hes-10q_20180331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

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

For the quarter ended March 31, 2018

or

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

For the transition period from                      to                     

Commission File Number 1-1204

 

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 preceding 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      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

At March 31, 2018, there were 308,055,101 shares of Common Stock outstanding.

 

 

 

 


 

HESS CORPORATION

Form 10-Q

TABLE OF CONTENTS

 

Item

No.

 

Page

Number

 

PART I - FINANCIAL INFORMATION

 

1.

Financial Statements (Unaudited)

 

 

Consolidated Balance Sheet at March 31, 2018, and December 31, 2017

2

 

Statement of Consolidated Income for the Three Months Ended March 31, 2018, and 2017

3

 

Statement of Consolidated Comprehensive Income for the Three Months Ended March 31, 2018, and 2017

4

 

Statement of Consolidated Cash Flows for the Three Months Ended March 31, 2018, and 2017

5

 

Statement of Consolidated Equity for the Three Months Ended March 31, 2018, and 2017

6

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

Note 1 - Basis of Presentation

7

 

Note 2 - Revenue

8

 

Note 3 - Debt

10

 

Note 4 - Inventories

10

 

Note 5 - Capitalized Exploratory Well Costs

11

 

Note 6 - Hess Infrastructure Partners LP

11

 

Note 7 - Severance Costs

11

 

Note 8 - Retirement Plans

12

 

Note 9 - Weighted Average Common Shares

12

 

Note 10 - Guarantees and Contingencies

13

 

Note 11 - Segment Information

15

 

Note 12 - Financial Risk Management Activities

15

 

Note 13 - Subsequent Event

18

 

 

 

2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

3.

Quantitative and Qualitative Disclosures about Market Risk

32

4.

Controls and Procedures

32

 

 

 

 

PART II - OTHER INFORMATION

 

1.

Legal Proceedings

33

2.

Share Repurchase Activities

33

6.

Exhibits

34

 

Signatures

35

 

Certifications

 

 

 

Unless the context indicates otherwise, references to “Hess”, the “Corporation”, “Registrant”, “we”, “us”, “our” and “its” refer to the consolidated business operations of Hess Corporation and its subsidiaries.


PART I - FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements.

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In millions,

 

 

 

except share amounts)

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,726

 

 

$

4,847

 

Accounts receivable:

 

 

 

 

 

 

 

 

From contracts with customers

 

 

729

 

 

 

677

 

Joint venture and other

 

 

268

 

 

 

347

 

Inventories

 

 

239

 

 

 

232

 

Other current assets

 

 

52

 

 

 

54

 

Total current assets

 

 

5,014

 

 

 

6,157

 

Property, plant and equipment:

 

 

 

 

 

 

 

 

Total — at cost

 

 

32,906

 

 

 

32,504

 

Less: Reserves for depreciation, depletion, amortization and lease impairment

 

 

16,725

 

 

 

16,312

 

Property, plant and equipment — net

 

 

16,181

 

 

 

16,192

 

Goodwill

 

 

360

 

 

 

360

 

Deferred income taxes

 

 

22

 

 

 

21

 

Other assets

 

 

495

 

 

 

382

 

Total Assets

 

$

22,072

 

 

$

23,112

 

Liabilities

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

375

 

 

$

435

 

Accrued liabilities

 

 

1,251

 

 

 

1,337

 

Taxes payable

 

 

82

 

 

 

83

 

Current maturities of long-term debt

 

 

196

 

 

 

580

 

Total current liabilities

 

 

1,904

 

 

 

2,435

 

Long-term debt

 

 

6,372

 

 

 

6,397

 

Deferred income taxes

 

 

425

 

 

 

429

 

Asset retirement obligations

 

 

774

 

 

 

753

 

Other liabilities and deferred credits

 

 

660

 

 

 

744

 

Total Liabilities

 

 

10,135

 

 

 

10,758

 

Equity

 

 

 

 

 

 

 

 

Hess Corporation stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $1.00; Authorized — 20,000,000 shares

 

 

 

 

 

 

 

 

