UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2007

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

HESS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)

13-4921002
(I.R.S. Employer Identification Number)

1185 AVENUE OF THE AMERICAS, NEW YORK, N.Y.
(Address of Principal Executive Offices)
10036
(Zip Code)
(Registrant’s Telephone Number, Including Area Code is (212) 997-8500)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ      Accelerated Filer o      Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o       No þ

     At September 30, 2007, there were 319,449,308 shares of Common Stock outstanding.

 

 

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)
(In millions, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
REVENUES AND NON-OPERATING INCOME
Sales (excluding excise taxes) and other operating revenues		$	7,451			$	7,035			$	22,191			$	20,912
Non-operating income
Equity in income of HOVENSA L.L.C.			19				67				156				172
Gain on asset sales			—				—				21				369
Other, net			34				25				56				59
Total revenues and non-operating income			7,504				7,127				22,424				21,512
COSTS AND EXPENSES
Cost of products sold (excluding items shown separately below)			5,322				4,899				15,922				14,854
Production expenses			394				323				1,118				892
Marketing expenses			238				230				701				686
Exploration expenses, including dry holes and lease impairment			131				221				314				412
Other operating expenses			45				32				115				89
General and administrative expenses			133				115				406				354
Interest expense			59				49				185				150
Depreciation, depletion and amortization			365				323				1,046				871
Total costs and expenses			6,687				6,192				19,807				18,308
INCOME BEFORE INCOME TAXES			817				935				2,617				3,204
Provision for income taxes			422				639				1,295				1,643
NET INCOME		$	395			$	296			$	1,322			$	1,561
Less preferred stock dividends			—				12				—				36
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS		$	395			$	284			$	1,322			$	1,525
NET INCOME PER SHARE
BASIC		$	1.26			$	1.03			$	4.24			$	5.54
DILUTED			1.23				.94				4.15				4.95
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)			319.9				316.0				318.6				315.5
COMMON STOCK DIVIDENDS PER SHARE		$	.10			$	.10			$	.30			$	.30

See accompanying notes to consolidated financial statements.

PART I-FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In millions of dollars, thousands of shares)

		September 30,				December 31,
		2007				2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	565			$	383
Accounts receivable			3,076				3,873
Inventories			1,341				1,005
Other current assets			287				587
Total current assets			5,269				5,848
INVESTMENTS IN AFFILIATES
HOVENSA L.L.C.			1,011				1,055
Other			180				188
Total investments in affiliates			1,191				1,243
PROPERTY, PLANT AND EQUIPMENT
Total — at cost			25,122				21,980
Less reserves for depreciation, depletion, amortization and lease impairment			10,849				9,672
Property, plant and equipment — net			14,273				12,308
GOODWILL			1,225				1,253
DEFERRED INCOME TAXES			1,634				1,430
OTHER ASSETS			344				360
TOTAL ASSETS		$	23,936			$	22,442
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	4,440			$	4,803
Accrued liabilities			1,458				1,477
Taxes payable			458				432
Current maturities of long-term debt			46				27
Total current liabilities			6,402				6,739
LONG-TERM DEBT			3,939				3,745
DEFERRED INCOME TAXES			2,310				2,116
ASSET RETIREMENT OBLIGATIONS			826				824
OTHER LIABILITIES			950				871
Total liabilities			14,427				14,295
STOCKHOLDERS’ EQUITY
Preferred stock, $1.00 par value, 20,000 shares authorized
3% cumulative convertible series
Authorized — 330 shares
Issued — 284 shares ($14 million liquidation preference)			—				—
Common stock, $1.00 par value
Authorized — 600,000 shares
Issued — 319,449 shares at September 30, 2007; 315,018 shares at December 31, 2006			319				315
Capital in excess of par value			1,831				1,689
Retained earnings			8,933				7,707
Accumulated other comprehensive income (loss)			(1,574	)			(1,564	)
Total stockholders’ equity			9,509				8,147
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	23,936			$	22,442

PART I-FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In millions of dollars)

		Nine Months Ended
		September 30,
		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	1,322			$	1,561
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization			1,046				871
Exploratory dry hole costs			25				192
Lease impairment			50				79
Pre-tax gain on asset sales			(21	)			(369	)
Provision for deferred income taxes			66				286
Distributed earnings of HOVENSA L.L.C., net			44				128
Changes in other operating assets and liabilities			169				(36	)
Net cash provided by operating activities			2,701				2,712
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(2,773	)			(2,883	)
Proceeds from asset sales			93				444
Payments received on notes receivable			46				61
Other			(52	)			20
Net cash used in investing activities			(2,686	)			(2,358	)
CASH FLOWS FROM FINANCING ACTIVITIES
Debt with maturities of greater than 90 days
Borrowings			761				21
Repayments			(548	)			(31	)
Cash dividends paid			(127	)			(148	)
Employee stock options exercised			81				35
Net cash provided by (used in) financing activities			167				(123	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			182				231
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			383				315
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	565			$	546

See accompanying notes to consolidated financial statements.

