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Article by DailyStocks_admin    (11-03-08 06:41 AM)

The Daily Magic Formula Stock for 11/03/2008 is Hess Corp. According to the Magic Formula Investing Web Site, the ebit yield is 26% and the EBIT ROIC is 25-50 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Hess Corporation (the Registrant) is a Delaware corporation, incorporated in 1920. The Registrant and its subsidiaries (collectively referred to as the “Corporation” or “Hess”) is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. These exploration and production activities take place principally in Algeria, Australia, Azerbaijan, Brazil, Denmark, Egypt, Equatorial Guinea, Gabon, Ghana, Indonesia, Libya, Malaysia, Norway, Russia, Thailand, the United Kingdom and the United States. The M&R segment manufactures, purchases, transports, trades and markets refined petroleum products, natural gas and electricity. The Corporation owns 50% of a refinery joint venture in the United States Virgin Islands, and another refining facility, terminals and retail gasoline stations, most of which include convenience stores, located on the East Coast of the United States.

Exploration and Production

On a barrel of oil equivalent (boe) basis, 44% of the Corporation’s worldwide proved reserves are undeveloped at December 31, 2007 (40% at December 31, 2006). Proved reserves held under production sharing contracts at December 31, 2007 totaled 25% of crude oil and natural gas liquids and 57% of natural gas reserves.

United States

At December 31, 2007, 19% of the Corporation’s total proved reserves were located in the United States. During 2007, 15% of the Corporation’s crude oil and natural gas liquids production and 14% of its natural gas production were from United States operations. The Corporation’s production in the United States was principally from properties offshore in the Gulf of Mexico, which include the Llano (Hess 50%), Conger (Hess 37.5%), Baldpate (Hess 50%), Hack Wilson (Hess 33.3%) and Penn State (Hess 50%) fields, onshore in North Dakota including interests in the Bakken Play and Williston Basin and the Seminole-San Andres Unit (Hess 34.3%) onshore Texas in the Permian Basin.

The Shenzi development (Hess 28%) in the Green Canyon area of the deepwater Gulf of Mexico was sanctioned by the operator in 2006 and progressed in 2007 with installation of the tension leg platform tendon piles and hull fabrication. First production from Shenzi is expected to commence in mid-2009. In February 2007, the Corporation completed the acquisition of a 28% interest in the Genghis Khan oil and gas development located in the deepwater Gulf of Mexico on Green Canyon Blocks 652 and 608. The Genghis Khan development is part of the same geological structure as the Shenzi development. These fields were unitized in 2007. Crude oil production from the Genghis Khan Field commenced in October 2007.

Development of a residual oil zone at the Seminole-San Andres Unit commenced in the fourth quarter of 2007 and it is anticipated that production from this development will begin in 2009. The Corporation intends to inject carbon dioxide gas supplied from its interests in the West Bravo Dome and Bravo Dome fields in New Mexico into the residual oil zone to enhance recovery of crude oil.

At the Corporation’s Tubular Bells prospect (Hess 20%) located in the Mississippi Canyon area of the deepwater Gulf of Mexico a successful sidetrack to the second Tubular Bells well was completed during the first quarter of 2007 and the drilling of a third well commenced in October 2007. On the Pony prospect on Green Canyon Block 468 (Hess 100%) in the deepwater Gulf of Mexico a sidetrack from the original discovery well was successfully completed in the first quarter of 2007 and a second appraisal well is being drilled about 1.5 miles northwest of the original discovery well.

At December 31, 2007, the Corporation has interests in more than 370 exploration blocks in the Gulf of Mexico, which include 1,372,529 net undeveloped acres.

Europe

At December 31, 2007, 33% of the Corporation’s total proved reserves were located in Europe (United Kingdom 11%, Norway 14%, Denmark 3% and Russia 5%). During 2007, 36% of the Corporation’s crude oil and natural gas liquids production and 42% of its natural gas production were from European operations.

United Kingdom: Production of crude oil and natural gas liquids from the United Kingdom North Sea was principally from the Corporation’s non-operated interests in the Beryl (Hess 22.2%), Bittern (Hess 28.3%), Schiehallion (Hess 15.7%) and Clair (Hess 9.3%) fields. Natural gas production from the United Kingdom in 2007 was primarily from fields in the Easington Catchment Area (Hess 28.8%), as well as the Everest (Hess 18.7%), Lomond (Hess 16.7%), Beryl (Hess 22.2%), Atlantic (Hess 25%) and Cromarty (Hess 90%) fields.

In 2007, the Corporation completed the sale of its interests in the Scott and Telford fields located offshore United Kingdom.

Norway: Substantially all of the 2007 and 2006 Norwegian production was from the Corporation’s interest in the Valhall Field (Hess 28.1%). A field redevelopment for Valhall was sanctioned during 2007. In September 2007, gas production commenced at the Snohvit Field (Hess 3.26%) located offshore Norway.

Denmark: Crude oil and natural gas production comes from the Corporation’s interest in the South Arne Field (Hess 57.5%).

