the computation of diluted shares:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Restricted common stock
|
|
|
3,450,490
|
|
|
|
3,522,376
|
|
|
|
3,288,356
|
|
|
|
3,279,493
|
|
Stock options
|
|
|
6,550,253
|
|
|
|
6,994,061
|
|
|
|
6,424,574
|
|
|
|
6,857,262
|
|
Performance share units
|
|
|
522,280
|
|
|
|
1,031,420
|
|
|
|
417,642
|
|
|
|
958,679
|
|
Common shares from conversion of preferred stocks
|
|
|
12,734,069
|
|
|
|
12,547,650
|
|
|
|
12,640,859
|
|
|
|
9,880,971
|
|
During the six months ended June 30, 2017, we granted 1,209,247 shares of restricted stock (2016: 1,610,190), 438,980 performance share units (2016: 447,536) and 662,819 stock options (2016: 824,225).
10
PART I
-
FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9. Guara
ntees
and Contingencies
We are subject to loss contingencies with respect to various claims, lawsuits and other proceedings. A liability is recognized in our consolidated financial statements when it is probable that a loss has been incurred and the amount can be reasonably estimated. If the risk of loss is probable, but the amount cannot be reasonably estimated or the risk of loss is only reasonably possible, a liability is not accrued; however, we disclose the nature of those contingencies. We cannot predict with certainty if, how or when existing claims, lawsuits and proceedings will be resolved or what the eventual relief, if any, may be, particularly for proceedings that are in their early stages of development or where plaintiffs seek indeterminate damages. Numerous issues may need to be resolved, including through lengthy discovery, conciliation and/or arbitration proceedings, or litigation before a loss or range of loss can be reasonably estimated. Subject to the foregoing, in management’s opinion, based upon currently known facts and circumstances, the outcome of such lawsuits, claims and proceedings, including the matters described below, is not expected to have a material adverse effect on our financial condition. However, we could incur judgments, enter into settlements, or revise our opinion regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations in the period in which the amounts are accrued and our cash flows in the period in which the amounts are paid.
We, along with many companies that have been or continue to be engaged in refining and marketing of gasoline, have been a party to lawsuits and claims related to the use of methyl tertiary butyl ether (MTBE) in gasoline. A series of similar lawsuits, many involving water utilities or governmental entities, were filed in jurisdictions across the U.S. against producers of MTBE and petroleum refiners who produced gasoline containing MTBE, including us. The principal allegation in all cases was that gasoline containing MTBE is a defective product and that these parties are strictly liable in proportion to their share of the gasoline market for damage to groundwater resources and are required to take remedial action to ameliorate the alleged effects on the environment of releases of MTBE. The majority of the cases asserted against us have been settled. In June 2014, the Commonwealth of Pennsylvania and the State of Vermont each filed independent lawsuits alleging that we and all major oil companies with operations in each respective state, have damaged the groundwater in those states by introducing thereto gasoline with MTBE. The Pennsylvania suit has been removed to Federal court and has been forwarded to the existing MTBE multidistrict litigation pending in the Southern District of New York. The suit filed in Vermont is proceeding there in a state court. In September 2016, the State of Rhode Island also filed a lawsuit alleging that we and other major oil companies damaged the groundwater in Rhode Island by introducing thereto gasoline with MTBE. The suit filed in Rhode Island is proceeding in federal court.