PART I-FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.		Basis of Presentation
		The financial statements included in this report reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of Hess Corporation’s (the Corporation) consolidated financial position at September 30, 2007 and December 31, 2006, the consolidated results of operations for the three and nine month periods ended September 30, 2007 and 2006 and the consolidated cash flows for the nine month periods ended September 30, 2007 and 2006. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.
		Certain notes and other information have been condensed or omitted from these interim financial statements. These statements, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Corporation’s Form 10-K for the year ended December 31, 2006.
		Effective January 1, 2007, the Corporation adopted Financial Accounting Standards Board (FASB) Staff Position (FSP) AUG AIR-1, Accounting for Planned Major Maintenance Activities. This FSP eliminates the previously acceptable accrue-in-advance method of accounting for planned major maintenance. As a result, the Corporation retrospectively changed its method of accounting to recognize expenses associated with refinery turnarounds when such costs are incurred. The impact of adopting this FSP decreased previously reported third quarter 2006 net income by $1 million with no impact to diluted earnings per share and increased previously reported net income for the nine months ended September 30, 2006 by $4 million ($.02 per diluted share). The impact on the fourth quarter of 2006 was not material. In addition, previously reported net income for the year ended December 31, 2005 decreased by $16 million and retained earnings as of January 1, 2005 increased by $48 million. Prior period financial information in the financial statements and notes reflect this retrospective accounting change.
		Effective January 1, 2007, the Corporation adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes the financial statement recognition and measurement criteria for a tax position taken or expected to be taken in a tax return. FIN 48 also requires additional disclosures related to uncertain income tax positions. See note 9, “Income Taxes”, for further information.
2.		Acquisition
		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 for $371 million, of which $342 million was allocated to proved and unproved properties and the remainder to wells and equipment. The Genghis Khan development is part of the same geologic structure as the Shenzi development. This transaction was accounted for as an acquisition of assets.

PART I-FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.		Inventories
		Inventories consist of the following (in millions):

4.		Refining Joint Venture
		The Corporation accounts for its investment in HOVENSA L.L.C. (HOVENSA) using the equity method.
		Summarized financial information for HOVENSA follows (in millions):

(*)		Reflects the impact of the retrospective adoption of a new accounting pronouncement related to expensing the costs of refinery turnarounds.

          During the first nine months of 2007 and 2006, the Corporation received cash distributions from HOVENSA of $200 million and $300 million, respectively.

PART I-FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.		Capitalized Exploratory Well Costs
		The following table discloses the net changes in capitalized exploratory well costs pending determination of proved reserves for the nine months ended September 30, 2007 (in millions):

		The preceding table excludes costs related to exploratory dry holes of $25 million, which were incurred and subsequently expensed in 2007. Capitalized exploratory well costs greater than one year old after completion of drilling were $130 million as of September 30, 2007 and $71 million as of December 31, 2006.
6.		Long-Term Debt and Capitalized Interest
		At September 30, 2007, the Corporation classified an aggregate of $457 million of borrowings under short-term credit facilities as long-term debt, based on the available capacity under the $3 billion syndicated revolving credit facility, substantially all of which is committed through May 2012.
		Capitalized interest on development projects amounted to the following (in millions):

7.		Foreign Currency
		Pre-tax foreign currency gains (losses) amounted to the following (in millions):

PART I-FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

8.		Retirement Plans
		Components of net periodic pension cost consisted of the following (in millions):

		In 2007, the Corporation expects to contribute approximately $75 million to its funded pension plans and $15 million to the trust established for its unfunded pension plan. Through September 30, 2007, the Corporation contributed $58 million to its pension plans.
9.		Income Taxes
		The provision for income taxes consisted of the following (in millions):

