UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant R Filed by a Party other than the Registrant £
Check the appropriate box:
£ Preliminary Proxy Statement
£ Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
£ Definitive Proxy Statement
£ Definitive Additional Materials
R Soliciting Material Pursuant to §240.14a-12
HESS CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
R No fee required.
£ Fee computed below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on
which the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
£ Fee paid previously with preliminary materials.
£ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
its multi-year strategic transformation process by exiting downstream businesses and becoming a pure playE&P co.
THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us
©2013Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without theprior written consent of Thomson Reuters. 'Thomson Reuters' and theThomson Reuters logo are registered trademarks of Thomson Reuters and itsaffiliated companies.
CORPORATE PARTICIPANTS
JayWilson Hess Corp - VP, IR
JohnHess Hess Corp - Chairman of the Board & CEO
JohnRielly Hess Corp - SVP & CFO
GregHill Hess Corp - Senior Executive, Board of Directors
CONFERENCE CALL PARTICIPANTS
PaulSankey Deutsche Bank - Analyst
Edward Westlake Credit Suisse - Analyst
Evan Calio Morgan Stanley - Analyst
RogerRead Wells Fargo Securities - Analyst
Doug Leggate BofA Merrill Lynch - Analyst
Arjun Murti Goldman Sachs - Analyst
DougTerreson ISI Group - Analyst
JohnHerrlin Societe Generale - Analyst
BlakeFernandez Howard Weil Incorporated - Analyst
PRESENTATION
Operator
Goodday, ladies and gentlemen, and welcome to the Hess March 4, investor call. My name is Grant, and I'll be your operator for today. At this time allparticipants are in listen-only mode. We will be conduct a question and answer session toward the end of this conference.
(OperatorInstructions)
Asa reminder this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Jay Wilson, Vice President Investor Relations. Pleaseproceed, sir.
JayWilson - Hess Corp - VP, IR
Thankyou, Grant. Good morning, everyone and thank you for joining us.
We have a lot to cover today, and I suggest that if you haven't done so already, turn to the slide presentation we posted at www.transforminghess.com.We'll ask you to follow along with ourslides. John Hess will walk you through the first 18 slides. We encourage you to review the remaining slides, aswell. I trust you've already seen the press release and a shareholder letter that we also released this morning. Both are also availableon the website.
Before Iturn it over to John Hess, some housekeeping.This presentation contains projections and other forward-looking statements within the meaningof the Securities Exchange Act of 1934. These projections and statements reflect the Company's current views with respect to future eventsand financial performance. No assurances, excuse me, no assurances can be given, however, that these events will occur or thatthese projectionswill be achieved, and actualresults could differ materially from those projected, as a result of certain risk factors. A discussion of these riskfactors is included in the Company's periodic reports filed with the Securities and Exchange Commission.
Finally,I will note that Hess, its directors, and certain of its executive officers may be deemed to be participants in the solicitations of proxies from shareholdersin connection with the matters to be considered at our 2013 annual meeting. Hess intends to file a proxy statement and white proxy cardwith the US Securities and Exchange Commission in connection with any such solicitation of proxies from Hess shareholders. Investors and shareholdersare strongly encouraged to read Hess's proxy statement and any other document filed with the SEC, carefully and in their entirety, whenthey become available, as they will contain important information.
Withthat, let me turn it overto John Hess, our Chairman and CEO, to get started.
JohnHess - Hess Corp - Chairman of the Board & CEO
Thankyou, Jay. Let me add my thanks to all of you for joining us this morning.
Wewill begintoday on slide number 4. As many of you know, our board and management team havebeen in the process of transforming Hess intoa more focused and higher growth exploration and production Company. Today we are announcing the culmination of that process by exiting ourDownstream businesses and becoming a pure play E&P company.
Specifically,we will be divesting our Retail Energy marketing and Energy Trading businesses, divesting our E&P assets in Indonesia and Thailand, andpursuing the monetization of our Bakken midstream assets. Proceeds from all initiatives announced to date will be used, first to strengthen ourbalance sheet in order to fund future growth, and next, to increase current returns to all shareholders through a 150% increase of our annual dividendsto $1 per share, commencing in the third quarter of 2013, as well as to re-purchase upto $4 billion of Hess shares. We also expect to returnadditional capital to shareholders in connection with the monetization of our midstream Bakken assets expected in 2015.
Weare also adding six world class independent directors to board. Last August, we met with a search firm to begin identifying candidates. The sixnew independent directors are outstanding by any measure. They bring the right mix of top corporate leadership, operational and financial expertise,and top level E&P experience. With these six new directors,13 of the 14 members of our board will be independent.
BeforeI continue, I would like to recognize our existing directors. Former Treasury Secretary Nicholas Brady, former Governor Thomas Kean, former SenatorSam Nunn, and Frank Olson will be retiring from our board. Two of our senior executives, Greg Hill and Borden Walker, also are leaving the Board,but will continue in their current leadership roles. All of these directors have served with distinction. They, along with our management team,and our continuing directors, deserve significant credit for building our Company today, and positioning us tocreate near and long-term valuefor all of our shareholders.