Russia: The Corporation’s activities in Russia are conducted through its 80%-owned interest in a corporate joint venture operating in the Volga-Urals region of Russia.

Africa

At December 31, 2007, 22% of the Corporation’s total proved reserves were located in Africa (Equatorial Guinea 9%, Algeria 2%, Libya 10% and Gabon 1%). During 2007, 42% of the Corporation’s crude oil and natural gas liquids production was from African operations.

Equatorial Guinea: The Corporation is the operator and owns an interest in Block G (Hess 85%) which contains the Ceiba Field and Okume Complex.

Algeria: The Corporation has a 49% interest in a venture with the Algerian national oil company that is redeveloping three oil fields.

Libya: The Corporation, in conjunction with its Oasis Group partners, has oil and gas production operations in the Waha concessions in Libya (Hess 8.16%). The Corporation also owns a 100% interest in offshore exploration Area 54, where drilling of an exploration well is planned for 2008.

Gabon: The Corporation’s activities in Gabon are conducted through its 77.5% owned Gabonese subsidiary, where the Corporation has interests in the Rabi Kounga, Toucan and Atora fields.

Egypt: The Corporation has a 25-year development lease for the West Med Block 1 concession (West Med Block) (Hess 55%), which contains four existing natural gas discoveries and additional exploration opportunities. During 2007, the Corporation commenced front-end engineering and seismic studies.

Ghana: The Corporation holds an interest in the Cape Three Points South Block (Hess 100%) located offshore Ghana where drilling of an exploration well is planned during 2008.

Asia and Other

At December 31, 2007, 26% of the Corporation’s total proved reserves were located in the Asia and other region (JDA 14%, Indonesia 7%, Thailand 3% and Azerbaijan 2%). During 2007, 7% of the Corporation’s crude oil and natural gas liquids production and 44% of its natural gas production were from Asia and other operations.

Joint Development Area of Malaysia and Thailand: The Corporation owns an interest in the JDA (Hess 50%) in the Gulf of Thailand. In the fourth quarter of 2007, the Corporation completed the expansion of offshore facilities and installation of wellhead platforms at the JDA. Full Phase 2 production is expected in the second half of 2008.

Indonesia: The Corporation’s natural gas production in Indonesia primarily comes from its interests offshore in the Ujung Pangkah project (Hess 75%) and the Natuna A gas Field (Hess 23%). Natural gas production from the Ujung Pangkah project commenced in April 2007. In addition, during 2007 a crude oil development project commenced at Ujung Pangkah. Production from this Phase 2 oil project is expected to commence in 2009. The Corporation also owns an interest in the onshore Jambi Merang natural gas project (Hess 25%), which was sanctioned for development in 2007.

Thailand: The Corporation has an interest in the Pailin gas Field (Hess 15%) offshore Thailand. The Corporation is the operator and owns an interest in the onshore natural gas project in the Sinphuhorm Block (formerly the Phu Horm Block) (Hess 35%) which commenced production in the fourth quarter of 2006.

Azerbaijan: The Corporation has an interest in the Azeri-Chirag-Gunashli (ACG) fields (Hess 2.72%) in the Caspian Sea. The Corporation also holds an interest in the Baku-Tbilisi-Ceyhan (BTC) Pipeline (Hess 2.36%).

Australia: In 2007, the Corporation acquired a 100% interest in an exploration license covering 780,000 acres in the Carnarvon basin offshore Western Australia (Block 390-P). During 2008, the Corporation plans to drill four wells of a 16 well commitment on the block. During 2007, the Corporation also acquired a 50% interest in Block 404-P located offshore Western Australia, which covers a total area of 680,000 acres.

Brazil: The Corporation has interests in two blocks located offshore Brazil, the BMS-22 Block (Hess 40%) in the Santos Basin, where drilling of an exploration well is planned in 2008, and the BM-ES-30 Block (Hess 60%) in the Espirito Santo Basin.

Oil and Gas Reserves

The Corporation’s net proved oil and gas reserves at the end of 2007, 2006 and 2005 are presented under Supplementary Oil and Gas Data on pages 76 through 78 in the accompanying financial statements.

During 2007, the Corporation provided oil and gas reserve estimates for 2006 to the United States Department of Energy. Such estimates are compatible with the information furnished to the SEC on Form 10-K for the year ended December 31, 2006, although not necessarily directly comparable due to the requirements of the individual requests. There were no differences in excess of 5%.

Sales commitments: The Corporation has no contracts or agreements to sell fixed quantities of its crude oil production. In the United States, natural gas is marketed on a spot basis and under contracts for varying periods to local distribution companies, and commercial, industrial and other purchasers. The Corporation’s United States natural gas production is expected to approximate 30% of its 2008 sales commitments under long-term contracts. The Corporation attempts to minimize price and supply risks associated with its United States natural gas supply commitments by entering into purchase contracts with third parties having reliable sources of supply, on terms substantially similar to those under its commitments and by leasing storage facilities.