Series A 8% Cumulative Mandatory Convertible; $1,000 per share liquidation preference; Issued — 575,000 shares (2017: 575,000)

 

 

1

 

 

 

1

 

Common stock, par value $1.00; Authorized — 600,000,000 shares

 

 

 

 

 

 

 

 

Issued — 308,055,101 shares (2017: 315,053,615)

 

 

308

 

 

 

315

 

Capital in excess of par value

 

 

5,701

 

 

 

5,824

 

Retained earnings

 

 

5,166

 

 

 

5,597

 

Accumulated other comprehensive income (loss)

 

 

(571

)

 

 

(686

)

Total Hess Corporation stockholders’ equity

 

 

10,605

 

 

 

11,051

 

Noncontrolling interests

 

 

1,332

 

 

 

1,303

 

Total equity

 

 

11,937

 

 

 

12,354

 

Total Liabilities and Equity

 

$

22,072

 

 

$

23,112

 

See accompanying Notes to Consolidated Financial Statements.

2

 


PART I - FINANCIAL INFORMATION (CONT’D.)

 

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(In millions,

except per share amounts)

 

Revenues and Non-Operating Income

 

 

 

 

 

 

 

 

Sales and other operating revenues

 

$

1,346

 

 

$

1,258

 

Gains on asset sales, net

 

 

7

 

 

 

 

Other, net

 

 

37

 

 

 

(4

)

Total revenues and non-operating income

 

 

1,390

 

 

 

1,254

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

Marketing, including purchased oil and gas

 

 

358

 

 

 

200

 

Operating costs and expenses

 

 

288

 

 

 

358

 

Production and severance taxes

 

 

39

 

 

 

31

 

Exploration expenses, including dry holes and lease impairment

 

 

40

 

 

 

58

 

General and administrative expenses

 

 

110

 

 

 

95

 

Interest expense

 

 

103

 

 

 

84

 

Loss on debt extinguishment

 

 

27

 

 

 

 

Depreciation, depletion and amortization

 

 

417

 

 

 

737

 

Total costs and expenses

 

 

1,382

 

 

 

1,563

 

Income (Loss) Before Income Taxes

 

 

8

 

 

 

(309

)

Provision (benefit) for income taxes

 

 

73

 

 

 

(13

)

Net Income (Loss)

 

 

(65

)

 

 

(296

)

Less: Net income (loss) attributable to noncontrolling interests

 

 

41

 

 

 

28

 

Net Income (Loss) Attributable to Hess Corporation

 

 

(106

)

 

 

(324

)

Less: Preferred stock dividends

 

 

11

 

 

 

12

 

Net Income (Loss) Attributable to Hess Corporation Common Stockholders

 

$

(117

)

 

$

(336

)

 

 

 

 

 

 

 

 

 

Net Income (Loss) Attributable to Hess Corporation Per Common Share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.38

)

 

$

(1.07

)

Diluted

 

$

(0.38

)

 

$

(1.07

)

Weighted Average Number of Common Shares Outstanding (Diluted)

 

 

309.5

 

 

 

313.9

 

Common Stock Dividends Per Share

 

$

0.25

 

 

$

0.25

 

See accompanying Notes to Consolidated Financial Statements.

 

3

 


PART I - FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

(65

)

 

$

(296

)

 

 

 

 

 

 

 

 

 

Other Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedges

 

 

 

 

 

 

 

 

Effect of hedge (gains) losses reclassified to income

 

 

31

 

 

 

 

Income taxes on effect of hedge (gains) losses reclassified to income

 

 

 

 

 

 

Net effect of hedge (gains) losses reclassified to income

 

 

31

 

 

 

 

Change in fair value of cash flow hedges

 

 

(22

)

 

 

4

 

Income taxes on change in fair value of cash flow hedges

 

 

 

 

 

(2

)

Net change in fair value of cash flow hedges

 

 

(22

)

 

 

2

 

Change in derivatives designated as cash flow hedges, after taxes

 

 

9

 

 

 

2

 

 

 

 

 

 

 

 

 

 

Pension and other postretirement plans

 

