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Article by DailyStocks_admin    (12-29-08 06:28 AM)

Hess Corp. CEO JOHN B HESS bought 195500 shares on 12-19-2008 at $48.08

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.

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.

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.


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.

2007: The gain from asset sales relates to the sale of the Corporation’s interests in the Scott and Telford fields located in the United Kingdom North Sea. The charge for asset impairments relates to two mature fields in the United Kingdom North Sea. The pre-tax amount of this charge is reflected in depreciation, depletion and amortization. The estimated production imbalance settlements represent a charge for adjustments to prior meter readings at two offshore fields, which are recorded as a reduction of sales and other operating revenues.

2006: The gains from asset sales relate to the sale of certain United States oil and gas producing properties located in the Permian Basin in Texas and New Mexico and onshore Gulf Coast. The accrued office closing cost relates to vacated leased office space in the United Kingdom. The related expenses are reflected principally in general and administrative expenses. The income tax adjustment represents a one-time adjustment to the Corporation’s deferred tax liability resulting from an increase in the supplementary tax on petroleum operations in the United Kingdom from 10% to 20%.

2005: The gains from asset sales represent the disposal of non-producing properties in the United Kingdom and the exchange of a mature North Sea asset for an increased interest in the Ujung Pangkah Field in Indonesia. The Corporation recorded incremental production expenses in 2005, principally repair costs and higher insurance premiums, as a result of hurricane damage in the Gulf of Mexico. The income tax adjustment reflects the effect on deferred income taxes of a reduction in the income tax rate in Denmark and a tax settlement in the United Kingdom. The legal settlement reflects the favorable resolution of contingencies on a prior year asset sale, which is recorded in other income in the income statement.

The Corporation’s future Exploration and Production earnings may be impacted by external factors, such as political risk, volatility in the selling prices of crude oil and natural gas, reserve and production changes, industry cost inflation, exploration expenses, the effects of weather and changes in foreign exchange and income tax rates.

Marketing and Refining

Earnings from Marketing and Refining activities amounted to $300 million in 2007, $394 million in 2006 and $499 million in 2005. After considering the Marketing and Refining items in the table on page 21, the earnings amounted to $276 million in 2007, $394 million in 2006 and $475 million in 2005 and are discussed in the paragraphs below. The Corporation’s downstream operations include its 50% interest in HOVENSA, 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 earnings, which consist of the Corporation’s share of HOVENSA’s results, Port Reading earnings, interest income on a note receivable from PDVSA and results of other miscellaneous operating activities were $193 million in 2007, $240 million in 2006 and $330 million in 2005.

The Corporation’s share of HOVENSA’s net income was $108 million ($176 million before income taxes) in 2007, $124 million ($201 million before income taxes) in 2006 and $227 million ($370 million before income taxes) in 2005. The lower earnings in 2007 and 2006 compared to the respective prior years were principally due to lower refining margins. During 2007, the coker unit at HOVENSA was shutdown for approximately 30 days for a scheduled turnaround. Certain related processing units were also included in this turnaround. In 2006, the fluid catalytic cracking unit at HOVENSA was shutdown for approximately 22 days of unscheduled maintenance. During 2005, a crude unit and the fluid catalytic cracking unit at HOVENSA were each shutdown for approximately 30 days of scheduled maintenance. Cash distributions from HOVENSA were $300 million in 2007, $400 million in 2006 and $275 million in 2005.

Pre-tax interest income on the PDVSA note was $9 million, $15 million and $20 million in 2007, 2006 and 2005, respectively. Interest income is reflected in other income in the income statement. At December 31, 2007, the remaining balance of the PDVSA note was $76 million, which is scheduled to be fully repaid by February 2009.

Port Reading’s after-tax earnings were $75 million in 2007, $104 million in 2006 and $88 million in 2005. Refined product margins were lower in 2007 compared with 2006. Higher refined product sales volumes were offset by lower margins in 2006 compared with 2005. In 2005, the Port Reading facility was shutdown for 36 days of planned maintenance.