In September 2003, we received a directive from the New Jersey Department of Environmental Protection (NJDEP) to remediate contamination in the sediments of the Lower Passaic River. The NJDEP is also seeking natural resource damages. The directive, insofar as it affects us, relates to alleged releases from a petroleum bulk storage terminal in Newark, New Jersey we previously owned. We and over 70 companies entered into an Administrative Order on Consent with the Environmental Protection Agency (EPA) to study the same contamination; this work remains ongoing. We and other parties settled a cost recovery claim by the State of New Jersey and also agreed with EPA to fund remediation of a portion of the site. In April 2014, the EPA issued a Focused Feasibility Study (FFS) proposing to conduct bank-to-bank dredging of the lower eight miles of the Lower Passaic River at an estimated cost of $1.7 billion. On March 4, 2016, the EPA issued a Record of Decision (ROD) in respect of the lower eight miles of the Lower Passaic River, selecting a remedy that includes bank-to-bank dredging at an estimated cost of $1.38 billion. The ROD does not address the upper nine miles of the Lower Passaic River, which may require additional remedial action. In addition, the federal trustees for natural resources have begun a separate assessment of damages to natural resources in the Passaic River. Given that the EPA has not selected a remedy for the entirety of the Lower Passaic River, total remedial costs cannot be reliably estimated at this time. Based on currently known facts and circumstances, we do not believe that this matter will result in a significant liability to us because there are numerous other parties who we expect will share in the cost of remediation and damages and our former terminal did not store or use contaminants which are of the greatest concern in the river sediments and could not have contributed contamination along most of the river’s length.
In March 2014, we received an Administrative Order from EPA requiring us and 26 other parties to undertake the Remedial Design for the remedy selected by the EPA for the Gowanus Canal Superfund Site in Brooklyn, New York. The remedy includes dredging of surface sediments and the placement of a cap over the deeper sediments throughout the Canal and in-situ stabilization of certain contaminated sediments that will remain in place below the cap. EPA has estimated that this remedy will cost $506 million; however, the ultimate costs that will be incurred in connection with the design and implementation of the remedy remain uncertain. Our alleged liability derives from our former ownership and operation of a fuel oil terminal and connected ship-building and repair facility adjacent to the Canal. We indicated to EPA that we would comply with the Administrative Order and are currently contributing funding for the Remedial Design based on an interim allocation of costs among the parties. At the same time, we are participating in an allocation process whereby a neutral
11
PART I
-
FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
expert selected
by the parties will determine the final shares of the Remedial Design costs to be paid by each of the participants. The parties have not yet addressed the allocation of costs associated with implementing the remedy that is currently being designed.
On January 18, 2017, we entered into a Consent Decree with the North Dakota Department of Health resolving alleged non-compliance with North Dakota’s air pollution laws and provisions of the federal Clean Air Act. Pursuant to the Consent Decree, we were required to implement corrective actions, including implementation of a leak detection and repair program, at most of our existing facilities in North Dakota. We were assessed a base penalty of $922,000 and made an initial penalty payment of $55,000 during the first quarter of 2017. Based on corrective actions completed in 2016 and the first half of 2017, we expect a reduction in the remainder of the penalty to approximately $745,000. Payment of the final penalty amount will occur after final accounting is approved by the North Dakota Department of Health, which is expected in the third quarter of 2017.
From time to time, we are involved in other judicial and administrative proceedings, including proceedings relating to other environmental matters. We cannot predict with certainty if, how or when such proceedings will be resolved or what the eventual relief, if any, may be, particularly for proceedings that are in their early stages of development or where plaintiffs seek indeterminate damages. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters before a loss or range of loss can be reasonably estimated for any proceeding. Subject to the
foregoing
, in management’s opinion, based upon currently known facts and circumstances, the outcome of such proceedings is not expected to have a material adverse effect on our financial condition, results of operations or cash flows.
12
PART I
-
FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10. Segme
nt
Information
We currently have two operating segments, Exploration and Production and Midstream. All unallocated costs are reflected under Corporate, Interest and Other.