In international markets, the Corporation generally sells its natural gas production under long-term sales contracts with prices that are periodically adjusted due to changes in the commodity prices or other indices. In the United Kingdom, the Corporation sells the majority of its natural gas production on a spot basis.


Refining

The Corporation owns a 50% interest in HOVENSA L.L.C. (HOVENSA), a refining joint venture in the United States Virgin Islands with a subsidiary of Petroleos de Venezuela S.A. (PDVSA). In addition, it owns and operates a refining facility in Port Reading, New Jersey.

HOVENSA: Refining operations at HOVENSA consist of crude units, a fluid catalytic cracking unit and a delayed coker unit.

The delayed coker unit permits HOVENSA to run lower-cost heavy crude oil. HOVENSA has a long-term supply contract with PDVSA to purchase 115,000 barrels per day of Venezuelan Merey heavy crude oil. PDVSA also supplies 155,000 barrels per day of Venezuelan Mesa medium gravity crude oil to HOVENSA under a long-term crude oil supply contract. The remaining crude oil requirements are purchased mainly under contracts of one year or less from third parties and through spot purchases on the open market. After sales of refined products by HOVENSA to third parties, the Corporation purchases 50% of HOVENSA’s remaining production at market prices.

Gross crude runs at HOVENSA averaged 454,000 barrels per day in 2007 compared with 448,000 barrels per day in 2006 and 461,000 barrels per day in 2005. During the second quarter of 2007, the coker unit at HOVENSA was shut down for approximately 30 days for a scheduled turnaround. The fluid catalytic cracking unit at HOVENSA was shut down for approximately 22 days of unscheduled maintenance in 2006.

Port Reading Facility: The Corporation owns and operates a fluid catalytic cracking facility in Port Reading, New Jersey, with a capacity of 65,000 barrels per day. This facility, which processes residual fuel oil and vacuum gas oil, operated at a rate of approximately 61,000 barrels per day in 2007 compared with 63,000 barrels per day in 2006 and 55,000 barrels per day in 2005. Substantially all of Port Reading’s production is gasoline and heating oil.

Marketing

The Corporation markets refined petroleum products on the East Coast of the United States to the motoring public, wholesale distributors, industrial and commercial users, other petroleum companies, governmental agencies and public utilities. It also markets natural gas and electricity to utilities and other industrial and commercial customers.

The Corporation has 1,371 HESS ® gasoline stations at December 31, 2007, including stations owned by the WilcoHess joint venture (Hess 44%). Approximately 90% of the gasoline stations are operated by the Company or WilcoHess. Of the operated stations, 93% have convenience stores on the sites. Most of the Corporation’s gasoline stations are in New York, New Jersey, Pennsylvania, Florida, Massachusetts, North Carolina and South Carolina.

Refined product sales averaged 451,000 barrels per day in 2007 compared with 459,000 barrels per day in 2006 and 456,000 barrels in 2005. Total energy marketing natural gas sales volumes, including utility and spot sales, were approximately 1.9 million mcf per day in 2007, 1.8 million mcf per day in 2006 and 1.7 million mcf per day in 2005. In addition, energy marketing sold electricity volumes at the rate of 2,800, 1,400 and 500 megawatts (round the clock) in 2007, 2006 and 2005, respectively.

The Corporation owns 22 terminals with an aggregate storage capacity of 22 million barrels in its East Coast marketing areas. The Corporation also owns a terminal in St. Lucia with a storage capacity of 10 million barrels, which is used for third party storage.

The Corporation has a 50% voting interest in a consolidated partnership that trades energy commodities and derivatives. The Corporation also takes energy commodity and derivative trading positions for its own account.

The Corporation also has a 92.5% interest in Hess LNG, which is pursuing investments in liquefied natural gas (LNG) terminals and related supply, trading and marketing opportunities. The joint venture is pursuing the development of LNG terminal projects located in Fall River, Massachusetts and Shannon, Ireland. The Corporation also has invested in a venture to develop fuel cells for electricity generation.

Competition and Market Conditions

See Item 1A, Risk Factors Related to Our Business and Operations, for a discussion of competition and market conditions.

Other Items

Compliance with various existing environmental and pollution control regulations imposed by federal, state, local and foreign governments is not expected to have a material adverse effect on the Corporation’s earnings and competitive position within the industry. The Corporation spent $23 million in 2007 for environmental remediation.

The number of persons employed by the Corporation at year end was approximately 13,300 in 2007 and 13,700 in 2006.

