Hess Corporation, Company Intelligence Report

Tuesday 24 July 2012, Amsterdam

Hess Has Been Exploring Unconventional Oil and Natural Gas Resources to Map Long Term Growth
Hess has been mapping unconventional oil and natural gas resources to fuel the future global energy demand. Hess’s existing development activities in the Bakken shale, coupled with its joint venture agreement with Newfield Exploration in the Marcellus Shale, has redirected the company towards the development of unconventional resources; this, in turn, helps the company to build a balanced and a diversified oil and gas portfolio. Apart from these two shales, the company has been expanding its acreage footprints in Eagle ford, Utica Shale and other unconventional plays in the US.

Hess’s expansion plan in the unconventional resources development is quite clear from the company’s aggressive capital expenditure (capex) program for the shales. The company planned the capex of $3.4 bn for unconventional sources in 2011, accounting for 47% of its total capex, this was focused on development activities in Bakken, Eagle Ford, Utica shale. Consequently, the company has grown in terms of scale, infrastructure and export capacity in the Bakken shale play, with an average daily production of 30,000boe/d in 2011.

In order to continue its focus on unconventional assets, Hess has a capex plan of $2.5 bn for 2012. Through this, the company plans to invest $1.9 bn in the Bakken shale to double its production from this shale in 2012. The company expects that its productions from the Bakken shale will reach 120,000boe/d by 2015. The company plans to drill 25 to 30 wells in the Eagle Ford shale in 2012, 7 and 22 appraisal wells in the Utica shale on 100% owned acreage and 50/50 joint venture acreage, respectively.

The company has focused on unconventional opportunities across the geographies and has allocated 37% of its 2012 capex plan towards unconventional resources, reflecting its long term plan of Oil’s upstream portfolio is more inclined toward natural gas since past few years. Natural gas contributed an average of 73.8% to the company’s total production during 2009–2011. This indicates that Forest Oil is highly dependent on natural gas to grow its revenue, which exposes the company to fluctuations in natural gas prices. The figure below shows the company’s production mix during 2009–2012.

Hess has a well diversified portfolio of shale assets with a substantial working interest in oil-rich shale assets. It holds 900,000 acres of working interest in the Bakken shale and is the operator of the shale. The company has plans to increase the rig count to 16 for further development of this shale. The company expects that its production from the Bakken shale will increase at the CAGR of more than 50% from 2010 to reach 120 Mboe/d by 2015. The figure shows the acreage position of Hess and peer group in the Bakken shale according to the latest available information.

In 2011, Hess reported an average production of 30 Mboe/d from the Bakken shale; this is expected to increase by 100% in 2012 to 60 Mboe/d. The company has consolidated its position as the second largest acreage holder in this shale, with enhanced infrastructure to support increased production capacity.

Additionally the company is also increasing its position in the oil-rich Eagle Ford shale, where it currently owns ~100,000 acres with a 90% working interest. The company has been consistently allocating capital for the development of this shale. With a good level of initial production, the company has planned to drill 25-30 wells in 2011 and 2012.

In line with its expansion plans to develop unconventional resources, in 2009 the company entered into a joint venture agreement with Newfield Exploration Company (Newfield) to explore 140,000 gross acres (70,000 net acreage) in the Marcellus shale.

Chesapeake Energy holds the highest acreage position of approximately 1,780,000 acres in the Marcellus shale play, followed by Royal Dutch Shell (850,000 acres) and Range Resources Corp. (750,000 acres).

In addition to this shale, Hess also acquired ~91,000 net acres independently and ~100,000 net acres in joint venture with Consol in the Utica shale. The company plans to delineate the oil, liquids and gas rich areas by drilling 29 appraisal wells in both owned and joint venture acreage in 2012.

The company’s increasing shale exposure, including the Bakken shale development coupled with other shale, will provide a significant development opportunity to expand its unconventional resource base and fuel its growth.