The decreases in 2007 and 2006 primarily reflect lower margins on refined product sales. Total refined product sales volumes were 451,000 barrels per day in 2007, 459,000 barrels per day in 2006 and 456,000 barrels per day 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 has a 50% voting interest in a consolidated partnership that trades energy commodities and energy derivatives. The Corporation also takes trading positions for its own account. The Corporation’s after-tax results from trading activities, including its share of the earnings of the trading partnership, amounted to income of $24 million in 2007, $46 million in 2006 and $33 million in 2005.

Marketing expenses were comparable in 2007 and 2006, but increased in 2006 compared with 2005, due to higher expenses from an increased number of retail convenience stores, growth in energy marketing operations and increased utility and compensation related costs.

In 2007 and 2005, Marketing and Refining earnings include income from the liquidation of prior year LIFO inventories. In 2005, Marketing and Refining earnings also include a charge resulting from the bankruptcy of a customer in the utility industry, which is included in marketing expenses.

The Corporation’s future Marketing and Refining earnings may be impacted by volatility in margins, competitive industry conditions, government regulatory changes, credit risk and supply and demand factors, including the effects of weather.

Operating Activities: Net cash provided by operating activities, including changes in operating assets and liabilities, was comparable in 2007 and 2006. Net cash provided by operating activities increased to $3,491 million in 2006 from $1,840 million in 2005, principally reflecting higher earnings, changes in working capital accounts and increased distributions from HOVENSA. The Corporation received cash distributions from HOVENSA of $300 million in 2007, $400 million in 2006 and $275 million in 2005.

Financing Activities: During 2007, net borrowings were $208 million. The Corporation reduced debt by $13 million in 2006 and $50 million in 2005. In 2005, bond repurchases of $600 million were funded by borrowings on the revolving credit facility in connection with the repatriation of foreign earnings to the United States.

Common stock dividends paid were $127 million in 2007. Total common and preferred stock dividends paid were $161 million in 2006 and $159 million in 2005. The Corporation received net proceeds from the exercise of stock options totaling $110 million, $40 million and $62 million in 2007, 2006 and 2005, respectively.

Future Capital Requirements and Resources

The Corporation anticipates $4.4 billion in capital and exploratory expenditures in 2008, of which $4.3 billion relates to Exploration and Production operations. The Corporation has maturities of long-term debt of $62 million in 2008 and $143 million in 2009. The Corporation anticipates that it can fund its 2008 operations, including capital expenditures, dividends, pension contributions and required debt repayments, with existing cash on-hand, projected cash flow from operations and its available credit facilities.

The Corporation maintains a $3.0 billion syndicated, revolving credit facility (the facility), substantially all of which is committed through May 2012. The facility can be used for borrowings and letters of credit. At December 31, 2007, outstanding borrowings under the facility were $220 million and additional available borrowing capacity under the facility was $2,780 million.

The Corporation has a 364-day asset-backed credit facility securitized by certain accounts receivable from its Marketing and Refining operations, which are sold to a wholly-owned subsidiary. Under the terms of this financing arrangement, the Corporation has the ability to borrow up to $800 million, subject to the availability of sufficient levels of eligible receivables. At December 31, 2007, the Corporation had $250 million in outstanding borrowings and outstanding letters of credit of $534 million which were collateralized by $1,336 million of Marketing and Refining accounts receivable. These receivables are not available to pay the general obligations of the Corporation before repayment of outstanding borrowings under the asset-backed facility.

At December 31, 2007, $600 million of outstanding borrowings under short-term credit facilities are classified as long term based on the Corporation’s available capacity under the committed revolving credit facility. These borrowings consist of the $250 million under the asset-backed credit facility described above, $300 million under a short-term committed facility and $50 million under uncommitted lines at December 31, 2007. The Corporation also has a shelf registration under which it may issue additional debt securities, warrants, common stock or preferred stock.





MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview
Hess Corporation (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 was $775 million for the third quarter of 2008, compared with $395 million in the third quarter of 2007.
Exploration and Production: E&P earnings were $699 million for the third quarter of 2008, compared with $414 million in the third quarter of 2007. In the third quarter of 2008, the Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $93.36 per barrel compared with $65.26 per barrel in the third quarter of 2007. The Corporation’s average worldwide natural gas selling price, including the effect of hedging, was $7.60 per Mcf in the third quarter of 2008 compared with $5.38 per Mcf in the third quarter of 2007. Worldwide crude oil and natural gas production was 361,000 barrels of oil equivalent per day (boepd) in the third quarter of 2008 compared with 357,000 boepd in the same period of 2007. Facilities downtime associated with hurricanes in the Gulf of Mexico reduced third quarter production by an average of approximately 11,000 boepd and will also reduce fourth quarter production. As a result, full year production is now expected to be approximately 380,000 boepd.
The following is an update of recent Exploration and Production activities:
• The Corporation continued progressing its field developments during the third quarter. Production from Phase 2 at Block A-18 of the Joint Development Area of Malaysia and Thailand (Hess 50%) and the Shenzi Field (Hess 28%) in the deepwater Gulf of Mexico are expected to start up in early 2009 and oil production from the Ujung Pangkah Field (Hess 75%) in Indonesia is planned to commence in mid-2009.

• The Corporation completed its initial four exploration well program on Block WA-390-P (Hess 100%) located in Australia’s Northwest Shelf. Following the Glencoe and Briseis discoveries, the Corporation’s Nimblefoot-1 exploration well encountered 93 feet of net gas pay in September. In October, the Corporation completed the fourth well, Warrior-1, which failed to find commercial quantities of hydrocarbons. The Corporation plans to integrate the results of this drilling campaign with recently acquired seismic data to determine its 2009 drilling program, which is currently expected to commence in the second half of the year.

• In the third quarter of 2008, the Corporation commenced drilling deepwater wells on Block 54 (Hess 100%) in Libya and Cape Three Points (Hess 100%) in Ghana. In October 2008, drilling of an exploration well commenced on the BMS 22 Block in the Santos Basin (Hess 40%) located offshore Brazil.
Marketing and Refining: M&R results generated income of $161 million in the third quarter of 2008, compared with income of $46 million in the third quarter of 2007, primarily reflecting higher refining and marketing margins.

Results of Operations

In the third quarter of 2007, the Corporation recorded charges totaling $33 million ($64 million before income taxes) for adjustments to prior meter readings at two offshore fields. 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 North Sea.
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.

Sales and production volumes: The Corporation’s crude oil and natural gas production, on a barrel of oil equivalent basis, was 361,000 boepd in the third quarter of 2008 compared with 357,000 boepd in the same period of 2007. Production in the first nine months of 2008 was 382,000 boepd compared with 372,000 boepd in the first nine months of 2007. Facilities downtime associated with hurricanes in the Gulf of Mexico reduced third quarter production by an average of approximately 11,000 boepd. Delays from the hurricanes in bringing back the operations of third-party transportation infrastructure will also reduce fourth quarter production. The Corporation anticipates that its production for the full year of 2008 will average approximately 380,000 boepd and that production impacted by the hurricanes will be fully restored by January 2009.