CEO BACKGROUND

Except for Messrs. Bohling, Drennen, Sandison, Scelfo and Shearer, each of the above officers has been employed by the Registrant or its subsidiaries in various managerial and executive capacities for more than five years. Mr. Bohling was employed in senior human resource positions with American Standard Corporation and CDI Corporation before joining the Registrant in 2004. Mr. Drennen served in senior executive positions in exploration and technology at ExxonMobil and its subsidiaries prior to joining the company in 2007. Mr. Scelfo was chief financial officer of Sirius Satellite Radio and a division of Dell Computer before his employment by the Registrant in 2003. Mr. Sandison served in senior executive positions in the area of global drilling with Texaco, Inc. before he was employed by the Registrant in 2003. Prior to joining Hess LNG, a joint venture subsidiary of the company, in 2004, Mr. Shearer was a consultant at Poten Partners, and held other senior positions in the liquefied natural gas industry.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

The Corporation is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. The M&R segment manufactures, purchases, transports, trades and markets refined petroleum products, natural gas and electricity.

Net income in 2007 was $1,832 million compared with $1,920 million in 2006 and $1,226 million in 2005. Diluted earnings per share were $5.74 in 2007 compared with $6.08 in 2006 and $3.93 in 2005. A table of items affecting comparability between periods is shown on page 21.

Exploration and Production

The Corporation’s strategy for the E&P segment is to profitably grow reserves and production in a sustainable and financially disciplined manner. The Corporation’s total proved reserves were 1,330 million barrels of oil equivalent (boe) at December 31, 2007 compared with 1,243 million boe at December 31, 2006 and 1,093 million boe at December 31, 2005. Total proved reserves at year end 2007 increased 87 million boe or 7% from the end of 2006.

E&P net income was $1,842 million in 2007, $1,763 million in 2006 and $1,058 million in 2005. The improved results in 2007 as compared to 2006 were primarily driven by higher average crude oil selling prices and increased crude oil and natural gas production. See further discussion in Comparison of Results on page 21.

Production averaged 377,000 barrels of oil equivalent per day (boepd) in 2007 compared with 359,000 boepd in 2006 and 335,000 boepd in 2005. Production in 2007 increased 18,000 boepd or 5% from 2006 reflecting the following developments:


• The Okume Complex in Equatorial Guinea (Hess 85%), which commenced production in December 2006, exhibited strong reservoir performance and facilities uptime during the year. In January 2008, production reached design capacity of 60,000 boepd, gross (approximately 40,000 boepd, net).

• The Ujung Pangkah Field (Hess 75%) in Indonesia commenced natural gas production in April 2007. The Corporation’s net share of production from the field ramped up to an average of 69,000 mcf per day in the fourth quarter of 2007.

• The Atlantic (Hess 25%) and Cromarty (Hess 90%) natural gas fields in the United Kingdom North Sea, which came onstream in June 2006, contributed to the Corporation’s year-over-year production growth. Production from the Cromarty Field was shut in during the summer when natural gas prices were seasonally lower and then full production re-commenced in October at higher prices.

• The Corporation benefited from a full year of natural gas production from Sinphuhorm (Hess 35%) located onshore Thailand, which commenced production in the fourth quarter of 2006, and from production growth in Azerbaijan and Russia.

• The Snohvit Field located offshore Norway (Hess 3.26%) commenced natural gas production in September 2007 and the Genghis Khan Field in the Gulf of Mexico (Hess 28%) started crude oil production in October 2007.

In 2008, the Corporation expects total worldwide production of approximately 380,000 boepd to 390,000 boepd.

During the year, the Corporation progressed development projects that will add to its production in future years:


• The expansion of offshore facilities and installation of wellhead platforms was completed in the fourth quarter at Block A-18 of the Joint Development Area of Malaysia and Thailand (JDA) (Hess 50%). Full Phase 2 production is expected in the second half of 2008.

• The Shenzi development (Hess 28%) in the deepwater Gulf of Mexico progressed with the installation of tension leg platform tendon piles and hull fabrication. First production is expected to commence in mid-2009.

• Development of the residual oil zone at the Seminole-San Andres Unit (Hess 34.3%) in the Permian Basin commenced and is advancing as planned. Production is expected to start up in 2009.

• Development of the Ujung Pangkah crude oil project commenced and facilities engineering and construction continue on schedule. Production from this Phase 2 oil project is expected to commence in 2009.

• The Jambi Merang natural gas project (Hess 25%) in Indonesia was sanctioned during the year.

During 2007, the Corporation’s exploration activities included:


• The Corporation gained access to new exploration acreage including two offshore blocks on the Australian Northwest Shelf, licenses WA-390-P (Hess 100%) and nearby WA-404-P (Hess 50%) with total gross acreage of approximately 1.5 million acres. Additionally, more than 125,000 net undeveloped acres were added in the Bakken trend of North Dakota.

• On the Pony prospect on Green Canyon Block 468 (Hess 100%) in the deepwater Gulf of Mexico a sidetrack from the original discovery well was successfully completed in the first quarter and a second appraisal well is being drilled about 1.5 miles northwest of the original discovery well.

• At the Tubular Bells discovery (Hess 20%) on Mississippi Canyon Block 682 in the deepwater Gulf of Mexico a successful sidetrack well was completed during the first quarter of 2007 and a further appraisal well was spud in October 2007.

