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Hess Asks For Patience in Bakken

As part of lackluster first quarter results released Wednesday, Hess Corp. said it doesn't expect to meet production targets in the Bakken Shale this year, but warned analysts to be patient with the company while it shifts its focus from international basins toward its three liquids rich shale plays in the United States.

Traditionally an international oil company focused on overseas ventures such as the North Sea and Africa, Hess recently announced plans to dedicate nearly 37% of its $6.8 billion global capital budget this year on unconventional plays, specifically the Bakken, Eagle Ford and Utica shales (see Shale Daily, Jan. 17).

"It's early stages in a major investment for our company," Hess CEO John Hess said. "It creates some volatility in being able to predict, both on the cost side and on the production side, but we're very confident that we're on a solid growth trajectory. As we moved forward in time, our unit costs with improve."

Hess Corp. saw first quarter profits fall 41% year over year, as lower crude oil sales and high operating costs offset higher commodity prices, according to the chief executive. The New York City-based company earned $545 million ($1.60/diluted share) in the first quarter, down from $929 ($2.74/diluted share) million in the first quarter of 2011. Even after adjusting for asset sales, though, Hess posted a 17% decline in profits year over year, to $509 million this year from $619 million in the first quarter of 2011.

Hess recently sold its Snohvit field in Norway and natural gas assets in the United Kingdom and plans to sell its St. Lucia oil terminal, partially to direct more capital toward shale. "Additional assets sales are in progress and we will provide updates as soon as details become available. We anticipate that proceeds from asset sales, along with internally generated cash flow, will fund the majority of our capital and exploratory expenditures in 2012," said Greg Hill, president of worldwide exploration and production.

Companywide, Hess produced 397,000 boe/d in the first quarter, down slightly from 399,000 boe/d in the first quarter of 2011. Through its hedging programs, it reported an average sales price of $89.92 per barrel for oil, up from $87.22 per barrel last year, and $6.23/Mcf for natural gas, up from $5.84/Mcf.

Although rising, Bakken production is falling short of expectations. Hess produced 42,000 b/d from the play in the first quarter and 47,000 b/d so far in April, compared to 25,000 b/d in the first quarter of 2011. "While we expect the monthly average to continue to increase throughout the rest of the year, we now expect the average for the full year may come in somewhat lower than our original estimate of 60,000 b/d," Hill said. The company blamed that performance on its drilling portfolio and on permitting bottlenecks. "We're focused on getting acreage held by production rather than focusing on sweet spots," Hill said, noting that Hess is currently drilling lower-performing targets in its portfolio required to hold acreage, but plans to increase its rig count by two to 16 this year to increase drilling of higher-producing prospects.

"We still have a backlog of wells to complete. That backlog is coming down," Hill said.

In the first quarter, Hess drilled 37 wells and completed 52 wells. Of its 142 wells in the play, 112 are producing and 86 have been online for at least a month and average initial production rates of 900 b/d.

That program is costly, Hill noted. The wells to hold acreage are typically the first in a pad and therefore the most expensive, while the wells in "sweet spots" require contracting additional rigs. Additionally, Hess saw higher operating costs because of a shortage of white sand proppant during the quarter. On top of that, Hess is currently spending between $400 million and $500 million per year on major infrastructure projects in the Bakken, such as its recent rail facility to ship volumes to Louisiana and its gas processing plant.

Those costs won't alleviate until late this year or early next year, Hill said, but pointed to encouraging signs, such as shorter drilling times quarter-over-quarter and expected declines in drilling costs.

Drilling activity in the Bakken/Sanish/Three Forks Basin area is up by about 31% from a year ago, according to NGI's Shale Daily Unconventional Rig Count. There were 226 rigs active in the play as of April 20, up from 173 during the same time a year ago.

While Hess is feeling growing pains in the Bakken, its still in its infancy in the Utica and Eagle Ford.

"We're still in very early stages of our appraisal of the Utica," Hill said. A recently completed appraisal well in Jefferson County, OH, that Hess acquired from Marquette Exploration LLC produced at an initial 30-day rate of 11 MMcf/d but is currently producing only around 4.5MMcf/d because of infrastructure bottlenecks. Hess plans to begins its six-well program through its joint venture with Consol Energy Inc. in mid-May (see Shale Daily, April 18).

Of the 38 wells Hess has drilled on its 109,000 net acres in the Eagle Ford, 29 are currently in production and 22 of those have 30-day initial production rates between 250 and 650 b/d. Those wells are currently 60% condensate and 40% oil, but Hess is in the process of exploring the various windows in its acreage.

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