Thefact that Hess has some of the best oil and gas assetsin our industry, including our leading position in the Bakken, is in large part due to their visionand commitment. They have my most sincere gratitude and respect, and I want to thank them for their service and many invaluable contributionsto Hess over the years.
Iam now looking at slide number 5. It was on our quarterly conference call in July 2012, that I first referred to the significant transformation which wasunderway at Hess. I described how we were at the midpoint of a five-year transformation process. Subsequently, our shareholders and Wall Street analystsindicated broad support for Hess's strategic transformation. From the date of that announcement, to the date we announced the saleof our terminal network, our stock has been up 34%.
There havebeen essentially three phases that this transformation has followed, and as you can see on this slide, we have made profound changes andtaken a significant number of actions over the last several years. Beginning in 2010 with Phase I, we began a process of continuing to invest inour growth engines forthe future, focusing the upstream business by pruning mature assets and reducing our exposure to the downstream business.Specifically, we substantially built upon our leadership position in the Bakken, including adding 250,000 net acres in 2010. We established acore position in the emerging Utica shale play, and through a series of transactions, we increased our ownership interest inValhall. Lastly we closedour HOVENSA joint refinery in St. Croix, US Virgin Islands.
Interms of PhaseII, on our July 2012 earnings call, for thefirst time wepublicly communicated how wewere at a midpoint of Hess'sstrategic transformation.On the call, we specified a number of steps that the Company was committed to making in the future in support of that process.
Thesesteps included focusingour E&P strategy on lower risk and higher growth shale assets, including our Bakken and Utica positions, exploiting existingdiscoveries such as Tubular Bells in the North Malay Basin, narrowing our exploration focus to a few key areas such as offshore Ghana, furtherdivesting upstream assets to focus on our growth engines, continuing to reduce our exposure to downstream, by completing our exit from theRefining business with a closure of our Port Reading, New Jersey refinery, and divesting our terminal network.We also reduced capital expendituresby increasing efficienciesin the Bakken and sharpening our focus in exploration.
Withtoday's announcement, we are entering Phase III, completing our transformation to a pure play E&P company. We will exit what remains of thedownstream andfurther focus our E&P portfolio on future growth. As slide number 6 makes clear, the market has been recognizing the value weare creating. From when we announced our July 2012 strategy update, our shares have outperformed our peer group. Our reported financial resultshave been strong, for the full year 2012, our net income of $2 billion was the third highest in Hess Company history and our cash flow of
$5.7billion was the highest in our history. We are committed to delivering long-term, sustainable value to all of our shareholders, andthe road mapwe have laid out today is going to help us do just that.
Letme take amoment now to sketch out the profile of the transformed Hess in greater detail. Movingto slide number 8. As I said with today's announcement, Hess will become a more focused, higher growth, lower risk, pure play E&P Company. We will deliver current returns to allshareholders while investing for future growth. With this focus, we expect to achieve a five-year compound average annual growth rate in productionthrough 2017, of 5% to 8% off of 2012 pro forma production.
Wealso expect to grow our production in the mid-teens in aggregate, from 2012 pro forma to 2014. In addition, beginning in 2013, pro forma cash marginfor BOE is expected to increase by $5. Importantly, we have the breadth of technical skills and operating capabilities to deliver this growth andprofit. Sharing these capabilities and technical skills across all of our projects globally enables usto drive better returns through cost and other efficiencies.
Asevidence of these capabilities, Hess is a partner of choice for leading international oil companies and host governments on major E&P projects. Thisrecognition of our capabilities drives value creation for all of our shareholders now and for the future. We will also retain our financial flexibility tofund future development, return capital to shareholders, and allocate capital efficiently.
Movingto slide number 9. You can see our focus on the five key areas I mentioned earlier. This map shows that 78% of our proved reserves and
84%of our production is concentrated in five geographic locations. All of our long-term growth opportunities are close to our near term producing assets,and in many cases have been generated as a result thereof. These opportunities include, Tubular Bells in the Deep Water Gulf of Mexico, NorthMalay Basin, which is adjacent to and shares similar geology with the Malaysia Thailand joint development area in the Gulf of Thailand, Utica, wherewe are applyingthe expertise developed in the Bakken, andGhana, whichshares similar geology as Equatorial Guinea, wherewe have a strongoperating position.
Onslide number 10, you'll see that we have six core projects. Collectively they will underpin an expected five-year compound average annual growthrate in production through 2017, of 5% to 8%, off of 2012 pro forma production. Our production growth over the next two years will come fromthe continued development of the Bakken in Valhall and the start-up production in North Malay Basin and Tubular Bells. Utica will also support ourlonger term production growth, and Ghana is in the early stages. It is a promising longer term opportunity. We recently announced that we haveseven consecutive discoveries in Ghana. We are planning appraisal activities there, and are conducting pre-development studies.