During 2007, the Corporation completed the following acquisition and divestiture transactions:


• In February 2007, the Corporation completed the acquisition of a 28% interest in the Genghis Khan oil and gas development located in the deepwater Gulf of Mexico on Green Canyon Blocks 652 and 608, which is part of the same geological structure as the Shenzi development.

• In the second quarter, interests in the Scott-Telford fields located offshore United Kingdom were sold for $93 million resulting in an after-tax gain of $15 million ($21 million before income taxes). The Corporation’s share of production from the Scott-Telford fields was approximately 6,500 boepd at the time of sale.

Marketing and Refining

The Corporation’s strategy for the M&R segment is to deliver consistent operating performance and generate free cash flow. M&R net income was $300 million in 2007, $394 million in 2006 and $499 million in 2005. Profitability in 2007 and 2006 was adversely affected by lower average margins.

Refining operations contributed net income of $193 million in 2007, $240 million in 2006 and $330 million in 2005. The Corporation received cash distributions from HOVENSA, a 50% owned refining joint venture with a subsidiary of Petroleos de Venezuela S.A. (PDVSA), totaling $300 million in 2007, $400 million in 2006 and $275 million in 2005. Gross crude runs at HOVENSA averaged 454,000 barrels per day in 2007 compared with 448,000 barrels per day in 2006 and 461,000 barrels per day in 2005. In 2007, HOVENSA successfully completed the first turnaround of its delayed coking unit. The Port Reading refinery operated at an average of 61,000 barrels per day in 2007 versus 63,000 barrels per day in 2006 and 55,000 barrels per day in 2005. Marketing earnings were $83 million in 2007, $108 million in 2006 and $136 million in 2005. Total refined product sales volumes averaged 451,000 barrels per day in 2007 compared with 459,000 barrels per day in 2006 and 456,000 barrels per day in 2005.

Liquidity and Capital and Exploratory Expenditures

Net cash provided by operating activities was $3,507 million in 2007, $3,491 million in 2006 and $1,840 million in 2005, principally reflecting increasing earnings. At December 31, 2007, cash and cash equivalents totaled $607 million compared with $383 million at December 31, 2006. Total debt was $3,980 million at December 31, 2007 compared with $3,772 million at December 31, 2006. The Corporation’s debt to capitalization ratio at December 31, 2007 was 28.9% compared with 31.6% at the end of 2006. The Corporation has debt maturities of $62 million in 2008 and $143 million in 2009.

Consolidated Results of Operations

In the discussion that follows, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings. Management believes that after-tax amounts are a preferable method of explaining variances in earnings, since they show the entire effect of a transaction rather than only the pre-tax amount. After-tax amounts are determined by applying the income tax rate in each tax jurisdiction to pre-tax amounts.

The items in the table above are explained, and the pre-tax amounts are shown, on pages 24 through 27.

Comparison of Results

Exploration and Production

After considering the Exploration and Production items in the table on page 21, the remaining changes in Exploration and Production earnings are primarily attributable to changes in selling prices, production volumes, operating costs, exploration expenses and income taxes, as discussed below.

Selling prices: Higher average selling prices, primarily crude oil, increased Exploration and Production revenues by approximately $740 million in 2007 compared with 2006. In 2006, the increase in average crude oil selling prices and reduced hedge positions increased revenues by approximately $1,900 million compared with 2005.

The after-tax impacts of hedging reduced earnings by $244 million ($399 million before income taxes) in 2007, $285 million ($449 million before income taxes) in 2006 and $989 million ($1,582 million before income taxes) in 2005.

Production and sales volumes: The Corporation’s crude oil and natural gas production was 377,000 boepd in 2007 compared with 359,000 boepd in 2006 and 335,000 boepd in 2005. The Corporation anticipates that its 2008 production will average between 380,000 and 390,000 boepd.

United States: Crude oil and natural gas production was lower in 2007 compared with 2006 and 2005, principally due to natural decline and asset sales.

Europe: Crude oil production in 2007 was lower than in 2006, reflecting natural decline, facilities work on three North Sea fields, and the sale of the Corporation’s interests in the Scott and Telford fields in the United Kingdom. These decreases were partially offset by increased production in Russia. Decreased natural gas production in 2007 compared with 2006 was principally due to lower nominations related to the shut-down of a non-operated pipeline in the North Sea and natural decline, partially offset by higher production from the Atlantic and Cromarty natural gas fields in the United Kingdom which commenced in June 2006. Production in Europe was comparable in 2006 and 2005, reflecting increased production from Russia and new production from the Atlantic and Cromarty fields, which offset lower production due to maintenance and natural decline.

Africa: Crude oil production increased in 2007 compared with 2006 primarily due to the start-up of the Okume Complex in Equatorial Guinea in December 2006. Production in 2006 was higher than 2005 levels, principally due to production from Libya, which the Corporation re-entered in January 2006.