		The Corporation adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, effective January 1, 2007. The impact of adoption was not material to the Corporation’s financial position, results of operations or cash flows. A deferred tax asset of $28 million related to an acquired net operating loss carryforward was recorded in conjunction with adopting FIN 48 and goodwill was reduced.
		At January 1, 2007, the Corporation had $142 million of unrecognized income tax benefits, of which $76 million, if recognized, would affect the Corporation’s effective income tax rate. The Corporation has elected to classify interest and penalties associated with uncertain tax positions as income tax expense.
		The Corporation and its subsidiaries file income tax returns in the United States and various foreign jurisdictions. The Corporation is no longer subject to examinations by income tax authorities in most jurisdictions for years prior to 2002.
		In July 2006, the United Kingdom increased by 10% the supplementary tax on petroleum operations with an effective date of January 1, 2006. As a result, in the third quarter of 2006 the Corporation recorded a charge of $105 million consisting of an incremental income tax of $60 million on operating earnings for the first half of 2006 and $45 million to adjust the United Kingdom deferred tax liability.

PART I-FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

10.		Weighted Average Common Shares
		The weighted average number of common shares used in the basic and diluted earnings per share computations are as follows (in thousands):

11.		Share-based Compensation
		Share-based compensation expense was as follows (in millions):

		The Corporation issued 3,025,800 stock options and 1,015,350 shares of restricted stock in the first nine months of 2007 and 2,804,100 stock options and 957,600 shares of restricted stock in the first nine months of 2006.
12.		Comprehensive Income
		Comprehensive income (loss) was as follows (in millions):

At September 30, 2007, accumulated other comprehensive income (loss) included after-tax unrealized deferred losses of $1,396 million primarily related to crude oil contracts used as hedges of future Exploration and Production sales. The pre-tax amount of deferred hedge losses is reflected in accounts payable and the related income tax benefits are recorded as deferred tax assets on the balance sheet.

PART I-FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

13.		Segment Information
		The Corporation’s results by operating segment were as follows (in millions):

          Identifiable assets by operating segment were as follows (in millions):

PART I-FINANCIAL INFORMATION (CONT’D.)

		Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.
		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 $395 million for the third quarter of 2007, compared with $296 million in the third quarter of 2006.

     Exploration and Production: E&P earnings were $414 million for the third quarter of 2007, compared with $206 million in the third quarter of 2006. Worldwide crude oil and natural gas production was 357,000 barrels of oil equivalent per day (boepd) in the third quarter of 2007 compared with 352,000 boepd in the same period of 2006. The Corporation anticipates that its production for the full year of 2007 will average between 375,000 and 380,000 boepd.

     The following is an update of recent Exploration and Production activities since the second quarter of 2007:

	•		In September, gas production commenced at the Snohvit Field located offshore Norway (Hess 3.26%) and in early October crude oil production commenced at the Genghis Khan Field in the Gulf of Mexico (Hess 28%).
	•		On October 10, the Corporation completed facilities installation work at Block A-18 of the Joint Development Area of Malaysia and Thailand (JDA) (Hess 50%) required for Phase 2 of the development. Production has resumed at the development after being temporarily suspended for 50 days for the upgrade.
	•		During the third quarter, exploration drilling commenced at the Bob North prospect in the Mississippi Canyon area (Hess 30%) in the deepwater Gulf of Mexico and is expected to be completed in the fourth quarter. In October, the Corporation resumed operations at the Pony discovery (Hess 100%), after it was temporarily suspended for a required drilling rig inspection, and commenced drilling an appraisal well at the Tubular Bells discovery (Hess 20%).
	•		In September, the Corporation secured a new drillship for use in its global deepwater exploration and development activities beginning in the middle of 2009. The rig will be equipped to drill in up to 7,500 feet of water.  The Corporation will make total payments of approximately $950 million under this five year contract.

Marketing and Refining: M&R earnings were $46 million in the third quarter of 2007 compared with $152 million in the corresponding period of 2006. The decrease principally reflects lower margins and less favorable trading results. During the third quarter of 2007, the Corporation received a cash distribution of $75 million from HOVENSA.

PART I-FINANCIAL INFORMATION (CONT’D.)

Results of Operations

     The after-tax results by major operating activity were as follows (in millions, except per share data):

     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.

Items Affecting Comparability Between Periods

     The following items of income (expense), on an after-tax basis, affect the comparability of earnings between periods (in millions):

     In the third quarter of 2007, the Corporation recorded charges totaling $33 million ($64 million before taxes) for production imbalances resulting from adjustments to prior meter readings at two offshore fields. The pre-tax adjustments are reflected as a reduction to sales and other operating revenues. During the nine months ended September 30, 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.