Andas I noted before, beginning in 2013, pro forma cash margin per BOE is expectedto increase by $5. Slide number 11 is a good snapshot of our provenreserve base. Simply put, we have the highest percentage of reserves that are liquids based among our peers. And as to production, 85% ofour pro forma 2013, estimated crude oil production is Brent linked. Also, only 6% of our production is US natural gas. Our significantly oil-linked portfolioshould allow us to achieve stronger cash margins and returns than our peers.
Thenext three slides show how the breadth of our world class technical capabilities translate into efficiencies, global synergies, higher returns, and newinvestment opportunities. Slide number 12 shows that we are a leader inthe Bakken and are realizing significant operating efficiencies there, whichis North America's most promising shale oil play. Our daily production is increasing, and we are demonstrating exceptional performance. On a30-day initial production rate basis, for 2012, 3 of the top 5 wells in the Bakken and 10 out of the top 25, areHess wells.
Youcan see along the top half of the slide, how we have substantially driven drilling and completion costs down and expect continued reductions aswe have moved to paddrilling. We also have some of the best people in the industry working on the Bakken play. As shown on slide number
13,our well costs now rank us among the lowest cost and best in our peer group.
Pleaseturn to slide number 14. We are a recognized quality global operator. Because of the breadth of our expertise and technical capabilities, we continueto be trusted and picked by leading international oil companies and host governments to operate major new oil and gas developments. Forexample, Chevron endorsed us as the operator of the $2.3 billion Tubular Bells Deep Water Gulf of Mexico development, and PETRONAS pickedus as operator of the $2.9 million North Malay Basin offshore development. This breath of our technical capabilities Has delivered great opportunitiesto develop new areas of growth. Now, and in the future.
Tohighlight just three examples. We are currently at the employing our Bakken fracking methodology to our drilling and completions in the MalaysiaThailand joint development area. We are leveraging our managed pressure drilling expertise from South Arne in Denmark to the Utica shaleplay in Ohio. And we are using expertise gained in the Gulf of Mexico and Equatorial Guineato drive our recent success in Ghana.
Turningto slide number 15. Our plan is laser focused on creating value for our shareholders, including returning capital to shareholders, retaining financialflexibility for future growth, and continuing to allocate capital efficiently. Specifically, we expect to deploy the proceeds from all of our initiativesannounced to date in the following manner. First, to pay down short-term debt, provide a cash cushion of an additional $1 billion against futurecommodity price volatility, as well as help fund the development of our focused growth projects.
Next,to increase current returns to all shareholders through 150% increase of our annual dividend to $1 per share, commencing in the third quarter of2013. Third, to re-purchase up to $4 billion of Hess shares with amountand timing of these re-purchasestied to our asset-sale program. Fourth inaddition to this $4 billion repurchase authorization, we also expect to return capital to shareholder in connection with the monetization with ourmidstream Bakken assets expected in 2015.
Weare also efficiently allocating capital to maximizereturns. In 2013, we decreased upstream capital and exploratory expenditures by 17%, and weexpect further reductions in 2014. In terms of our exploration, we focused our budget by decreasing allocated spend by 29% when compared to2012. Lastly, we have a cost reduction program underway, which we anticipate could save us at least $150 million annually.
Slidesnumber 16 and number 17 introduce our new independent directors. We do not think there's a better team anywhere for what we are trying toachieve. These independent directors agreed to join our board, because they believe in our outstanding plan, and they recognize that our plan isthe right plan for all of our shareholders. Iwould like to take some time to tell you about each of these accomplished, recognized leaders in their fields.
JohnKrenicki, wasone of the four Vice Chairman of GE, and served as President and Chief Executive Officer of GE Energy. John is recognized as oneof the best operating executives in corporate America. He was responsible for doubling GE's revenue base and building it into one of GE's largestbusinesses, representing two-thirds of GE's non-financial revenues. He is currently a partner at private equity firm Clayton, Dublier & Rice.
Dr.Kevin Meyers, is recognized as one of the oil and gas industries' top senior E&P executives. As ConocoPhillips' Senior Vice President Exploration andProduction, he ran the company's E&P business for the Americas. He has over 30 years experience in exploration and production, both domestic andinternational, and spearheaded the company's development of the Eagle Ford Shale, and drove their operations in the Permian Basin and the Bakken.
FredReynolds, is recognized as one of the best CFOs in America. Fred has had an extensive career in corporate finance and accounting as Executive VicePresident and Chief Financial Officer of CBS Corporation and its predecessors from January 1994 untilhis retirement in August 2009. During histenure as CFO, shareholders experienced substantial share price appreciation and significant capital returns.