Asia and other: Crude oil production increased in 2007 versus 2006, reflecting a combination of an increased entitlement and higher production in Azerbaijan. Higher natural gas production in 2007 compared with 2006 was principally due to new production from the Sinphuhorm onshore gas project in Thailand which commenced in November 2006 and new production from the Ujung Pangkah Field in Indonesia which commenced in April 2007. These increases were partially offset by the planned shut-down of the JDA to install facilities required for Phase 2 gas sales. Natural gas production was higher in 2006 compared with 2005 due to increased production from the JDA.

Sales volumes: Higher sales volumes increased revenue by approximately $240 million in 2007 compared with 2006 and $400 million in 2006 compared with 2005.

Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, increased by $409 million in 2007 and $322 million in 2006 compared with the corresponding amounts in prior years (excluding the charges for

vacated leased office space and hurricane related costs in 2006). The increases in 2007 and 2006 were primarily due to higher production volumes, increased costs of services and materials, higher employee costs and increased production taxes. Cash operating costs per barrel of oil equivalent were $13.36 in 2007, $10.92 in 2006 and $9.07 in 2005. Cash operating costs in 2008 are estimated to be in the range of $14.00 to $15.00 per barrel of oil equivalent.

Excluding the pre-tax amount of the 2007 asset impairments, depreciation, depletion and amortization charges increased by $232 million and $194 million in 2007 and 2006, respectively. The increases were primarily due to higher production volumes and per barrel costs. Depreciation, depletion and amortization costs per barrel of oil equivalent were $10.11 in 2007, $8.85 in 2006 and $7.88 in 2005. Depreciation, depletion and amortization costs for 2008 are expected to be in the range of $12.50 to $13.50 per barrel.

Exploration expenses: Exploration expenses were lower in 2007 compared with 2006, primarily reflecting lower dry hole costs, partially offset by increased costs related to seismic studies. Exploration expenses were higher in 2006 compared with 2005, principally reflecting higher dry hole costs.

Income taxes: The effective income tax rate for Exploration and Production operations was 50% in 2007, 53% in 2006 and 41% in 2005. After considering the items in the table below, the effective income tax rates were 50% in 2007, 54% in 2006 and 42% in 2005. The effective income tax rate increased beginning in 2006 due to the Corporation’s re-entry into Libya and the increase in the supplementary tax on petroleum operations in the United Kingdom from 10% to 20%. The effective income tax rate for E&P operations in 2008 is expected to be in the range of 47% to 51%.

Other: The after-tax foreign currency loss was $7 million in 2007, compared with a gain of $10 million in 2006 and $20 million in 2005.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

During the second quarter of 2007, the Corporation recorded a net gain of $15 million ($21 million before income taxes) related to the sale of its interests in the Scott and Telford fields located in the United Kingdom.
In the discussion that follows, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings. Management believes that after-tax amounts are preferable to pre-tax amounts for explaining variances in earnings, since they show the entire effect of a transaction. After-tax amounts are determined by applying the appropriate income tax rate in each tax jurisdiction to pre-tax amounts.

Results of Operations (continued)

Comparison of Results

Selling prices: Higher average realized selling prices of crude oil and natural gas increased Exploration and Production revenues by approximately $1,250 million and $2,175 million in the second quarter and first half of 2008, respectively, compared with the corresponding periods of 2007.

Crude oil and natural gas hedges reduced Exploration and Production earnings by $144 million and $239 million in the second quarter and first half of 2008 ($234 million and $386 million before income taxes). Crude oil hedges reduced Exploration and Production earnings by $56 million and $95 million in the second quarter and first half of 2007 ($93 million and $157 million before income taxes).
Sales and production volumes: The Corporation’s crude oil and natural gas production, on a barrel of oil equivalent basis, was 393,000 boepd in the second quarter of 2008 compared with 378,000 boepd in the same period of 2007. Production in the first half of 2008 was 392,000 boepd compared with 380,000 boepd in the first half of 2007. The Corporation anticipates that its production for the full year of 2008 will average between 380,000 boepd and 390,000 boepd.

United States: Crude oil production in the United States was higher in the second quarter and first half of 2008, principally due to production from new wells in North Dakota and the deepwater Gulf of Mexico.
Europe: Crude oil production in Europe in the second quarter and first half of 2008 was lower than the comparable periods of 2007, reflecting the sale of the Corporation’s interests in the Scott and Telford fields in the United Kingdom, cessation of production at the Fife Field and natural decline. Natural gas production in the second quarter of 2008 was higher than in the second quarter of 2007, principally reflecting increased production from the Cromarty Field in the United Kingdom, which was shut-in in the second quarter of 2007 in response to market conditions.
Africa: Higher crude oil production in the second quarter and first half of 2008 was due to the ramp-up of the Okume Complex in Equatorial Guinea, partially offset by a lower entitlement to Algerian production.
Asia and other: Crude oil production in Asia was lower in the second quarter and first half of 2008 reflecting a reduced entitlement to production in Azerbaijan. Natural gas production increased in the second quarter and first half of 2008, principally due to production from the Pangkah Field in Indonesia, which commenced in April 2007, and increased production from Block A-18 of the Joint Development Area of Malaysia and Thailand (JDA).
Sales volumes: Higher crude oil sales volumes increased revenue by approximately $25 million in the second quarter and $200 million in the first half of 2008 compared with the corresponding periods of 2007.
Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, increased by $128 million and $211 million in the second quarter and first half of 2008 compared with the corresponding periods of 2007. The increases principally reflect higher production volumes, increased production taxes, higher costs of services and materials and increased employee related costs. Depreciation, depletion and amortization charges were higher in 2008 reflecting higher production volumes and per barrel rates.
Exploration expenses: Exploration expenses were higher in the second quarter and first half of 2008 compared with the corresponding periods of 2007, reflecting higher dry hole costs and increased costs of seismic studies. The Corporation’s planned exploratory drilling activities are expected to increase in the second half of the year.
Income Taxes: The effective income tax rate for Exploration and Production operations in the first half of 2008 was 47% compared with 49% in the first half of 2007. The effective income tax rate for Exploration and Production operations for the full year of 2008 is expected to be in the range of 47% to 51%.