United States: Crude oil production in the United States was higher in the first nine months of 2008, principally due to production from new wells in North Dakota and the deepwater Gulf of Mexico. In the third quarter of 2008, this increased production was offset by the impacts of hurricanes in the Gulf of Mexico.
Europe: Crude oil production in Europe in the third quarter and first nine months of 2008 was lower than the comparable periods of 2007, due to temporary shut-ins at two North Sea fields, cessation of production at the Fife Field and natural decline. These decreases were partially offset by increased production in Russia. Natural gas production in the third quarter and first nine months of 2008 was higher than in the same periods of 2007, principally reflecting increased production from the Cromarty Field in the United Kingdom, which was shut-in for a portion of 2007 in response to market conditions, partially offset by natural decline. In addition, third quarter 2008 natural gas nominations at certain fields were higher because a third-party pipeline was shut down in the third quarter of 2007.
Africa: Higher crude oil production in the first nine months of 2008 was principally due to the continued development 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 third quarter and first nine months of 2008, reflecting a reduced entitlement to production in Azerbaijan and production interruptions. Natural gas production increased in the third quarter of 2008 principally due to increased production from Block A-18 of the Joint Development Area of Malaysia and Thailand (JDA). In the third quarter of 2007, operations at Block A-18 of the JDA were impacted by a planned shut-down in order to install facilities required for phase 2 gas sales. In the first nine months of 2008 production also increased as a result of production from the Pangkah Field in Indonesia, which commenced in April 2007.
Sales volumes: Higher crude oil sales volumes increased revenue by approximately $50 million in the third quarter and $260 million in the first nine months 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 $129 million and $340 million in the third quarter and first nine months of 2008, respectively, compared with the corresponding periods of 2007. The increases principally reflect higher production volumes, increased production taxes (due to higher realized selling prices), 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 third quarter and first nine months of 2008 compared with the corresponding periods of 2007, reflecting higher dry hole costs and increased costs of seismic studies.
Income Taxes: The effective income tax rate for Exploration and Production operations in the first nine months of 2008 was 48% compared with 50% in the first nine months 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 loss related to Exploration and Production activities was $8 million in the third quarter of 2008 compared with income of $1 million in the third quarter of 2007. The after-tax foreign currency gain was $3 million for the nine months ended September 30, 2008 and a loss of $8 million for the nine months ended September 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
Marketing and Refining income amounted to $161 million and $125 million in the third quarter and first nine months of 2008, respectively, compared with $46 million and $269 million in the third quarter and first nine months of 2007. 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 $46 million in the third quarter and first nine months of 2008 compared with income of $25 million in the third quarter and $166 million in the first nine months of 2007. The Corporation’s share of HOVENSA’s income, after income taxes, was $32 million in the third quarter of 2008 compared with $12 million in the third quarter of 2007. The Corporation’s share of HOVENSA’s income, after income taxes, was $14 million in the first nine months of 2008 compared with $96 million in 2007, principally reflecting lower refining margins.
At September 30, 2008, the remaining balance of the PDVSA note was $30 million, which is scheduled to be fully repaid by February 2009. Interest income on the PDVSA note, after income taxes, was $2 million in the first nine months of 2008 compared with $5 million in the first nine months of 2007, reflecting a lower outstanding balance.
Port Reading’s after tax earnings were $14 million and $30 million in the third quarter and first nine months of 2008, respectively, compared with $10 million and $62 million in the corresponding periods of 2007, also reflecting lower margins.

Marketing: Marketing operations, which consist principally of energy marketing and retail gasoline operations, generated earnings of $110 million in the third quarter of 2008 compared with $21 million in the third quarter of 2007. The increase was primarily due to increased margins in retail gasoline operations and energy marketing activities. Marketing operations had earnings of $102 million in the first nine months of 2008 compared with earnings of $64 million in the first nine months of 2007. Total refined product sales volumes were 470,000 barrels per day in the first nine months of 2008 compared with 447,000 barrels per day in the first nine months of 2007.