BillSchrader held senior executive positions at BP, overseeing many of BP 's most important E&P assets. Bill was Chief Operating Officer of TNK-BP, whichcomprised 27% of BP's reserves and 29% of BP's production. Bill also served as President of one of their most valuable assets, BP Azerbaijan, andas CEO of BP Exploration Angola, he oversaw a number of BP's deep water oil discoveries. Bill was also responsible for all of BP's E&P business Indonesia,including the Tangguh LNG project.
Dr.Mark Williams, served at the highest management level of Royal Dutch Shell during his 35-year career there, one of the world's largest oil and gascompanies. He has 17 years of broad experience in E&Pand the remainder in midstreamand downstream businesses. As a Shell executive committeemember, he was part of the senior leadership team collectively responsible for all strategic, capital, and operational matters.
Andfinally, also joining our board is Jim Quigley, who ran one of the world's largest consulting and accounting firms, Deloitte. Culminating with hisrole as the Chief Executive Officer of Deloitte, he has 38 years of experience in consulting, audit, tax, and financial advisoryservices. Jim was a seniortrusted advisor to the CEOs and boards of many of the world's largest companies.
Eachof these new independent directors has reviewed our plan and is excited about joining our board. We are delighted to have these outstanding individualson our team. I welcome them all.
I'mnow on slide number 18. In closing, I want to repeat a few key points. First, with today's announcement, Hess will become a pure play E&P company andexit the downstream. Second, in the next five years, we expect to achieve a 5% to 8% compound average annual growth rate in production,with aggregate growth through 2014 in the mid-teens. Third, we will apply the proceeds from all asset salesannounced to date, first tobolster our balance sheet and ensure our ability to fund this growth. Second, to raise our common stock dividend by 150% to a $1 per share.
Thirdreturning the remaining cash proceeds from asset sales to shareholders through share buybacks. Fourth, the strength of Hess lies in its world classteam of E&P professionals. Their collaborative efforts to share their experience andexpertise, form the basis of our confidences in delivering onour five-year plan and creating significant shareholder value in the years beyond.
LastlyI want to thank our outgoing directors for their instrumental role in guiding the Company through this transformation. There is no stronger statementof their leadership and contribution to this Company, than the quality of the incoming members who will follow in their footsteps.
Ilook forward to speakingwith you more about Hess inthe days and weeks ahead. John Riellyand Greg Hill are here with me, and we would be happynow to take any questions.
QUESTIONS AND ANSWERS
Operator
(OperatorInstructions)
PaulSankey, Deutsche Bank.
PaulSankey - Deutsche Bank - Analyst
Hi,good morning, everyone. John,I guess a simple question is, why did this take so long? I mean, what, why did it takean activist to prompt this? Thanks.
JohnHess - Hess Corp - Chairman of the Board & CEO
Firstof all, Paul, a couple of things I'd like to say tothis. Wehave had this strategic transformation, as my remarks noted, underway, really going backnot only since I became Chairman and we started to shift to E&P, but predominantly when we started to build our Bakken position in 2010. Sothis is not something that just happened overnight, and is response to an activist. In fact, Elliott got on the train after it really left the station. Thisis a carefully structured strategy that's been given a lot of thought and it's really the natural culmination of the strategic transformation I went throughin my remarks, soI think it's important to realize that.
PaulSankey - Deutsche Bank - Analyst
Okay. Thanks. Andjust to be specific on the volumes, can you just talk through again,how, how we're getting to the numbers? If you could just addsome details, if you want, around where we're going to be in 2013, and where we're going to go to from there? Thanks.
JohnRielly - Hess Corp - SVP & CFO
Sure,Paul. If we're looking at, first, let's just take 2012, pro forma production. If our actual production was 406,000 barrels a day and if you include allthe sales that we've announcedprior to today, andthen including Indonesia and Thailand, that dropsthat proforma production to 289,000 barrelsa day in 2012. As we look forward in 2013, on our prior call, we had talked about that the headline production number would be 375,000 to390,000 barrels a day, but that included the assets that would be producing, that would be sold, ultimately during 2013, the biggest piece of thatbeing Russia. So then, our guidance at that time was, if you excluded the production from those assets being sold, that would be 325,000 to
340,000 barrelsa day.
WithIndonesia and Thailand,the expected production from those two assets is approximately 35,000 barrels a day. So if you take that 35,000 off theguidance that we gave, thattakes youto that 290,000 to305,000 barrels a day that we have in the presentation. So there's your, that's your basethen, to 289,000 going to this 290,000 to 305,000. In 2013, we expect a significant increase, as we noted in the presentation, in 2014, where theBakken production really begins to ramp up from the change to our pad drilling, continued Valhall drilling of production wells, and then the TubularBells development coming on. So we have significant growth then, showing in 2014. But again,our guidance then, on the 5% to 8% CAGR growthcomes off the 289,000 barrels a day pro forma in 2012, and it's driven by those, those projects that John Hess went through.