 

 

 

 

 

 

 

(Increase) reduction in unrecognized actuarial losses

 

 

125

 

 

 

7

 

Income taxes on actuarial changes in plan liabilities

 

 

(30

)

 

 

(3

)

(Increase) reduction in unrecognized actuarial losses, net

 

 

95

 

 

 

4

 

Amortization of net actuarial losses

 

 

12

 

 

 

17

 

Income taxes on amortization of net actuarial losses

 

 

 

 

 

 

Net effect of amortization of net actuarial losses

 

 

12

 

 

 

17

 

Change in pension and other postretirement plans, after taxes

 

 

107

 

 

 

21

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

14

 

Change in foreign currency translation adjustment

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

 

116

 

 

 

37

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss)

 

 

51

 

 

 

(259

)

Less: Comprehensive income attributable to noncontrolling interests

 

 

41

 

 

 

28

 

Comprehensive Income (Loss) Attributable to Hess Corporation

 

$

10

 

 

$

(287

)

See accompanying Notes to Consolidated Financial Statements.

 

4

 


PART I - FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(65

)

 

$

(296

)

Adjustments to reconcile to net cash provided by (used in) operating activities

 

 

 

 

 

 

 

 

(Gains) losses on asset sales, net

 

 

(7

)

 

 

 

Depreciation, depletion and amortization

 

 

417

 

 

 

737

 

Exploration lease and other impairment

 

 

10

 

 

 

7

 

Stock compensation expense

 

 

13

 

 

 

22

 

Non-cash (gains) losses on commodity derivatives, net

 

 

38

 

 

 

 

Provision (benefit) for deferred income taxes and other tax accruals

 

 

(36

)

 

 

(27

)

Loss on debt extinguishment

 

 

27

 

 

 

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable

 

 

(11

)

 

 

115

 

(Increase) decrease in inventories

 

 

(7

)

 

 

(55

)

Increase (decrease) in accounts payable and accrued liabilities

 

 

(135

)

 

 

(115

)

Increase (decrease) in taxes payable

 

 

(1

)

 

 

6

 

Changes in other operating assets and liabilities

 

 

(33

)

 

 

(45

)

Net cash provided by (used in) operating activities

 

 

210

 

 

 

349

 

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment - E&P

 

 

(363

)

 

 

(340

)

Additions to property, plant and equipment - Midstream

 

 

(37

)

 

 

(50

)

Payments for Midstream equity investments

 

 

(24

)

 

 

 

Proceeds from asset sales

 

 

6

 

 

 

100

 

Other, net

 

 

(4

)

 

 

 

Net cash provided by (used in) investing activities

 

 

(422

)

 

 

(290

)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Net borrowings (repayments) of debt with maturities of 90 days or less

 

 

 

 

 

5

 

Debt with maturities of greater than 90 days

 

 

 

 

 

 

 

 

Borrowings

 

 

 

 

 

 

Repayments

 

 

(434

)

 

 

(26

)

Common stock acquired and retired

 

 

(371

)

 

 

 

Cash dividends paid

 

 

(89

)

 

 

(92

)

Noncontrolling interests, net

 

 

(12

)

 

 

 

Other, net

 

 

(3

)

 

 

8

 

Net cash provided by (used in) financing activities

 

 

(909

)

 

 

(105

)

 

 

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

(1,121

)

 

 

(46

)

Cash and Cash Equivalents at Beginning of Year

 

 

4,847

 

 

 

2,732

 

Cash and Cash Equivalents at End of Period

 

$

3,726

 

 

$

2,686

 

See accompanying Notes to Consolidated Financial Statements.