Trading: The Corporation has a 50% voting interest in a consolidated partnership that trades energy commodities and energy derivatives. The Corporation also takes trading positions for its own account. The Corporation’s after-tax results from trading activities, including its share of the results from the trading partnership, amounted to earnings of $5 million in the third quarter and a loss of $23 million in the first nine months of 2008 compared with breakeven results in the third quarter of 2007 and income of $39 million in the first nine months of 2007.
Marketing expenses increased in the third quarter and first nine months of 2008 compared with the corresponding periods of 2007, principally reflecting growth in energy marketing activities, higher credit card fees in retail gasoline operations and increased transportation costs.
The Corporation’s future Marketing and Refining earnings may be impacted by volatility in marketing and refining margins, competitive industry conditions, government regulatory changes, credit risk and supply and demand factors, including the effects of weather.
Corporate
After-tax corporate expenses were $42 million in the third quarter of 2008 compared with $28 million in the third quarter of 2007. After-tax corporate expenses were $114 million in the first nine months of 2008 compared with $91 million in the first nine months of 2007. The increases principally reflect higher employee related expenses, losses on pension related investments and higher professional fees.

Sales and Other Operating Revenues
Sales and other operating revenues increased by 53% in the third quarter and 52% in the first nine months of 2008 compared with the corresponding periods of 2007, primarily due to higher crude oil and refined product selling prices and increased sales of electricity. The increase in cost of goods sold principally reflects higher refined product costs and increased purchases of electricity.

Operating Activities: Net cash provided by operating activities, including changes in operating assets and liabilities, amounted to $4,072 million in the first nine months of 2008 compared with $2,701 million in 2007, reflecting increased earnings. In the first nine months of 2008, the Corporation received cash distributions of $50 million from HOVENSA compared with $200 million in 2007.

Financing Activities: In the first nine months of 2008, there was a net decrease in borrowings of $48 million from year-end 2007. Dividends paid were $130 million in the first nine months of 2008 ($127 million in the first nine months of 2007). During the first nine months of 2008, the Corporation received proceeds from the exercise of stock options totaling $111 million ($81 million in the same period of 2007).
Future Capital Requirements and Resources
The Corporation anticipates investing a total of approximately $5 billion in capital and exploratory expenditures during 2008. The Corporation expects that it will fund its 2008 operations, including capital expenditures, dividends, pension contributions and required debt repayments, with existing cash on-hand, cash flow from operations and its available credit facilities.

Commodity prices have decreased considerably subsequent to September 30, 2008. Such decreases will have an impact on the Corporation’s future revenues, earnings and cash flows. As a result, the Corporation will make an appropriate reduction to its 2009 capital and exploratory expenditures.
At September 30, 2008, the Corporation has $2,683 million of available borrowing capacity under its $3 billion syndicated revolving credit facility (the Revolver), substantially all of which is committed through May 2012. Outstanding borrowings under the Revolver were $317 million at September 30, 2008 compared with $220 million at December 31, 2007. In addition, at September 30, 2008, the Corporation had $315 million in outstanding borrowings and $534 million of outstanding letters of credit under its 364-day asset-backed credit facility (the Asset-backed Facility) compared with $250 million and $534 million, respectively, at December 31, 2007. The borrowings and outstanding letters of credit under the Asset-backed Facility were collateralized by approximately $1,200 million of Marketing and Refining accounts receivable. These receivables are not available to pay the general obligations of the Corporation before satisfaction of the Corporation’s obligations under the Asset-backed Facility. At September 30, 2008, the Corporation classified an aggregate of $515 million of borrowings under short-term credit facilities and the Asset-backed Facility as long-term debt, based on the available capacity under the Revolver. In October 2008, the Corporation renewed its Asset-backed Facility for an additional 364 days with a total capacity of $500 million, subject to available accounts receivable.
The Corporation also has a shelf registration under which it may issue additional debt securities, warrants, common stock or preferred stock.