PaulSankey - Deutsche Bank - Analyst
Yes.That's very clear. Thanks John. Can you just confirm how you're assuming assets are sold? What timing? And I'll leave it there,thank you.
JohnRielly - Hess Corp - SVP & CFO
Atthis point, I'd guide you -- we'd say 12 to18 months. I mean, it's early in the��process, but our guidance would be that we'd complete these sales bythe end of 2014.
PaulSankey - Deutsche Bank - Analyst
Yes.Thanks, this is an aggressive and impressive response, thanks.
Operator
EdwardWestlake, Credit Suisse.
EdwardWestlake - Credit Suisse - Analyst
Yes.Good morning. Can you hear me?
JohnHess - Hess Corp - Chairman of the Board & CEO
Yes,we can.
EdwardWestlake - Credit Suisse - Analyst
Great.Thanks very much. A very detailed presentation, very helpful. I guess in terms of resource replacement, as you look forward from here, you've laidout, obviously, Bakken Shale and there's [three-fourths] potential there, you have got the Utica, you have got Ghana. Are you comfortable that theassets and drilling around the assets that you have, can, Iguess, extend the growth beyond 2017? Or maybe talk about your confidence in longerterm reserve replacement? Thank you.
GregHill - Hess Corp - Senior Executive, Board of Directors
Yes, Ithink as John mentioned in his opening remarks, as youkind of go into thelong-term, you have additional growth in Valhall and Bakken in theearly days, in the outer years it's driven by the Utica and Ghana. Ghana, as John said, very promising, earlydays. Have a lot of appraisal drilling leftto do, and then also the Utica, although early days, very promising. So we're gaining confidence, daily, in those two areas.
EdwardWestlake - Credit Suisse - Analyst
Andthen on the Bakken. I mean, do you think you can cap a low $9 million, obviously, as you shift into pad drilling? And have you done any tests inyour acreage of -- at Three Forks?
GregHill - Hess Corp - Senior Executive, Board of Directors
Wehave done some test of the Three Forks, and we anticipate additional appraisal drilling in the Three Forks this year. As John mentioned in his openingremarks we're at $9 million now, and we're just now really transformed into pad drilling, so I am optimistic that further reductions will come.
EdwardWestlake - Credit Suisse - Analyst
Thankyou.
Operator
EvanCalio, Morgan Stanley.
EvanCalio - Morgan Stanley - Analyst
Yes.Good morning, guys. Appreciate the clarity this morning. John, can you expand on that, on the strategy, or new hierarchy and the use of the cash?I mean is the $4 billion buyback largely one-time funded from new asset sales, given that you're free cash flow -- or forecasting free cash fell flatin 2013?
JohnRielly - Hess Corp - SVP & CFO
Yes.Sure. I'll walk you through that. I mean, again, so what are we talking about today?We are now -- we put our strategy,returning capital shareholdersvia an enhanced sustained common dividend, so we've increased our dividend, and now we have the authorization for the $4 billion sharerepurchase. So what we expect at this time, as I said, it will take about 12 to 18 months to get the assets sales done. We expect the total proceedsfrom our asset sales to fund the proceeds that John had articulated.
Sothe first thing that we'll do with the proceeds is repay our short-term debt, and that will beapproximately $2.5 billion. We will addto cash to thebalance sheet of approximately $1 billion, really to cushion against commodity price volatility, and then we'll also use theproceeds to fund ourdevelopment program that Greg just discussed. Then we will have excess cash. We expect to have excess cash from those asset sales, and we're goingto use that excess cash to repurchase, at this point, expect to repurchase up to $4 billion of shares.
EvanCalio - Morgan Stanley - Analyst
Anyadditional hedging in connection with that, you know, commitment to those cash strategies?
JohnRielly - Hess Corp - SVP & CFO
So,in our 10-K if you see for 2013, we now have 90,000barrels a day hedged at a price of $109.74 Brent. So we do have that in 2013.
EvanCalio - Morgan Stanley - Analyst
Onthe -- if I [may ask] that question, on the potential monetization in the Bakken midstream assets that you discussed, I mean these are embedded assets,and could you provide any range on that EBITDA potential or just clarify the description of assets you're considering, or you would consider includinghere? And in addition, why 2015, as most of those assets would be operating -- generating potential cash, insomething that could be monetizedin the 2014 window?
JohnRielly - Hess Corp - SVP & CFO
So,you're right. I mean it's -- the timing of monetizing the midstream infrastructure just depends on when that midstream infrastructure has distributablecash flow. And as you know, we're building out our gas plant right now, and there's additional gathering facilities, and on our last call wetalked about that we'll be spending about $500,000 million in the Bakken on the midstream infrastructure. So we do expect, to your point, to completethis kind of build-out by early 2014. And so with our guidancefor 2015, what that just means, is we think we need some historical performancethere, of the cash flow, of the EBITDA, from these midstream assets, and as we get that historical performance, I expect the timing of themonetization is 2015.