Other: The after-tax foreign currency gain related to Exploration and Production activities was $1 million in the second quarter of 2008 compared with a loss of $6 million in the second quarter of 2007. The after-tax foreign currency gain was $12 million for the six months ended June 30, 2008 and a loss of $9 million for the six months ended June 30, 2007.
The Corporation’s future Exploration and Production earnings may be impacted by external factors, such as volatility in the selling prices of crude oil and natural gas, reserve and production changes, industry cost inflation, exploration expenses, changes in foreign exchange and income tax rates, political risk and the effects of weather.
Marketing and Refining
Results from Marketing and Refining activities amounted to a loss of $52 million and $36 million in the second quarter and first half of 2008, respectively, compared with income of $122 million and $223 million in the second quarter and first half of 2007, respectively. The Corporation’s downstream operations include HOVENSA L.L.C. (HOVENSA), a 50% owned refining joint venture with a subsidiary of Petroleos de Venezuela S.A. (PDVSA), which is accounted for using the equity method. Additional Marketing and Refining activities include a fluid catalytic cracking facility in Port Reading, New Jersey, as well as retail gasoline stations, energy marketing and trading operations.
Refining: Refining operations generated income of $3 million in the second quarter of 2008 and were breakeven in the first half of 2008 compared with income of $87 million in the second quarter of 2007 and $141 million in the first half of 2007. The Corporation’s share of HOVENSA’s results, after income taxes, was a loss of $12 million in the second quarter of 2008 compared with income of $49 million in the second quarter of 2007. The Corporation’s share of HOVENSA’s results, after income taxes, was a loss of $18 million in the first half of 2008 compared with income of $84 million in 2007, principally reflecting lower refining margins.
At June 30, 2008, the remaining balance of the PDVSA note was $46 million, which is scheduled to be fully repaid by February 2009. Interest income on the PDVSA note after income taxes was $1 million in the second quarter and $2 million in the first half of 2008 compared with $1 million in the second quarter and $3 million in the first half of 2007.
Port Reading’s after tax earnings were $14 million and $16 million in the second quarter and first half of 2008 compared with $35 million and $52 million in the corresponding periods of 2007, reflecting lower margins.

CONF CALL

Jay Wilson

Thank you, Katina. Good morning, everyone, and thank you for participating in our second quarter earnings conference all. 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; John O'Connor, 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 Hess

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

Net income for the second quarter of 2008 was $900 million, up from $557 million a year ago. Our results benefited from higher crude oil and natural gas selling prices, and natural gas production volumes, which more than offset the impact of weaker refining margins, compared to those in the year ago quarter.

For the second quarter of 2008, exploration and production earned $1.025 billion. Crude oil and natural gas production averaged 393,000 barrels of oil equivalent per day, which was 4% above the year ago period.

Contributing to higher year-over-year production volumes were strong performance from the Okume Complex in Equatorial Guinea and higher natural gas production volumes from the Cromarty field in the UK North Sea, the Ujung Pangkah field in Indonesia and the Malaysia-Thailand JDA. Our full year 2008 production forecast remains 380,000 to 390,000 barrels of oil equivalent per day.

With regard to our field developments, we continue to make good progress. Production from JDA Phase 2 will commence upon completion of the buyer's 42-inch export pipeline. Upon commissioning, net volumes from the JDA are expected to increase to approximately 250 million cubic feet per day. Hess has a 50% working interest in the Malaysia-Thailand JDA.

In the deep water Gulf of Mexico, development of the Shenzi field continues to move forward. The tension-leg platform haul and top sides have been installed on location. Work on the subsea facilities is ongoing. Commissioning and first production are scheduled for the first half of 2009. Hess owns a 28% working interest in the Shenzi field.

In Indonesia, development of the oil leg at the Ujung Pangkah field is continuing. Construction of the offshore platforms and onshore processing facilities is on schedule and oil production is expected to commence in the first half of 2009. Hess operates Ujung Pangkah with a 75% working interest.