A loan agreement covenant based on the Corporation’s debt to equity ratio allows the Corporation to borrow up to an additional $16.5 billion for the construction or acquisition of assets at September 30, 2008. The Corporation has the ability to borrow up to an additional $3.1 billion of secured debt at September 30, 2008 under the loan agreement covenants.
Off-Balance Sheet Arrangements
The Corporation has leveraged leases not included in its balance sheet, primarily related to retail gasoline stations that the Corporation operates. The net present value of these leases is $491 million at September 30, 2008. The Corporation’s September 30, 2008 debt to capitalization ratio would increase from 24.3% to 26.6% if the leases were included as debt.
The Corporation guarantees the payment of up to 50% of HOVENSA’s crude oil purchases from suppliers other than PDVSA. At September 30, 2008, the guarantee amounted to $342 million. This amount fluctuates based on the volume of crude oil purchased and related prices. In addition, the Corporation has agreed to provide funding up to a maximum of $15 million to the extent HOVENSA does not have funds to meet its senior debt obligations.

Change in Accounting Policies
Effective January 1, 2008, the Corporation adopted Financial Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements (FAS 157) for financial assets and liabilities that are required to be measured at fair value. FAS 157 established a framework for measuring fair value and requires disclosure of a fair value hierarchy (see Note 8, “Fair Value Measurements”). The impact of adopting FAS 157 was not material to the Corporation’s results of operations. Upon adoption, the Corporation recorded a reduction in the net deferred hedge losses reflected in accumulated other comprehensive income, which increased stockholders’ equity by approximately $190 million, after income taxes.
Recently Issued Accounting Standard
In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (FAS 160). FAS 160 changes the accounting for and reporting of noncontrolling interests in a subsidiary. The Corporation is currently evaluating the impact of adoption on its financial statements and, as required, will adopt the provisions of FAS 160 effective January 1, 2009.
Market Risk Disclosures
In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the prices of crude oil, natural gas, refined products and electricity, as well as to changes in interest rates and foreign currency values. In the disclosures that follow, these operations are referred to as non-trading activities. The Corporation also has trading operations, principally through a 50% voting interest in a trading partnership. These activities are also exposed to commodity risks primarily related to the prices of crude oil, natural gas and refined products.
Instruments: The Corporation primarily uses forward commodity contracts, foreign exchange forward contracts, futures, swaps, options and energy commodity based securities in its non-trading and trading activities. Generally, these contracts are widely traded instruments with standardized terms.
Value-at-Risk: The Corporation uses value-at-risk to monitor and control commodity risk within its trading and non-trading activities. The value-at-risk model uses historical simulation and the results represent the potential pre-tax loss in fair value over one day at a 95% confidence level. The model captures both first and second order sensitivities for options. The potential change in fair value based on commodity price risk is presented in the non-trading and trading sections below.

Accumulated other comprehensive income (loss) at September 30, 2008 included net after-tax unrealized deferred losses of $1,729 million related to crude oil contracts used as hedges of future Exploration and Production sales and derivatives used to manage risk in its Marketing activities. The pre-tax amount of any deferred hedge losses and gains is reflected in accounts payable and accounts receivable, respectively, and the related income tax impact is recorded as deferred income taxes on the balance sheet. The Corporation estimates that at September 30, 2008, the value-at-risk for commodity related derivatives used in non-trading activities was $139 million compared with $72 million at December 31, 2007.
In October 2008, the Corporation closed its Brent crude oil hedge positions by entering into offsetting contracts with the same counterparty covering 24,000 barrels per day from 2009 through 2012 at a per barrel price of $86.95 each year. The fourth quarter 2008 hedges were not affected by these transactions and are still open. The deferred after-tax loss as of the date the hedge positions were closed will be recorded in earnings as the contracts mature. As a result of entering into the offsetting contracts, the value-at-risk for commodity related derivatives used in non-trading activities as of September 30, 2008 would have been reduced to approximately $20 million.
Trading: In trading activities, the Corporation is exposed to changes in crude oil, natural gas and refined product prices. The trading partnership, in which the Corporation has a 50% voting interest, trades energy commodities and derivatives. The accounts of the partnership are consolidated with those of the Corporation. The Corporation also takes trading positions for its own account. The information that follows represents 100% of the trading partnership and the Corporation’s proprietary trading accounts.