EvanCalio - Morgan Stanley - Analyst
Perfect.And if I could just follow-up with just one last question, and really follow-up to the first question. Could you guys provide any, like a pro forma2013 CapEx on the lower production volume that you're showing, as you know, 289, 2012 pro forma? Meaning, how much of the CapEx is associatedwith assets being sold in this -- the $6.8 billion guidance of earlier in the year?
JohnRielly - Hess Corp - SVP & CFO
Sure.It is actually in the back slides that we didn't walkthrough, but as -- in the slide that talks about, kindof, some of our reductions in capital, so onthe upstream side, we have $6.7 billion of capital that we gave out, that's capital and exploratoryspend. The pro forma number on that $6.2 billion,excluding these asset sales.
EvanCalio - Morgan Stanley - Analyst
Perfect.I appreciate that.
JohnRielly - Hess Corp - SVP & CFO
You'rewelcome.
Operator
RogerRead, Wells Fargo.
RogerRead - Wells Fargo Securities - Analyst
Yes.Good morning. I guess quick questions I had, just to thinkabout, kind of future margins, or returns here, as we look at a more focused asset base?Can you kind of walk us throughthe impacts of where you're going to be seeing production increasing, for example, the Northern Malay Basinversus the assets you're selling there, and then also, sort of the impact on tax structure once assets, such as the Russian operations, are gone versus,what we know as a high tax area such as Norway? It may be a little earlyfor some of that, but I'm just trying to understand as we, you know, tryto make an expectation of '14 or '15 cash flow, some of the moving parts here.
JohnRielly - Hess Corp - SVP & CFO
Sure.Roger it is early, but Ican give yousome general ideas on what we see with our pro forma portfolio. As John had mentioned in his remarks, rightnow withour -- with this focused portfolio, asyou mentioned, will generate higher growth than we had before. The other thing that the portfoliois providing, is a higher cash margin per barrel. And as John mentioned, we're estimating that to be at $5, so every barrel we're producing inthis new portfolio, is, on average, giving us a $5 higher cash margin.
Andthen just in relation to the last question, as we see in our portfolio, we have some reduced capital spending that we'll have going forward, as Gregis talking about some efficiencies that will continue to drive in the Bakken. And as John Hess mentioned earlier, we're undergoing a significant costreduction program, so that we see incremental savings, and this is beyond the direct costs associated with the assets being sold, of $150 millionright now. So overall, just to answer your question, obviously we see the returns in the new portfolio obviously being positive as compared tothe prior portfolio.
Andthe assets driving it? As I think was your question? Again, the growth in the early stages we're going to be Bakken, which has great cash margins andexcellent returns. Valhall, now has completed its redevelopment projects, so the significant capital is behind it. What we're doing now is, just
--now drilling up the field, and BP is now drilling up the field. So, it's just drilling production wells and taking it through this infrastructure that we'vealready paid for.
Sothose two are driving our early production, and then Tubular Bells, obviously, I know, having assets producing in the Gulf of Mexico in the fiscal termsthat you havehere in the US, is extremely favorable. So with those assets really driving our short-term growth to your point, we're seeing -- goingto be a nice EBITDA in cash flow coming out of this new focus portfolio.
RogerRead - Wells Fargo Securities - Analyst
Okay.Thanks, and then just kind of a follow-upon the returns question. I mean, I understand where you intend to grow here, but if you were to justsay, what area, which region, produces the best returns for you right now, I mean, is it clear that it's the Bakken, ordoes another one of the opportunitiescompete favorably with that?
GregHill - Hess Corp - Senior Executive, Board of Directors
TheBakken has excellent returns on it. I mean, the way you have to lookat this though is, there will beassets, as I spoke of before, that have the completeinfrastructure build-out, and then drilling a well andturning it on, will have fantastic returns. Pick Equatorial Guinea. We have been operatingthere for a while. It's mature. We are drilling wells there that have unbelievable returns. So you have different aspects going across the portfoliothat -- where we can allocate capital, and we're going to allocate it efficiently.In our growth assets, though, Bakken, Valhall, and Tubular Bells,we have excellent returns that will be coming from those assets.
RogerRead - Wells Fargo Securities - Analyst
Okay.And then my final question. If we think about Ghana, I know that's much further out here, but you have a very high working interest ownership positionthere. I would expect that you sell thatdown. Is some of that capital? Or is that capital in addition to the $4 billion we're talking about, thatwould be returned to shareholders, via the asset sales of everything that was talked about today?
GregHill - Hess Corp - Senior Executive, Board of Directors
Yes.Of course, no, that's out further in future. We'll begin an appraisal program next year, and that's in all of our funding growth estimates for the proceeds.We're early phases there, as we said, we're going to be in an appraisal program. As we've stated previously on conference calls, we would liketo bring our working interest down. That's going to be a matter of timing as to when that occurs.