The following table presents operating segment financial data (in millions):
For the Three Months Ended June 30, 2017
|
|
Exploration and Production
|
|
|
Midstream
|
|
|
Corporate, Interest and Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues - Third parties
|
|
$
|
1,213
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,216
|
|
Intersegment Revenues
|
|
|
—
|
|
|
|
154
|
|
|
|
—
|
|
|
|
(154
|
)
|
|
|
—
|
|
Operating Revenues
|
|
$
|
1,213
|
|
|
$
|
157
|
|
|
$
|
—
|
|
|
$
|
(154
|
)
|
|
$
|
1,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) attributable to Hess Corporation
|
|
$
|
(354
|
)
|
|
$
|
16
|
|
|
$
|
(111
|
)
|
|
$
|
—
|
|
|
$
|
(449
|
)
|
Depreciation, Depletion and Amortization
|
|
|
708
|
|
|
|
32
|
|
|
|
1
|
|
|
|
—
|
|
|
|
741
|
|
Provision (Benefit) for Income Taxes (a)
|
|
|
(14
|
)
|
|
|
10
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
Capital Expenditures
|
|
|
483
|
|
|
|
20
|
|
|
|
—
|
|
|
|
—
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2016
|
|
Exploration and Production
|
|
|
Midstream
|
|
|
Corporate, Interest and Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues - Third parties
|
|
$
|
1,222
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,224
|
|
Intersegment Revenues
|
|
|
—
|
|
|
|
131
|
|
|
|
—
|
|
|
|
(131
|
)
|
|
|
—
|
|
Operating Revenues
|
|
$
|
1,222
|
|
|
$
|
133
|
|
|
$
|
—
|
|
|
$
|
(131
|
)
|
|
$
|
1,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) attributable to Hess Corporation
|
|
$
|
(328
|
)
|
|
$
|
11
|
|
|
$
|
(75
|
)
|
|
$
|
—
|
|
|
$
|
(392
|
)
|
Depreciation, Depletion and Amortization
|
|
|
765
|
|
|
|
30
|
|
|
|
2
|
|
|
|
—
|
|
|
|
797
|
|
Provision (Benefit) for Income Taxes
|
|
|
(273
|
)
|
|
|
7
|
|
|
|
(39
|
)
|
|
|
—
|
|
|
|
(305
|
)
|
Capital Expenditures
|
|
|
433
|
|
|
|
68
|
|
|
|
—
|
|
|
|
—
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2017
|
|
Exploration and Production
|
|
|
Midstream
|
|
|
Corporate, Interest and Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues - Third parties
|
|
$
|
2,488
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,493
|
|
Intersegment Revenues
|
|
|
—
|
|
|
|
301
|
|
|
|
—
|
|
|
|
(301
|
)
|
|
|
—
|
|
Operating Revenues
|
|
$
|
2,488
|
|
|
$
|
306
|
|
|
$
|
—
|
|
|
$
|
(301
|
)
|
|
$
|
2,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) attributable to Hess Corporation
|
|
$
|
(587
|
)
|
|
$
|
34
|
|
|
$
|
(220
|
)
|
|
$
|
—
|
|
|
$
|
(773
|
)
|
Depreciation, Depletion and Amortization
|
|
|
1,411
|
|
|
|
64
|
|
|
|
3
|
|
|
|
—
|
|
|
|
1,478
|
|
Provision (Benefit) for Income Taxes (a)
|
|
|
(34
|
)
|
|
|
21
|
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(21
|
)
|
Capital Expenditures
|
|
|
825
|
|
|
|
48
|
|
|
|
—
|
|
|
|
—
|
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2016
|
|
Exploration and Production
|
|
|
Midstream
|
|
|
Corporate, Interest and Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues - Third parties
|
|
$
|
2,193
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,197
|
|
Intersegment Revenues
|
|
|
—
|
|
|
|
264
|
|
|
|
—
|
|
|
|
(264
|
)
|
|
|
—
|
|
Operating Revenues
|
|
$
|
2,193
|
|
|
$
|
268
|
|
|
$
|
—
|
|
|
$
|
(264
|
)
|
|
$
|
2,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) attributable to Hess Corporation
|
|
$
|
(781
|
)
|
|
$
|
27
|
|
|
$
|
(147
|
)
|
|
$
|
—
|
|
|
$
|
(901
|
)
|
Depreciation, Depletion and Amortization
|
|
|
1,602
|
|
|
|
58
|
|
|
|
5
|
|
|
|
—
|
|
|
|
1,665
|
|
Provision (Benefit) for Income Taxes
|
|
|
(588
|
)
|
|
|
16
|
|
|
|
(79
|
)
|
|
|
—
|
|
|
|
(651
|
)
|
Capital Expenditures
|
|
|
937
|
|
|
|
104
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,041
|
|
(a)
|
The provision for income taxes in the Midstream segment is presented before consolidating its operations with other U.S. activities of the Company and prior to evaluating realizability of net U.S. deferred taxes. An offsetting impact is presented in the E&P segment.
