Flashback: Hess Earnings Transcript 3Q13

Not proofread; still needs to be edited.

With the recent reorganization at Hess, it was interesting to re-look at the 3Q13 earnings conference call last October.

Some data points from the conference call regarding the Bakken.

Hess says the company pins its growth on (and in the order they listed):

• the Bakken (70K bopd), 
• the Valhall Field in Norway (37K bopd), 
• the North Malay Basin Project in Malaysia (natural gas), 
• the Tubular Bells Field in the Gulf of Mexico, (25K bopd); and, 
• the Utica Shale in Ohio (wet gas).

Some data points:

• net production from the Bakken averaged 71,000 bopd in 3Q13, up 14% from 3Q12
• full production forecast for 2013: 64,000 to 70,000 bopd
• well cost declined 18% from a year ago, down to $7.8 million
• Hess is selling non-core assets to transition to a focused pure play E&P company
• Hess with planned downtime in the Bakken, 4Q13, to complete the Tioga Gas Plant expansion
• productivity per Bakken well among the highest in the industry
• brought 50 operated wells to production: 30 MB; 20 TF
• full year: expect 170 wells -- 2/3rds MB; 1/3rd TF
• Tioga CBR: 54K bopd to higher-value markets
• Tioga Gas Plant Expansion: wet gas capacity to increase from 120 to 250 million cubic feet/day (more than double); will commence at the end of 2013 
• a "5 and 4"configuration yields about 2,500 future drilling locations and about 1 billion bbls of  recoverable resource (Q&A)
• because of the Three Forks, that long-term 120,000 bopd guidance is going to go up; revised guidance will be presented in the annual report (Q&A)
• obviously with "7 and 6" those numbers go up again (Q&A)
• Hess activity in the Bakken will accelerate: 2013 - 14 rigs; plan to increase that to 17 rigs in 2014; will step it up to 20 rigs/year and potentially higher after that
• currently running 9 unit trains; but could increase (Q&A)
• testing some TF second bench in 2014 (Q&A)
• not optimistic about TF third or fourth bench; might test it in 2015, at the earliest (Q&A)

Downspacing/infills:

As a result of our continuing delineation in Three Forks, both the productivity and aerial extent of the formation has increased above our previous estimates. In addition, the results of our infill pilot programs and reservoir modeling have led us to believe both the Middle Bakken and Three Forks can be further downspaced. We believe that it will be economically attractive to increase the well count and the majority of our Middle Bakken acreage from 5 wells per 1,280 drilling -- acre drilling unit to 7.

Similarly in those areas where the Three Forks is perspective, we believe the well count can be increased from 4 wells per 1,280 acre drilling unit to 6. Over the next 12 months, we plan to install 17 well pads in this new configuration to obtain additional data before making a final decision to move to this tighter spacing. As we make further progress in our planning and field testing, we will provide updated guidance for production, drilling locations and resource potential.

Q&A, back to downspacing:

Our base design has been 9 wells per 1,280-acre DSU. So that's 5 wells in the Middle Bakken, and 4 on the Three Forks. So that yields effectively a 250- and 320-acre well spacing, respectively. Now based on the results of our infill pilot programs, we think that we can further downspace with minimal interference. So over the next 12 months, we're going to install tighter spacing at 17 of our DSUs, with 7 wells in the Middle Bakken and 6 in the Three Forks. So this will bring the spacing down to 180 acres in the Middle Bakken and 210 acres in the Three Forks. So again, moving from 250 to 180 in the Middle Bakken and 320 to 210 in the Three Forks.

And with further questioning, Hess says it would go even "tighter." So two points to be made: Hess will increase the number of drilling units where they move to tighter spacing (13 wells/1280) but in addition, the company is considering more than 13 wells/1280 in some drilling units.

It is interesting to note that Valhall is not working out as well as expected. When you add that to the mix, the Bakken becomes even more critical for Hess.

Of the five important plays Hess mentions above, three are oil, and two are gas. Of the three oil plays, one is not working out as well as expected and the third is just coming on line.

Then there is a very, very long response to a question regarding the lower benches of the Three Forks. I won't go through that here; best for interested readers to read it for themselves. Having said that, I cannot resist a few quotes from Hess:

Results on the Three Forks have been great. So results to date have exceeded our expectations. And in fact, our well results, coupled with the publicly available production data, show that our Three Forks acreage is among the best in the play. So a little context on where we are in the Three Forks. Regarding the benches, we do see several discrete thicker packages in certain areas of the field, where we will plan to test whether or not more than one well in the Three Forks actually can deliver superior returns.

Later in the Q&A, Hess seems to be a bit vague on just how "excited" they are about the lower benches. I've said the same thing: I think the jury is still out on how well the lower benches will do. I know Mike Filloon is very, very bullish on the lower benches. I think the jury is still out. The readers should read for themselves; I don't quite agree with Hess on this one; I think CLR would disagree, also.

Likewise, in the Q&A, there's a nice bit about CBR.

There's also some good information on pricing regarding Hess' Bakken oil. It's quite enlightening and quite optimistic.

They were a bit vague on "cash cost" in Q&A and I will let the readers sort it out for themselves:

... just to give you the same guidance is that on the cash cost, which includes production and severance taxes in there, the Bakken is slightly below our portfolio average there from all-in cash costs there. Going forward, we're looking at -- we're continuing to add information there. Obviously, you know we've got the whole, we're looking at the midstream and the marketing up there in North Dakota. So it's something we'll still be considering as we move forward to provide that information.

A nice reminder for folks: when the gas plant shuts down for a week or so (as part of the expansion project), a bit more gas will be flared in North Dakota -- one should expect to see that in late November, early December.