5

 


PART I - FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED EQUITY (UNAUDITED)

 

 

 

Mandatory Convertible Preferred Stock

 

 

Common Stock

 

 

Capital in Excess of Par

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Total Hess Stockholders' Equity

 

 

Noncontrolling Interests

 

 

Total Equity

 

 

 

(In millions)

 

Balance at January 1, 2018

 

$

1

 

 

$

315

 

 

$

5,824

 

 

$

5,597

 

 

$

(686

)

 

$

11,051

 

 

$

1,303

 

 

$

12,354

 

Cumulative effect of adoption of new accounting standards

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

(106

)

 

 

 

 

 

(106

)

 

 

41

 

 

 

(65

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

116

 

 

 

116

 

 

 

 

 

 

116

 

Share-based compensation, including income taxes

 

 

 

 

 

1

 

 

 

12

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

13

 

Dividends on preferred stock

 

 

 

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

 

(11

)

 

 

 

 

 

(11

)

Dividends on common stock

 

 

 

 

 

 

 

 

 

 

 

(78

)

 

 

 

 

 

(78

)

 

 

 

 

 

(78

)

Common stock acquired and retired

 

 

 

 

 

(8

)

 

 

(135

)

 

 

(237

)

 

 

 

 

 

(380

)

 

 

 

 

 

(380

)

Noncontrolling interests, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

(12

)

Balance at March 31, 2018

 

$

1

 

 

$

308

 

 

$

5,701

 

 

$

5,166

 

 

$

(571

)

 

$

10,605

 

 

$

1,332

 

 

$

11,937

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

 

$

1

 

 

$

317

 

 

$

5,773

 

 

$

10,147

 

 

$

(1,704

)

 

$

14,534

 

 

$

1,057

 

 

$

15,591

 

Cumulative effect of adoption of new accounting standards

 

 

 

 

 

 

 

 

2

 

 

 

(39

)

 

 

 

 

 

(37

)

 

 

 

 

 

(37

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

(324

)

 

 

 

 

 

(324

)

 

 

28

 

 

 

(296

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37

 

 

 

37

 

 

 

 

 

 

37

 

Share-based compensation, including income taxes

 

 

 

 

 

1

 

 

 

29

 

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

30

 

Dividends on preferred stock

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

(12

)

 

 

 

 

 

(12

)

Dividends on common stock

 

 

 

 

 

 

 

 

 

 

 

(80

)

 

 

 

 

 

(80

)

 

 

 

 

 

(80

)

Balance at March 31, 2017

 

$

1

 

 

$

318

 

 

$

5,804

 

 

$

9,692

 

 

$

(1,667

)

 

$

14,148

 

 

$

1,085

 

 

$

15,233

 

See accompanying Notes to Consolidated Financial Statements.

 

 

6

 


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 our consolidated financial position at March 31, 2018 and December 31, 2017, the consolidated results of operations for the three months ended March 31, 2018 and 2017, and consolidated cash flows for the three months ended March 31, 2018 and 2017.  The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.

The financial statements were prepared in accordance with the requirements of the Securities and Exchange Commission (SEC) for interim reporting.  As permitted under those rules, certain notes or other financial information that are normally required by generally accepted accounting principles (GAAP) in the United States 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 Annual Report on Form 10-K for the year ended December 31, 2017.

In the first quarter of 2018, we adopted Accounting Standards Codification (ASC) Topic, ASC 606, Revenue from Contracts with Customers, using the modified retrospective method.  The adoption of this standard did not affect the timing of revenue recognition for our uncompleted contracts at January 1, 2018, and as a result, no cumulative effect adjustment to Retained earnings was recognized.  Accounts receivables from contracts with customers is presented separately in the Consolidated Balance Sheet with the prior year balance recast to conform to the current period presentation.  In addition, as the adoption of ASC 606 did not affect previous conclusions regarding our involvement as a principal versus agent in contracts with customers, there were no changes in presentation to the Statement of Consolidated Income.

In the first quarter of 2018, we adopted Accounting Standards Update (ASU) 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  This ASU prohibits the capitalization of the non-service cost components of net periodic benefit cost in connection with the production or construction of an asset.  This provision will be applied prospectively effective January 1, 2018.  The provision requiring that non-service cost components of net periodic benefit cost to be presented separately from the service cost component in the Statements of Consolidated Income was applied retrospectively.  We elected the practical expedient allowing the use of the amounts previously disclosed in the notes to our consolidated financial statements as the basis for applying this provision retrospectively as the capitalization of the non-service cost components of net periodic benefit cost was not material during the comparative periods.  This resulted in a reclassification of $2 million of expense for the first quarter of 2017 from Operating costs and expenses, and General and administrative expenses to Other, net.