The Corporation uses observable market values for determining the fair value of its trading instruments. In cases where actively quoted prices are not available, other external sources are used which incorporate information about commodity prices in actively quoted markets, quoted prices in less active markets and other market fundamental analysis. Internal estimates are based on internal models incorporating underlying market information such as commodity volatilities and correlations. The Corporation’s risk management department regularly compares valuations to independent sources and models. The following table summarizes the sources of fair values of derivatives used in the Corporation’s trading activities at September 30, 2008 (in millions):

Forward-Looking Information
Certain sections of Management’s Discussion and Analysis of Results of Operations and Financial Condition, including references to the Corporation’s future results of operations and financial position, liquidity and capital resources, capital expenditures, oil and gas production, tax rates, debt repayment, hedging, derivative and market risk disclosures and off-balance sheet arrangements include forward-looking information. Forward-looking disclosures are based on the Corporation’s current understanding and assessment of these activities and reasonable assumptions about the future. Actual results may differ from these disclosures because of changes in market conditions, government actions and other factors.

CONF CALL

Jay Wilson

Thank you, Katina. Good morning, everyone, and thank you for participating in our third quarter earnings conference all. Earnings release was issued this morning and appears on our Web site, 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 & 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 third quarter conference call. I will make a few brief comments after which John Rielly will review our financial results.

Net income for the third quarter of 2008 was $775 million, up from $395 million a year ago. Our results benefited from higher crude oil and natural gas selling prices and stronger refining and marketing margins, which more than offset the impact of higher upstream costs compared to those in the year ago quarter.

For the third quarter of 2008, Exploration and Production earned $699 million. Crude oil and natural gas production averaged 361,000 barrels of oil equivalent per day, which was 1% above the year ago period. Facilities downtime associated with Hurricanes Gustav and Ike in the Gulf of Mexico had the effect of reducing our third quarter production by an average of 11,000 barrels of oil equivalent per day. In the deepwater Gulf of Mexico, delays from the hurricanes in bringing back the operations of third party transportation infrastructure have curtailed full resumption of our production. We have thus far restored 4,000 barrels of oil equivalent per day and the remaining 30,000 barrels of oil equivalent per day is expected to be back on stream by January. Including the impact of the hurricanes, we expect that full year

2008 production will be approximately 380,000 barrels of oil equivalent per day, which is within our original range of our guidance.

With regard to our field developments, we continue to make good progress. JDA Phase 2 in the Gulf of Thailand and the Shenzi Field in the deepwater Gulf of Mexico are on track to start up in early 2009 and oil production from the Ujung Pangkah Field in Indonesia is on schedule to commence in mid-2009.

With regard to exploration, we have successfully completed our initial four well drilling campaign on Permit WA-390-P in the Northwest Shelf of Australia, in which Hess has a 100% working interest. Following the Glencoe and Briseis discoveries, we announced in September that our third well, Nimblefoot-1 was also a discovery and had encountered 93 feet of net gas pay. In October, we completed operations on our fourth well, Warrior-1, which had gas shows but failed to find commercial quantities of hydrocarbons. While additional drilling is required to delineate the block, we are encouraged by the results of the drilling program to date. Earlier in the year, we acquired a 3-D seismic survey over the WA-390-P Permit. We will now integrate this data with the recent well results to remap the block and define our 2009 drilling campaign that is currently scheduled to resume in the second half of next year. In September, we spudded deepwater exploration wells on Block 54 in Libya and Cape Three Points in Ghana. Drilling operations are ongoing and we expect to have results from both wells during the fourth quarter. Hess has a 100% interest in Block 54 and Cape Three Points. In Brazil, drilling operations recently commenced on Block BM-S-22, in which Hess has a 40% working interest. Results of this well are expected in the first quarter of 2009.