     In July 2006, the United Kingdom increased by 10% the supplementary tax on petroleum operations with an effective date of January 1, 2006. As a result, in the third quarter of 2006 the Corporation recorded a charge of $105 million consisting of an incremental income tax of $60 million on operating earnings for the first half of 2006 and $45 million to adjust the United Kingdom deferred tax liability. For the nine months ended September 30, 2006, only the one-time adjustment to the deferred tax liability of $45 million represents an item affecting comparability of earnings between periods.

PART I-FINANCIAL INFORMATION (CONT’D.)

Results of Operations (continued)

     The gain from asset sales for the nine months ended September 30, 2006 relates to the sale of certain United States producing properties in the Permian Basin and along the Gulf Coast. The results for the first nine months of 2006 also include a charge for vacated leased office space.

Comparison of Results

Exploration and Production

     Following is a summarized income statement of the Corporation’s Exploration and Production operations (in millions):

*		Amounts differ from E&P operating revenues in Note 13 “Segment Information” primarily due to the exclusion of sales of hydrocarbons purchased from unrelated third parties.

     After considering the items affecting comparability between periods, the remaining changes in Exploration and Production earnings are primarily attributable to changes in selling prices, sales volumes, operating costs, exploration expenses and income taxes, as discussed below.

PART I-FINANCIAL INFORMATION (CONT’D.)

Results of Operations (continued)

 

Selling prices: Higher average realized selling prices of crude oil and natural gas increased Exploration and Production revenues by approximately $150 million in the third quarter of 2007 compared with 2006. Average selling prices were comparable in the first nine months of 2007 and 2006. The Corporation’s average selling prices were as follows:

     Crude oil hedges reduced Exploration and Production earnings by $60 million and $155 million ($101 million and $258 million before income taxes) in the third quarter and first nine months of 2007. Crude oil hedges reduced Exploration and Production earnings by $81 million and $228 million ($128 million and $357 million before income taxes) in the third quarter and first nine months of 2006.

Production and sales volumes: The Corporation’s crude oil and natural gas production, on a barrel of oil equivalent basis, was 357,000 boepd in the third quarter of 2007 compared with 352,000 boepd in the same period of 2006. Production in the first nine months of 2007 was 372,000 boepd compared with 356,000 boepd in the first nine months of 2006. The Corporation anticipates production growth in the fourth quarter which will primarily come from increases in the Cromarty, Everest, Lomond and Schiehallion fields in the United Kingdom, the Okume Complex in Equatorial Guinea, Block A-18 of the JDA and the start of production from the Genghis Khan field in the Deepwater Gulf of Mexico and the Snohvit field in Norway. The Corporation anticipates that its production for the full year of 2007 will average between 375,000 boepd and 380,000 boepd.

PART I-FINANCIAL INFORMATION (CONT’D.)

Results of Operations (continued)

     The Corporation’s net daily worldwide production by region was as follows (in thousands):

*		Natural gas production is converted assuming six Mcf equals one barrel.

     United States: Crude oil and natural gas production was lower in the third quarter and first nine months of 2007, principally due to natural decline and asset sales.

     Europe: Crude oil production in the third quarter and first nine months of 2007 was lower than the comparable periods of 2006, reflecting natural decline, facilities work on three North Sea fields, and the sale of the Corporation’s remaining 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 the third quarter of 2007 was principally due to a decision to reduce production at the Cromarty field in response to market conditions in the United Kingdom, lower nominations related to the shut-down of a non-operated pipeline in the North Sea and natural decline. Lower natural gas production in the first nine months of 2007 was also due to the non-operated pipeline shut-down and natural decline, partially offset by new production from the Atlantic and Cromarty fields in the United Kingdom which commenced in June 2006.

     Africa: Higher crude oil production in the third quarter and first nine months of 2007 was primarily due to the start-up of the Okume Complex in Equatorial Guinea in December 2006.

     Asia and other: Crude oil production increased in the third quarter and first nine months of 2007, reflecting a combination of an increased entitlement and greater production in Azerbaijan. Higher natural gas production was principally due to new production from the Phu Horm onshore gas project (now called Sinphuhorm) in Thailand which commenced in November 2006 and new production from the Pangkah field in Indonesia which commenced in the second quarter of 2007. These increases were partially offset by a planned shut-down of Block A-18 in the Joint Development Area of Malaysia and Thailand to install facilities required for Phase 2 gas sales.