RogerRead - Wells Fargo Securities - Analyst
Andthe funds for that would be whatever you need funds for at the time. We're not, pegging those funds to something in particular right here?
GregHill - Hess Corp - Senior Executive, Board of Directors
No,we aren't.
RogerRead - Wells Fargo Securities - Analyst
Okay.Thank you.
Operator
DougLeggate, Bank of America Merrill Lynch.
DougLeggate - BofA Merrill Lynch - Analyst
Thankseverybody, a joint congratulations anda thorough response to recent events.I have three quick ones if I may, moving [forward to take my callfrom here]. First, on the downstream. The exit of retail and downstreamis that intend as a sale, or are there any other options on the table, for examplean IPO? [I know] one was relatively small, but just want to get -- make sure that we dot the i's there, on any tax consequencesfrom John Riellyplease?
JohnHess - Hess Corp - Chairman of the Board & CEO
Yes.In terms of moving forward, in terms of pursuing strategic options to maximize value, be it the retail marketing business or energy marketing business,we are evaluating several options to monetize these businesses to maximize shareholder value. And we are just starting that process. We'removing forward in an orderly manner, and we'll keep you informed.
DougLeggate - BofA Merrill Lynch - Analyst
Andtax consequences?
JohnRielly - Hess Corp - SVP & CFO
Sure,Doug. As I see it now, the US cash taxes will be substantially deferred, because the intangible drilling cost deductions from our unconventionals operations,and of course, the combination of timing, structure, and alternative minimum tax come into play, but relativeto proceeds and gains, cashtax deferral will be substantial.
DougLeggate - BofA Merrill Lynch - Analyst
Sowhat I'm referring to specifically, is if you sell the downstream, is there a tax? What's the tax basis on those assets?
JohnRielly - Hess Corp - SVP & CFO
Thetax basis of those assets, will generate a significant taxable gain, Doug, fromthat standpoint. However, if the cash taxes associated withthose willbe deferred, because of the deductions we have from the IDCs and the unconventionals.
DougLeggate - BofA Merrill Lynch - Analyst
Understood.Thank you. My second question is, John, you know the additional asset salesare, I think you had some indicated time [INDISCERNIBLE] in the costspotentially going forward, but can you help us with the pro forma cash, cash per barrel impact? As to whatthe portfolio looks like? I guess whatI'm really trying to figure out is, were these assets for sale, significant free cash generators? And when answering the question, if I could alsoask you about some of your other peripheral assets that you haven't mentioned? For example, Australia? You're small working interest in non-operatedexploration in Brunei? I guess what I'm really trying to get to is, is the process done now or are there still additional things that could be sold? And I'vegot one (inaudible) follow-up please?
JohnHess - Hess Corp - Chairman of the Board & CEO
Whydon't I start. I'll start Doug, because you had a lot of questions there. So I'm just going to just go through the beginning part, and I think you're tryingto get some help on cashflow from -- per barrel or cash margins going forward. And as we said, that will increase $5 per barrel on the remainingportfolio. But to help you out, let's just talk 2012 pro forma. The capital expenditures for all these assets that we are selling in 2012, was
$1.030billion, that was the actual capital associated with those assets being sold.
assets.So Indonesia and Thailand will have,because they are more gas linked than oil linked, they have a lower cash margin per barrel than the
remainingpart of our portfolio. The real driver, I think, as you know, to increase the cash margin per barrel going forward, relates to Russia. Where theprices that we get for the Russian crude is significantly lower than the rest of the portfolio. So that's what drives the ultimate increase in our cashmargin then going forward.
GregHill - Hess Corp - Senior Executive, Board of Directors
Yes,Doug, youmentioned a couple other assets, you know whydidn't you sell them? One of them being Australia. I guess for assets like Australia, andStampede, and even Brunei, frankly, wejust don't feel like they're at the right point in their lifecycle to really pursue monetization alternatives.
DougLeggate - BofA Merrill Lynch - Analyst
Thanks,and might [-- I what the last one is]. I'm just going to trythis on for size, butGhana, you really haven'tgiven us any idea of scale. Is there anycolor you can share there, as particularly, given that you're including itin your growth targets? Is there a meaningful amount of volume associated?And if so [or is that] -- going to leave it there.Thank you.
JohnRielly - Hess Corp - SVP & CFO
Doug,could I just start, andGreg will add about Ghana. But those growth targets that we talked about, at 5% to 8% CAGR growth off 2012 pro formaproduction does not include any production from Ghana, so that is beyond 2017. And Greg can give you some color on Ghana.
GregHill - Hess Corp - Senior Executive, Board of Directors
Yes,Doug, so on Ghana, as you know we're in the middle of negotiating an appraisal program with the government, but we do not want to, we donot want to share any volumes at this point intime. What I will say, however, though, is we're progressingpre-development studies. So I think that's aclue that, you know, webelieve we have enough for a commercial hub there to begin development.