In the first quarter of 2018, we adopted ASU 2017-12, Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities.  This ASU makes certain targeted improvements to simplify the application of the existing hedge accounting guidance.  The adoption of this ASU resulted in an increase to Retained earnings and a decrease in Accumulated other comprehensive income (loss) of $1 million to remove the cumulative effect of hedging ineffectiveness previously recognized in earnings for contracts designated as hedging instruments that were outstanding at January 1, 2018.  

In the first quarter of 2018, we adopted ASU 2016-18, Statement of Cash Flows (Topic 230):  Restricted Cash (a consensus of the FASB Emerging Issues Task Force).  This ASU requires that the total change in cash and cash equivalents and restricted cash be reflected on the statement of cash flows.  A reconciliation to the balance sheet is also required when cash and cash equivalents and restricted cash are not separately presented on the balance sheet, or are presented in more than one line item on the balance sheet.  The adoption of this ASU did not have a material impact on our Consolidated Statements of Cash Flows.

In the first quarter of 2018, we adopted ASU 2016-15, Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force).  This ASU is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.  The guidance addresses eight specific classification issues for which current guidance is either unclear or is non-specific.  The requirement that fees paid to third-parties and premiums incurred in connection with the repayment of debt be classified as financing cash outflows is among the classification issues addressed by this ASU.  The adoption of this ASU did not have a material impact on our Consolidated Statements of Cash Flows.

To conform with the Statement of Consolidated Income presentation in our December 31, 2017 Form 10-K, we have revised the presentation of Sales and other operating revenues and Marketing, including purchased oil and gas for the three months ended March 31, 2017 associated with the recovery of certain natural gas processing costs from third parties, by reducing each by $19 million.  This revision did not impact net income, our Consolidated Balance Sheet, Statement of Consolidated Comprehensive Income, Statement of Consolidated Cash Flows, nor Statement of Consolidated

7

 


PART I - FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Equity.  Amounts reported as Sales and other operating revenue and Marketing, including purchased oil and gas (formerly Costs of products sold) in our March 31, 2017 Form 10-Q were $1,277 million and $219 million, respectively.

New Accounting Pronouncements:  In February 2016, the FASB issued ASU 2016-02, Leases, as a new Accounting Standards Codification (ASC) Topic, ASC 842.  The new standard will require assets and liabilities to be reported on the Consolidated Balance Sheet for all leases with lease terms greater than one year, including leases currently treated as operating leases under the existing standard.  This ASU is effective for us beginning in the first quarter of 2019, with early adoption permitted.  We have developed and are executing a project plan for the implementation of ASC 842 in the first quarter of 2019.  We are progressing our assessment of existing leases and evaluating our disclosure processes with reference to the requirements of the standard.  We continue to assess the impact of the ASU on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses.  This ASU makes changes to the impairment model for trade receivables, net investments in leases, debt securities, loans and certain other instruments.  The standard requires the use of a forward-looking "expected loss" model compared to the current "incurred loss" model.  This ASU is effective for us beginning in the first quarter of 2020, with early adoption permitted beginning in the first quarter of 2019.  We are currently assessing the impact of the ASU on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other – Simplifying the Test for Goodwill Impairment.  This ASU modifies the concept of goodwill impairment from a condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of the reporting unit exceeds its fair value.  Thus, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value.  The impairment charge would be limited by the amount of goodwill allocated to the reporting unit.  This ASU removes the requirement to determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination.  This ASU is effective for us beginning in the first quarter of 2020, with early adoption permitted.  We are currently assessing the impact of the ASU on our consolidated financial statements.