PART I-FINANCIAL INFORMATION (CONT’D.)

Results of Operations (continued)

     Sales volumes: Crude oil and natural gas sales volumes were comparable in the third quarter of 2007 and 2006. Higher sales volumes increased revenue by approximately $280 million in the first nine months of 2007 compared with 2006.

Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, increased by $89 million and $276 million in the third quarter and first nine months of 2007 compared with the corresponding periods of 2006. The increases principally reflect higher production volumes, increased costs of services and higher production taxes. Depreciation, depletion and amortization charges were higher in 2007 reflecting higher production volumes and per barrel rates.

Exploration expenses: Exploration expenses were $131 million and $314 million in the third quarter and first nine months of 2007, decreases of $90 million and $98 million, respectively, from the third quarter and first nine months of 2006. The changes principally reflect the timing of exploration drilling and seismic studies. The Corporation’s planned exploratory drilling activities are expected to increase in the fourth quarter.

Other: Exploration and Production foreign currency gains and (losses) were as follows (in millions):

     The effective income tax rate for Exploration and Production operations in the first nine months of 2007 was 50% compared with 53% in the first nine months of 2006.

     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

     Earnings from Marketing and Refining activities amounted to $46 million in the third quarter of 2007 compared with $152 million in the third quarter of 2006. Earnings from Marketing and Refining activities amounted to $269 million in the first nine months of 2007 compared with $327 million in the first nine months of 2006. 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 earnings were $25 million in the third quarter of 2007 and $166 million in the first nine months of 2007 compared with $63 million and $195 million in the corresponding periods of 2006. The Corporation’s share of HOVENSA’s earnings, after income taxes, was $12 million in the third quarter of 2007 compared with $41 million in the third quarter of 2006. The decrease was due to lower refining margins. The Corporation’s share of HOVENSA’s earnings, after income taxes, was $96 million in the first nine months of 2007 compared with $105 million in 2006. The decrease was due to the cost of expensing the coker turnaround in the second quarter, partially offset by higher refining margins in the first half of 2007.

PART I-FINANCIAL INFORMATION (CONT’D.)

Results of Operations (continued)

     Interest income on the PDVSA note after income taxes was $2 million in the third quarter and $5 million in the first nine months of 2007 compared with $2 million in the third quarter and $7 million in the first nine months of 2006. At September 30, 2007, the remaining balance of the PDVSA note was $91 million, which is scheduled to be fully repaid by February 2009.

     Port Reading’s after tax earnings were $10 million in the third quarter and $62 million in the first nine months of 2007 compared with $19 million in the third quarter and $81 million in the first nine months of 2006.

     The following table summarizes refinery capacity and utilization rates:

          Marketing: Marketing earnings, which consist principally of energy marketing and retail gasoline operations, were $21 million in the third quarter of 2007 and $64 million in the first nine months of 2007 compared with $63 million in the third quarter and $91 million in the first nine months of 2006. Total refined product sales volumes were 447,000 barrels per day in the first nine months of 2007 and 455,000 barrels per day in the first nine months of 2006.

     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 of the trading partnership, were breakeven in the third quarter of 2007 compared with income of $26 million in the third quarter of 2006. After-tax income from trading activities amounted to $39 million and $41 million in the first nine months of 2007 and 2006, respectively.

     Marketing expenses increased slightly in the third quarter and first nine months of 2007 compared with the corresponding periods of 2006, reflecting the increased number of retail sites, growth in energy marketing activities, partially offset by lower costs of the trading partnership.

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

PART I - FINANCIAL INFORMATION (CONT’D.)

Results of Operations (continued)

Corporate

     After-tax corporate expenses were $28 million in the third quarter of 2007 compared with $31 million in the third quarter of 2006. After-tax corporate expenses were $91 million in the first nine months of 2007 compared with $83 million in the first nine months of 2006. The increase principally reflects higher employee related expenses, including stock based compensation.

Interest

     Interest expense was as follows (in millions):

     The decrease in capitalized interest in 2007 reflects the completion of several development projects in 2007 and the latter portion of 2006. After-tax interest expense for the full year of 2007 is expected to be in the range of $160 to $165 million.