|
13
PART I
-
FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Identifiable assets by operating segment were as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In millions)
|
|
Exploration and Production
|
|
$
|
22,402
|
|
|
$
|
22,856
|
|
Midstream
|
|
|
3,207
|
|
|
|
3,165
|
|
Corporate, Interest and Other
|
|
|
2,189
|
|
|
|
2,600
|
|
Total
|
|
$
|
27,798
|
|
|
$
|
28,621
|
|
11. Financial Risk Management Activities
In the normal course of our business, we are exposed to commodity risks related to changes in the prices of crude oil and natural gas as well as changes in interest rates and foreign currency values. Financial risk management activities include transactions designed to reduce risk in the selling prices of crude oil or natural gas we produce or by reducing our exposure to foreign currency or interest rate movements. Generally, futures, swaps or option strategies may be used to fix the forward selling price of a portion of our crude oil or natural gas production. Forward contracts may also be used to purchase certain currencies in which we conduct the business with the intent of reducing exposure to foreign currency fluctuations. At June 30, 2017, these forward contracts relate to the British Pound. Interest rate swaps may be used to convert interest payments on certain long-term debt from fixed to floating rates and, in the case of certain long-term debt relating to our Midstream operating segment, from floating to fixed rates.
Gross notional amounts of both long and short positions are presented in the table below. These amounts include long and short positions that offset in closed positions and have not reached contractual maturity. Gross notional amounts do not quantify risk or represent assets or liabilities of the Corporation, but are used in the calculation of cash settlements under the contracts.
The gross notional amounts of financial risk management derivative contracts outstanding were as follows:
|
|
June 30,
2017
|
|
|
December 31, 2016
|
|
|
|
(In millions)
|
|
Commodity - crude oil (millions of barrels)
|
|
|
15
|
|
|
|
—
|
|
Foreign exchange
|
|
$
|
54
|
|
|
$
|
785
|
|
Interest rate swaps
|
|
$
|
995
|
|
|
$
|
350
|
|
At June 30, 2017, we have Brent crude oil price collars to hedge 20,000 barrels of oil per day (bopd) through December 31, 2017. These collars have a floor price of $55 per barrel and a ceiling price of $75 per barrel. We also have West Texas Intermediate (WTI) crude oil price collars covering 60,000 bopd through December 31, 2017 that have a floor price of
$50 per barrel and a ceiling price of $70 per barrel. The crude oil price collars, which have been designated as cash flow hedges, reduce the price exposure to our crude oil production that is hedged
.
During the second quarter of 2017,
HIP entered into amortizing interest rate swaps to hedge its exposure to variable rate debt through June 2020. Under the terms of the swaps, HIP will receive 3-month LIBOR from counterparties and pay an average fixed rate of 1.60%. These instruments have been designated as cash flow hedges.
14
PART I
-
FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below reflects the gross and net fair values of the risk management derivative instruments, all of which are based on Level 2 inputs:
|
|
Accounts Receivable
|
|
|
Accounts Payable
|
|
|
|
(In millions)
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
Derivative Contracts Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
Commodity
|
|
$
|
75
|
|
|
$
|
—
|
|
Interest rate
|
|
|
1
|
|
|
|
(3
|
)
|
Total derivative contracts designated as hedging instruments
|
|
|
76
|
|
|
|
(3
|
)
|
Derivative Contracts Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
|
1
|
|
|
|
—
|
|
Total derivative contracts not designated as hedging instruments
|
|
|
1
|
|
|
|
—
|
|
Gross fair value of derivative contracts
|
|
|
77
|
|
|
|
(3
|
)
|
Net Fair Value of Derivative Contracts
|
|
$
|
77
|
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Derivative Contracts Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
—
|
|
|
$
|
—
|
|
Total derivative contracts designated as hedging instruments
|
|
|
—
|
|
|
|
—
|
|
Derivative Contracts Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
|
9
|
|
|
|
(1
|
)
|
Total derivative contracts not designated as hedging instruments
|
|
|
9
|
|
|
|
(1
|
)
|
Gross fair value of derivative contracts
|
|
|
9
|
|
|
|
(1
|
)
|
Master netting arrangements
|
|
|
(1
|
)
|
|
|
1
|
|
Net Fair Value of Derivative Contracts
|
|
$
|
8
|
|
|
$
|
—
|
|
Derivative contracts designated as hedging instruments:
Crude oil collars:
Realized and unrealized losses from crude oil collars for the three and six months ended June 30, 2017 decreased Sales and other operating revenue by $12 million and $11 million, respectively of which gains of $20 million were reclassified from Other comprehensive income.