2.  Revenue

In the first quarter of 2018, revenue from contracts with customers on a disaggregated basis was as follows:

 

 

Exploration and Production

 

 

Midstream

 

 

Eliminations

 

 

Total

 

 

 

United States

 

 

Europe

 

 

Africa

 

 

Asia

 

 

E&P Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from sales of our net production volumes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude oil revenue

 

$

593

 

 

$

33

 

 

$

99

 

 

$

43

 

 

$

768

 

 

$

 

 

$

 

 

$

768

 

Natural gas liquids revenue

 

 

71

 

 

 

 

 

 

 

 

 

 

 

 

71

 

 

 

 

 

 

 

 

 

71

 

Natural gas revenue

 

 

39

 

 

 

3

 

 

 

8

 

 

 

128

 

 

 

178

 

 

 

 

 

 

 

 

 

178

 

Revenue from sale of third-party purchased volumes

 

 

325

 

 

 

 

 

 

24

 

 

 

14

 

 

 

363

 

 

 

 

 

 

 

 

 

363

 

Intercompany revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

167

 

 

 

(167

)

 

 

 

Total revenues from contracts with customers

 

 

1,028

 

 

 

36

 

 

 

131

 

 

 

185

 

 

 

1,380

 

 

 

167

 

 

 

(167

)

 

 

1,380

 

Other operating revenue (a)

 

 

(34

)

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

 

 

 

 

 

 

(34

)

Total sales and other operating revenues

 

$

994

 

 

$

36

 

 

$

131

 

 

$

185

 

 

$

1,346

 

 

$

167

 

 

$

(167

)

 

$

1,346

 

(a)

Includes gains (losses) on commodity derivatives.

 

Exploration and Production

The E&P segment recognizes revenue from the sale of crude oil, natural gas liquids (NGLs), and natural gas as performance obligations under contracts with customers are satisfied.  Our responsibilities to deliver each unit of quantity of crude oil, NGL, and natural gas under these contracts represent separate, distinct performance obligations.  These performance obligations are satisfied at the point in time control of each unit of quantity transfers to the customer.  Pricing is determined subsequent to contract inception, but prior to the transfer of control or shortly thereafter if required per contractual terms, with reference to a particular market or pricing index, plus or minus adjustments reflecting quality or location differentials.  As a result, the entire transaction price at contract inception is variable.  We do not apply a constraint to the transaction price at contract inception.

8

 


PART I - FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Our responsibility to stand-ready to provide a minimum volume over each commitment period under long-term international gas contracts with take-or-pay provisions represent separate, distinct performance obligations.  Shortfall payments received from customers that occur when volumes purchased are below the minimum volume commitment under contracts with customer make-up rights are deferred upon receipt as a contract liability.  Revenue is recognized at the earlier of when we deliver the make-up volumes in subsequent periods or when it becomes remote that the customer will exercise their make-up rights.  Price discounts owed against future deliveries of international natural gas due to delivery of natural gas volumes below minimum volume commitments are recognized as reductions to revenue in the commitment period when the shortfall occurs.

Certain crude oil, NGL, and natural gas volumes are purchased by Hess from third-parties, including working interest partners and royalty owners in certain Hess-operated properties, before they are sold to customers.  Where control over the crude oil, NGLs, or natural gas transfers to Hess before the volumes are transferred to the customer, revenue and the associated cost of purchased volumes are presented on a gross basis in the Statement of Consolidated Income.  Where control of crude oil, NGLs, or natural gas is not transferred to Hess, revenue is presented net of the associated cost of purchased volumes.

Contract types

The following is a summary of contract types for our E&P segment:

Crude oil, natural gas liquids, and natural gas – U.S.:  Contracts with customers for the sale of U.S. crude oil, NGLs, and natural gas primarily include those contracts that involve the short-term sale of volumes during a specified period, and those contracts that automatically renew on a periodic basis until either party cancels.  We have certain long-term contracts with customers for the sale of U.S. natural gas and NGLs that have remaining durations of less than ten years.  Contracts may specify a fixed volume for delivery subject to tolerance thresholds, or may specify a percentage of production to be delivered from a particular location.  Pricing is determined with reference to a particular market or pricing index, plus or minus adjustments reflecting quality or location differentials, prior to transfer of control.

Crude oil – International:  Contracts with customers for the sale of int