Sales and Other Operating Revenues

     Sales and other operating revenues increased by 6% in the third quarter and first nine months of 2007 compared with the corresponding periods of 2006. The increases are primarily due to higher selling prices and sales volumes of crude oil, higher refined product selling prices and increased sales volumes of electricity. The increase in cost of goods sold principally reflects higher refined product costs and increased purchases of electricity.

Liquidity and Capital Resources

     The following table sets forth certain relevant measures of the Corporation’s liquidity and capital resources (in millions, except ratios):

*		Total debt as a percentage of the sum of total debt plus stockholders’ equity.

PART I - FINANCIAL INFORMATION (CONT’D.)

Liquidity and Capital Resources (Continued)

Cash Flows: The following table sets forth a summary of the Corporation’s cash flows (in millions):

     Operating Activities: Net cash provided by operating activities, including changes in operating assets and liabilities, amounted to $2,701 million in the first nine months of 2007 compared with $2,712 million in 2006. The change reflects lower earnings and a reduced distribution from HOVENSA, offset by increased cash flow from changes in working capital accounts. In the first nine months of 2007, the Corporation received a cash distribution of $200 million from HOVENSA compared with $300 million in 2006.

     Investing Activities: The following table summarizes the Corporation’s capital expenditures (in millions):

     Capital expenditures in the first nine months of 2007 include the acquisition of a 28% interest in the Genghis Khan Field in the deepwater Gulf of Mexico for $371 million. Investing activities in the nine months of 2006 include payments of $260 million related to the Corporation’s re-entry into Libya and $413 million to acquire a 55% working interest in the West Med Block in Egypt.

     In the first nine months of 2007, proceeds from the sale of the Corporation’s interests in the Scott and Telford fields, located in the United Kingdom were $93 million. In the first nine months of 2006, proceeds from the sale of the Corporation’s interests in certain producing properties in the Permian Basin and onshore Gulf Coast in Texas and New Mexico were $444 million.

     Financing Activities: In the first nine months of 2007, there was a net increase in borrowings of $213 million. Dividends paid were $127 million in the first nine months of 2007 ($148 million in the first nine months of 2006). During the first nine months of 2007, the Corporation received proceeds from the exercise of stock options totaling $81 million ($35 million in the same period of 2006).

PART I - FINANCIAL INFORMATION (CONT’D.)

Liquidity and Capital Resources (Continued)

Future Capital Requirements and Resources: The Corporation anticipates investing a total of approximately $4.2 billion, excluding additional acquisitions, if any, in capital and exploratory expenditures during 2007. The Corporation expects that it will fund its 2007 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.

     At September 30, 2007, the Corporation has $2,618 million of available borrowing capacity under its $3 billion syndicated revolving credit facility, substantially all of which is committed through May 2012. Outstanding borrowings under the revolving credit facility were $382 million at September 30, 2007 ($300 million at December 31, 2006).

     At September 30, 2007, the Corporation had $57 million of outstanding borrowings under its 364-day asset-backed credit facility ($318 million at December 31, 2006). This borrowing and outstanding letters of credit under this facility of $509 million were collateralized by approximately $966 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 credit facility. The Corporation’s total borrowing capacity under the asset-backed credit facility is $570 million, subject to the availability of sufficient levels of eligible receivables.

     At September 30, 2007, the Corporation classified an aggregate of $457 million of borrowings under short-term credit facilities as long-term debt, based on the available capacity under the $3 billion syndicated revolving credit facility.

     The Corporation has additional unused lines of credit of approximately $486 million, primarily for letters of credit, under uncommitted arrangements with banks. The Corporation also has a shelf registration under which it may issue additional debt securities, warrants, common stock or preferred stock.

Outstanding letters of credit were as follows (in millions):

     Loan agreement covenants allow the Corporation to borrow up to an additional $11.9 billion for the construction or acquisition of assets at September 30, 2007. The Corporation has the ability to borrow up to an additional $2.8 billion of secured debt at September 30, 2007 under the loan agreement covenants. At September 30, 2007 the maximum amount of dividends or stock repurchases that can be paid from borrowings under the loan agreement covenants is $4.4 billion.

     Credit Ratings: There are three major credit rating agencies that rate the Corporation’s debt. All three agencies have currently assigned an investment grade rating to the Corporation’s debt. The interest rates and facility fees charged on the Corporation’s borrowing arrangements and margin requirements from non-trading and trading counterparties are subject to adjustment if the Corporation’s credit rating changes.