At June 30, 2017, the after-tax deferred gains in Accumulated other comprehensive income (loss) related to crude oil collars were $56 million, which will be reclassified into earnings during 2017 as the hedged crude oil sales are recognized in earnings.
There were no crude oil hedge contracts in 2016.
Interest rate swaps designated as fair value hedges:
At June 30, 2017 and December 31, 2016, Hess Corporation had interest rate swaps with gross notional amounts totaling $450 million and $350 million, respectively, which were designated as fair value hedges and relate to debt where we have converted interest payments on certain long-term debt from fixed to floating rates. For the three and six months ended June 30, 2017, the change in fair value of interest rate swaps was an increase in the liability of $2 million and $3 million respectively, compared with an increase to assets of $4 million and $18 million in the second quarter and first six months of 2016, respectively. Changes in the fair value of the interest rate swaps and the hedged fixed‑rate debt are recorded in Interest expense in the
Statement of Consolidated Income
.
Interest rate swaps designated as cash flow hedges:
At June 30, 2017, HIP had interest rate swaps with gross notional amounts totaling $545 million, which were designated as cash flow hedges and relates to debt in our Midstream operating segment
where HIP has converted interest payments on certain long-term debt from floating to fixed rates
.
For the three and six months ended June 30, 2017, the change in fair value of interest rate swaps was an increase to assets of
$1 million. At June 30, 2017, the after-tax deferred gains in Accumulated other comprehensive income (loss) related to interest rate swaps were $1 million before noncontrolling interests, which will be reclassified into earnings as the hedged interest payments are recognized in earnings. Of this amount, losses of less than $1 million will be reclassified into earnings during the next 12 months. There were no floating to fixed interest rate swap contracts in 2016.
Derivative contracts not designated as hedging instruments:
Foreign exchange:
Total foreign exchange gains and losses, which are reported in Other, net in Revenues and non-operating income in the
Statement of Consolidated Income
amounted to gains of $10 million and $9 million in the three months and six months ended June 30, 2017, respectively, compared with gains of $15 million and $21 million in the second quarter and first six months of 2016, respectively. A component of foreign exchange gains or losses is the result of foreign exchange derivative contracts that are not designated as hedges which amounted to a gain of $2 million in both the second
15
PART I
-
FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
quarter and first six months of 2017, respectively, compared to gains of $33 million and $13 million in the seco
nd quarter and first six months of 2016, respectively.
The after‑tax foreign currency translation adjustments included in the
Statement of Consolidated Comprehensive Income
amounted to gains of $73 million and $87 million in the second quarter and first six months of 2017, respectively, compared to a loss of $27 million and a gain of $142 million in the second quarter and first six months of 2016, respectively. The cumulative currency translation adjustment at June 30, 2017, was a reduction to shareholders’ equity of $958 million compared with a reduction of $1,045 million at December 31, 2016.
Fair Value Measurement:
We have other short-term financial instruments, primarily cash equivalents, accounts receivable and accounts payable, for which the carrying value approximated fair value at June 30, 2017. Total long-term debt with a carrying value of $6,733 million at June 30, 2017, had a fair value of $7,100 million based on Level 2 inputs.
12. Subsequent Event
On August 1, 2017, we completed the sale of our enhanced oil recovery assets in the Permian Basin for total consideration of approximately $600 million. As a result of the sale, we will recognize a pre-tax gain of approximately $270 million ($270 million after income taxes) in the third quarter of 2017. These assets produced an average of 8,000
barrels of oil equivalent per day
during the first six months of 2017.
16
PART I - FINANCIAL INFORMATION (CONT’D.)