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After 'Difficult' 2011, Hess Embracing Unconventionals in 2012

Hess Corp.'s total crude oil and natural gas production fell in 2011 and it suffered a net loss in the fourth quarter, but company officials said Wednesday they are confident this year will be better as the company commits to developing its growing North American unconventional portfolio.

"Our financial position remains strong," CEO John Hess told financial analysts in a conference call. "2011 was a difficult year operationally, but important strategically."

Hess reported that it lost $131 million (minus 39 cents/share) in 4Q2011, compared with net income of $58 million (18 cents) in the year-ago period.

Last year total crude oil and gas production averaged 367,000 boe/d, which was down 11% from the 420,000 boe/d averaged in 2010. The CEO attributed most of last year's production issues to short-term setbacks, that included harsh winter weather and severe flooding in North Dakota's portion of the Bakken Shale (see Shale Daily, Aug. 2, 2011). It also suffered shortfalls internationally and in the Gulf of Mexico.

"We continue to make progress in restoring these lost production volumes," said the CEO. He added that the company predicts output would rebound to average between 370,000 and 390,000 boe/d this year.

Despite the setbacks, the CEO and Greg Hill, the company's president for worldwide exploration and production, were optimistic about 2012 and plans to spend $6.8 billion in global capital expenditures (capex), $2.5 billion of it on unconventional plays (see Shale Daily, Jan. 17).

"With the addition of our newly acquired acreage position in the Utica Shale, the company now has the critical mass for shale resources to make a significant contribution to our future production and reserve growth, with lower risk than has been the case historically," said the CEO.

According to Hill, the company plans to invest about $1.9 billion on development in the Utica in 2012, operating 16 drilling rigs and having five crews dedicated to hydraulic fracturing. Most of the wells drilled would be single laterals, spaced 1,280 acres apart and would be held by production.

"This program will enable us to get the vast majority of our core acreage [held by production] by [the end of] 2012," Hill said.

Hess is forecasting that net production from the Bakken Shale will average 60,000 boe/d in 2012 -- double the 2011 average of 30,000 boe/d -- and could double again to average 120,000 boe/d in 2015.

Meanwhile, the company continues to delineate its acreage position in the Eagle Ford Shale, operating a three rig program there and drilling between 25 and 30 wells in 2012.

In the Utica Shale, Hess plans to conduct an appraisal drilling program designed to delineate the areas rich in oil, gas and natural gas liquids (NGLs) -- both on its 100%-owned acreage and on the acreage where it holds a 50% interest with joint venture (JV) partner Consol Energy Inc. (see Shale Daily, Sept. 8, 2011). Hill said Hess plans to drill about seven wells on its Utica acreage with 22 wells in the Consol JV acreage.

The company expects to fund most of its capex through internally generated cash flow and asset sales. It also plans to hedge 120,000 b/d of oil -- about 45% of production forecast for 2012 -- at an average Brent (North Sea) price of $107.70/bbl to protect the company's cash flow.

Hess has been snapping up unconventional acreage for more than a year. Last September the company acquired almost 185,000 net acres in Ohio's Utica Shale and more than 18,000 undeveloped net acres in Louisiana's Haynesville Shale after agreeing to buy Marquette Exploration LLC for $750 million (see Shale Daily, Sept. 9, 2011). The company also agreed to pay Consol $593 million to acquire a half interest in nearly 200,000 net acres in eastern Ohio. In December 2010 Hess paid $1.05 billion in cash to acquire 167,000 net acres in the Bakken from TRZ Energy LLC (see Shale Daily, Dec. 30, 2010).

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