PART I - FINANCIAL INFORMATION (CONT’D.)

Liquidity and Capital Resources (Continued)

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 $489 million at September 30, 2007. The Corporation’s September 30, 2007 debt to capitalization ratio would increase from 29.5% to 32% 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, 2007, the guarantee amounted to $264 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.

Contractual Obligations: In the third quarter of 2007, the Corporation entered into a five-year operating lease agreement for a deepwater drillship and related services. Under the terms of the new agreement, the rig will be delivered in the middle of 2009, at which time the Corporation will commence lease payments ratably over the subsequent five years totaling approximately $950 million.

Changes in Accounting Policies

     Effective January 1, 2007, the Corporation adopted Financial Accounting Standards Board (FASB) Staff Position (FSP) AUG AIR-1, Accounting for Planned Major Maintenance Activities. This FSP eliminates the previously acceptable accrue-in-advance method of accounting for planned major maintenance. As a result, the Corporation retrospectively changed its method of accounting to recognize expenses associated with refinery turnarounds when such costs are incurred. The impact of adopting this FSP decreased previously reported third quarter 2006 net income by $1 million with no impact to diluted earnings per share and increased previously reported net income for the nine months ended September 30, 2006 by $4 million ($.02 per diluted share). The impact on the fourth quarter of 2006 was not material. In addition, previously reported 2005 net income decreased by $16 million and retained earnings as of January 1, 2005 increased by $48 million. Prior period financial information in the financial statements and notes reflect this retrospective accounting change.

     Effective January 1, 2007, the Corporation adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes the financial statement recognition and measurement criteria for a tax position taken or expected to be taken in a tax return. The impact of adoption was not material to the Corporation’s financial position, results of operations or cash flows. FIN 48 also requires additional disclosures related to uncertain income tax positions. At January 1, 2007, the Corporation had uncertain tax positions of $142 million.

Recently Issued Accounting Standard

     In September 2006, the Financial Accounting Standards Board (FASB) issued FAS No. 157, Fair Value Measurements, which the Corporation will adopt effective January 1, 2008. FAS No. 157 establishes requirements for determining fair value, which apply broadly to financial and non-financial assets and liabilities measured at fair value under other authoritative accounting pronouncements. Additionally, the standard requires increased disclosure of the methods of determining fair value. The Corporation is continuing to evaluate the impact of adopting FAS No. 157 and developments at the FASB, which could potentially impact the requirements of this standard.

PART I - FINANCIAL INFORMATION (CONT’D.)

Market Risk Disclosure

     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 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.

Non-Trading: The Corporation’s Exploration and Production segment uses futures and swaps to fix the selling prices of a portion of its future production and the related gains or losses are an integral part of its selling prices. Following is a summary of the Corporation’s outstanding crude oil hedges at September 30, 2007:

		Brent Crude Oil
		Average				Thousands
		Selling				of Barrels
		Price				per Day
Maturities
2007		$		25.85				24
2008				25.56				24
2009				25.54				24
2010				25.78				24
2011				26.37				24
2012				26.90				24

     There were no hedges of WTI crude oil or natural gas production at September 30, 2007. As market conditions change, the Corporation may adjust its hedge positions. The Corporation also markets energy commodities including refined petroleum products, natural gas and electricity. The Corporation uses derivatives to manage the risk in its marketing activities.

     Accumulated other comprehensive income (loss) at September 30, 2007 includes after-tax unrealized deferred losses of $1,396 million primarily related to crude oil contracts used as hedges of Exploration and Production sales. The Corporation estimates that at September 30, 2007, the value-at-risk for commodity related derivatives used in non-trading activities was $54 million ($62 million at December 31, 2006). The results may vary from time to time as hedge levels change.

     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.

PART I - FINANCIAL INFORMATION (CONT’D.)

Market Risk Disclosure (Continued)

Total realized gains for the first nine months of 2007 amounted to $358 million ($640 million of realized gains for the first nine months of 2006). The following table provides an assessment of the factors affecting the changes in fair value of trading activities (in millions):

     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, 2007 (in millions):

     The Corporation estimates that at September 30, 2007, the value-at-risk for trading activities was $13 million ($17 million at December 31, 2006). The results may change from time to time as strategies change to capture potential market rate movements.

     The following table summarizes the fair values of net receivables relating to the Corporation’s trading activities and the credit ratings of counterparties at September 30, 2007 (in millions):