In the Williston Basin of North Dakota, we have increased our net acreage position in the Bakken play to approximately 500,000 acres. We currently have seven rigs operating in the Bakken and we will add one additional rig in the fourth quarter.

With regard to exploration, on June 5th, we announced the successful result of our Pony #2 sidetrack well on Green Canyon Block 468. Based on drilling results today, the estimated recoverable reserves from the field are approximately 200 million barrels of oil equivalent. We are currently evaluating development options for Pony, in which we own a 100% working interest.

On Permit WA-390-P in the North West Shelf of Australia, we recently announced two discoveries. On June 10th, we announced that the Glencoe-1 exploration well encountered 92 feet of net gas pay. And on July 20th, we announced that the Briseis-1 exploration well encountered a 151 feet of net gas pay.

Results, thus far, are very encouraging. We planned to drill two additional wells on the permit in 2008. The next well, Nimblefoot-1 will be drilled about 14 kilometers southwest of the Glencoe-1 discovery and should spud in August. Hess is a 100% interest in Permit WA-390-P.

In addition to the two remaining wells to be drilled in Australia, in the fourth quarter we expect to spud deep water wells on Block 54 in Libya, Cape Three Points in Ghana and BMS-22 in Brazil. Hess has a 100% interest in Block 54 and Cape Three Points and a 40% interest in BMS-22.

Turning to marketing and refining, we reported a loss of $52 million for the second quarter of 2008. Our results were below the year ago quarter, reflecting the difficult economic headwinds we are facing in the United States.

Refining margins at both our HOVENSA joint venture refinery and our Port Reading, New Jersey facility were lower than a year ago as a result of significantly lower gasoline crack spreads. Marketing earnings were lower than the year ago quarter as a result of supply costs rising faster than selling prices. Retail marketing fuel volumes on a per site basis were down 4%, while total convenient store sales were flat.

In energy marketing while fuel oil volumes were slightly lower, natural gas and electricity sales volumes continued to grow year-over-year. Capital and exploratory expenditures in the first half of 2008 were $2.2 billion, of which just over $2.1 billion was related to exploration and production activities. For the full year 2008, our capital and exploratory expenditures are forecasted to be approximately $5 billion, up $600 million from our guidance in January.

The increase primarily reflects our success at Central GOM Lease Sale 206 where we were the high bidder on 25 deep water blocks and the acquisition of additional leases and increased activity levels in the Bakken play in the Williston Basin of North Dakota.

I will now turn the call over to John Rielly.

John Rielly

Thanks, John. Hello, everyone. In my remarks today, I will compare second quarter 2008 results to the first quarter. Net income for the second quarter of 2008 was $900 million, compared with $759 million in the first quarter.

Turning to exploration and production, income from exploration and production operations in the second quarter of 2008 was $1.25 billion, compared with $824 million in the first quarter. The after-tax components of the increase are as follows. Higher selling prices increased earnings by $340 million. The impact of sales volumes reduced earnings by $27 million. Higher costs decreased income by $81 million. All other items net to a decrease in earnings of $31 million for an overall increase in second quarter income of $201 million.

Turning to marketing and refining, the results of marketing and refining operations amounted to a loss of $52 million in the second quarter of 2008, compared with income of $16 million in the first quarter. Results of refining operations amounted to income of $3 million in the second quarter of 2008, compared with a loss of $3 million in the first quarter.

The corporation share of HOVENSA's results after income taxes amounted to a loss of $12 million in the second quarter, compared with a loss of $6 million in the first quarter, primarily reflecting lower margins. During the second quarter, the corporation received a distribution from HOVENSA of $25 million.

Port Reading earnings were $14 million in the second quarter of 2008, compared with $2 million in the first quarter. Marketing results amounted to a loss of $40 million in the second quarter of 2008, compared with income of $32 million in the first quarter. Second quarter 2008 marketing results include seasonally lower margins and sales volumes of natural gas. Trading activities generated losses of $15 million and $13 million in the second and first quarters of 2008 respectively.

Turning to corporate, net corporate expenses amounted to $33 million in the second quarter of 2008, compared with $39 million in the first quarter. Our after-tax interest expense was $40 million in the second quarter, compared with $42 million in the first quarter, principally reflecting lower average debt.

Turning to cash flow, net cash provided by operating activities in the second quarter, including an increase of $294 million from changes in working capital, was $1.691 billion. The principal use of cash was capital expenditures of $1.156 billion. All other items amounted to an increasing cash flow of $42 million, resulting in a net increase in cash and cash equivalents in the second quarter of $577 million. At June 30, 2008 we had $1.479 billion of cash and cash equivalents. Our available revolving credit capacity was $2.718 billion at quarter end. Total debt was $3.945 billion at June 30, 2008 and $3.980 million at December 31, 2007.

The corporation's debt-to-capitalization ratio at June 30, 2008 was 26.2%, compared with 28.9% at the end of 2007.

This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

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