Turning to Marketing and Refining, we reported a profit of $161 million for the third quarter of 2008. Both our HOVENSA joint venture refinery and our Port Reading New Jersey facility posted higher earnings than a year ago as refinery problems in the Gulf Coast following Hurricanes Gustav and Ike resulted in higher refining margins. Marketing earnings were also higher than the year ago quarter primarily as a result of improvement in margins. Retail Marketing margins strengthened during the quarter while fuel volumes, on a per site basis, were down 7% reflecting weaker economic conditions. Year over year convenience store sales were flat, after being lower during the first half of this year. In Energy Marketing, sales volumes of fuel oil, natural gas and electricity all grew versus last year.

Finally, we are facing a global financial crisis that has decreased the demand for energy resulting in significant decreases in crude oil and natural gas prices. Crude oil, which was priced at over $140 per barrel in July, is now in the $60 per barrel range. Based upon this uncertain economic environment, we will make an appropriate reduction in our 2009 capital and exploratory expenditures to maintain our financial strength.

I will now turn the call over to John Rielly.

John Rielly

Thanks, John. Hello everyone. In my remarks today, I will compare third quarter 2008 results to the second quarter.

Net income for the third quarter of 2008 was $775 million compared with $900 million in the second quarter. Turning to Exploration and Production, income from Exploration and Production operations in the third quarter of 2008 was $699 million compared with $1,025 million in the second quarter. The after-tax components of the decrease are as follows, lower selling prices decreased earnings by $103 million, decreased sales volumes reduced earnings by $213 million. All other items net to a decrease in earnings of $10 million for an overall decrease in third quarter income $326 million. In the third quarter of 2008, our E&P operations were underlifted compared with production, resulting in decreased income in the quarter of approximately $25 million.

Turning to Marketing and Refining, the results of Marketing and Refining operations amounted to income of $161 million in the third quarter of 2008 compared with a loss of $52 million in the second quarter. Results of refining operations amounted to income of $46 million in the third quarter of 2008 compared with $3 million in the second quarter. The Corporation’s share of HOVENSA’s results, after income taxes, amounted to income of $32 million in the third quarter compared with a loss of $12 million in the second quarter, primarily reflecting higher margins. Port Reading earnings were $14 million in both the third and second quarters of 2008. Marketing results amounted to income of $110 million in the third quarter of 2008 compared with a loss of $40 million in the second quarter. Third quarter 2008 marketing results reflect higher margins in retail gasoline operations and energy marketing activities. Trading activities generated income of $5 million in the third quarter compared with a loss of $15 million in the second quarter.

Turning to Corporate, net corporate expenses amounted to $42 million in the third quarter of 2008 compared with $33 million in the second quarter, principally reflecting losses on pension related investments in the third quarter. After tax interest expense was $43 million in the third quarter compared with $40 million in the second quarter.

Turning to cash flow, net cash provided by operating activities in the third quarter, including a decrease of $211 million from changes in working capital was $1,205. The principal use of cash was capital expenditures of $1,277 million. All other items amounted to a decrease in cash flow of $27 million resulting in a net decrease in cash and cash equivalents in the third quarter of $99 million. At September 30, 2008, we had $1,380 million of cash and cash equivalents. Our available revolving credit capacity was $2,683 million at quarter end. Total debt was $3,932 million at September 30, 2008 and $3,980 million at December 31, 2007. The Corporation’s debt to capitalization ratio at September 30, 2008 was 24.3% compared with 28.9% at the end of 2007.

Turning to other matters, as noted on page 10 of our earnings release, subsequent to quarter end the Corporation closed its Brent crude oil hedge positions by entering into offsetting contracts covering 24,000 barrels per day of production from 2009 through 2012 at a per barrel price of $86.95 each year. The fourth quarter 2008 hedges were not affected by these transactions and are still open. The deferred after-tax loss as of the date the positions were closed will be reflected in earnings as the contracts mature. The estimated annual after tax loss from the closed positions will be approximately $335 million from 2009 through 2012. The pretax amounts will continue to be recorded as a reduction of revenue and allocated to the selling prices of our African production.

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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