Hess Earnings Call Insights: Strategic Review and Downstream Corporate Costs

Hess Corp (NYSE:HES) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Strategic Review

Evan Calio – Morgan Stanley: Let me start with a strategic question, strategy question. John, you’ve reconstituted the Board since last earnings call; 10 new and experienced members. The Board has met – while you appear to have clear operational momentum, could you update us on any broader strategic review occurring or any update on the strategic assessment or comments on how the Board transition has gone so far?

John B. Hess – Chairman and CEO: Yeah, the Board transition has gone very well. I would characterize the first Board meeting that we had in June as very constructive and we’re totally focused on executing the strategy we’ve outlined.

Evan Calio – Morgan Stanley: Keeping on the asset sale theme, restructuring theme, sale proceeds have exceeded expectations, I think yesterday is included. Maybe it’s harder to reconcile from a deconstructed historical EBITDA on the retail segment. Maybe a few questions that could help. Could you provide a 2012 EBITDA or a cash metric for energy marketing business for the OM?

John P. Rielly – SVP and CFO: Evan, so obviously we are in the middle of these processes, right, to the sale process and we don’t want to front run the process. You saw I think in Centrica’s release that they had $200 million of estimated EBITDA for 2013. That’s a reasonable estimate for the business. Last year obviously it was a warmer winter, so it was at least 20% less heating degree days last year. So, that obviously would have impacted the EBITDA in 2012 as is related to energy marketing, but that’s really as far as we’re going to go. We are not going to front run the sale process…

Evan Calio – Morgan Stanley: Maybe risk of getting a similar response on the terminal sales, can you give us any historical utilization rates or any metric there except I presume some uptick in potential value will be – improved utilizations to a potential buyer?

John P. Rielly – SVP and CFO: Evan, I mean every buyer is going to look at the business potentially differently from how they want to manage it. So we’re not providing that data right now. We are well into the process. Obviously, selling the terminal business in this current environment is a positive thing. It’s a very good environment. The assets are strong. We’ve got a nice of assets here on the East Coast. And the interest has been keen in these assets. So that’s as far as I think we want to go. And just as John said earlier, the sales progress is well underway and is going according to plan.

Evan Calio – Morgan Stanley: And maybe lastly if I could, could you provide any tax basis in assets held or how much coverage, how much tax coverage you have for those assets that are announced yet that haven’t yet received, closed yet?

John P. Rielly – SVP and CFO: There will be significant gains on the assets on an overall basis to be sold. From a tax leakage guidance standpoint from the overall sale proceeds that we are getting as part of this program, we’ve talked about that our tax leakage will be less than 5%, that’s overall. That’s with the E&P businesses and the downstream businesses.

Downstream Corporate Costs

Ed Westlake – Credit Suisse: Just continuing on that downstream thought process. Are there any corporate costs that are in the downstream that would be discontinued if those assets were sold? Just trying to true up historical reporting to what a seller might look at for these assets.

John P. Rielly – SVP and CFO: There are allocated costs and for the most part, the corporate cost, if you want to call it that or assigned to the business units are allocated and/or within the segments. Now, there’s no question as I said as part of our cost saving initiative that we are looking at overall our functions and are going to right size and reorganize the functions for the smaller portfolio that we have. But I would tell you, in general, most of the costs are allocated into the segment.

Ed Westlake – Credit Suisse: Then, switching to the Bakken, obviously you’ve guided that the shift to pad drilling would constrain volumes and that there will be an inflection in the second half. As we look out into 2014, ’15, ’16, I mean, any sort of feeling at this stage in terms of which of those years will be the faster growth on towards the sort of 120,000 barrel a day that you’ve discussed in the past in terms of the rates of that growth. Any color there would be helpful…

John P. Rielly – SVP and CFO: Yeah, sure. And so I think that’s going to be a function of obviously how much capital we put in it, but I think once we get through that, the gas plant commissioning at the end of this year, I think for all practical purposes, you assume a relatively steady ramp from there to 120,000 barrels a day over…

Ed Westlake – Credit Suisse: And initial volume estimates for the Utica given the results you’ve had?

Gregory P. Hill – EVP and President, Worldwide Exploration and Production: In terms of what year?

Ed Westlake – Credit Suisse: So, say, next year 2014?

Gregory P. Hill – EVP and President, Worldwide Exploration and Production: We haven’t finished our plan yet and we’re still in the appraisal phase. So, next year will be another appraisal year.

A Closer Look: Hess Corp Earnings Cheat Sheet>>