DougLeggate - BofA Merrill Lynch - Analyst
Whatdoes that come out to a threshold Greg?
GregHill - Hess Corp - Senior Executive, Board of Directors
Can'tbe specific right now, Doug, sorry. (laughter)
DougLeggate - BofA Merrill Lynch - Analyst
Allright. I'll leave it there,thanks.
Operator
ArjunMurti, Goldman Sachs.
ArjunMurti - Goldman Sachs - Analyst
Thankyou and thanks for all the update as well on today's presentation. Just a question, one thing you've been working towards has been a better balancebetween cash flow and CapEx. And just curious with the higher growth rate now, I realize some of these proceeds are going to be used to helpfund CapEx over the next year or so, but long-term, can you make any comments on how you are thinking about that balance -- will look like?
JohnRielly - Hess Corp - SVP & CFO
Sure.Arjun, obviously on -- over a long-term period, obviously wewant to be spending underneathour cash flow as we go forward and still -- generatethis growth. What we have is, as Greg has mentioned, and I think we've talked about it earlier, we still do have some build-out of the Bakkengoing on. We've got the midstream build-out, $500 million that we're estimating this year on the Bakken, and we're beginning to ramp up nowwith the production drilling in Valhall. So the production and the cash flow will come a little bit later. At this point in time still, as we see in '13 and'14, some of these -- this assets [to] proceeds as we said are being allocated to fund this program. Then this focused portfolio, as we see going forward,begins to generate that excess cash flow.
ArjunMurti - Goldman Sachs - Analyst
Ithink, John, you'd previously targeted, having kind of the balance between cash flow and CapEx in '14, but you are targeting a higher growth rate now,so I guess X asset sales. Should we just think about, maybe, there is a bitmore CapEx, but in return we're getting a highertargeted growth rate?
JohnRielly - Hess Corp - SVP & CFO
Thatis correct.
ArjunMurti - Goldman Sachs - Analyst
That'sterrific. You mentioned the potential to monetize the Bakken midstream. Are there other midstream assets that you could also stick in some vehicle?For example, the Gulf of Mexico, you havesome producing fields, or are you really just thinking of the Bakken at this point?
GregHill - Hess Corp - Senior Executive, Board of Directors
Atthis point Arjun,we're just thinking about the Bakken.
ArjunMurti - Goldman Sachs - Analyst
Okay.Great. And then just lastly, one thing about Valhall, is you have alarge interest, but BP is the operator with the smaller interest. You've got somesmaller interests in the Gulf of Mexico in their fields -- can I presume there are additional asset exchanges and flops you'll be looking at as justpart of normal ongoing restructuring activities and business development?
GregHill - Hess Corp - Senior Executive, Board of Directors
Yes,Arjun, I think not to be specific about Valhall, but as youknow, we've been very active portfolio managers, so I think in the course of normal business,we will always be looking at ways to further optimize our portfolio.
ArjunMurti - Goldman Sachs - Analyst
That'sgreat. Thank you so much.
Operator
DougTerreson, ISI.
DougTerreson - ISI Group - Analyst
Goodmorning everybody, congratulations on your new initiatives. John, there was a lot of commentary today on capital allocation, return of capital toshareholders, et cetera, and on this point, my question is, post to transition to becoming a pure play E&P company, where will emphasis be placed as it relates to measurement of corporate performance? Meaning, while it may be too early to know, since the newly proposed board is yet toassemble, do you envision growth superseding returns in importance, or vice versa? Or do you think changes are even neededin this area?
JohnHess - Hess Corp - Chairman of the Board & CEO
Well,I think is -- very good question. We've got the right balance. What did we say? We want to fund our growth of our reserves and production. We'rein the E&P business to build that value for our shareholders, and we certainly feel we have the right plan to maximize shareholder value, that ourBoard and managementteam have put in place. Having said that, obviously, as you invest money, the whole reason you invest money is to maximizereturns.
DougTerreson - ISI Group - Analyst
Yes.
JohnHess - Hess Corp - Chairman of the Board & CEO
So,we intend to do both. We're going to have a growth rate, but we're also going to have anexpanding cash margin that we talked about. But in allof that, we'll allocate capital to maximize returns.
DougTerreson - ISI Group - Analyst
Goodanswer, John.
JohnHess - Hess Corp - Chairman of the Board & CEO
And,and I think, you know, the other important thing is, we are very happy and proud to have thenew directors that just joined us. They're all independent.Three have, extensive experience in E&P, and the other three have extensive experience in business and finance, and I think that the newdirectors have approved our strategy, are enthusiastic about our strategy, is a testament that it is the right strategy to maximize value for our shareholders,and it's the right one for our shareholders.
DougTerreson - ISI Group - Analyst
Right.Good answer, John. Thanks a lot.
Operator
JohnHerrlin, Societe Generale
JohnHerrlin - Societe Generale - Analyst
Yes,hi, three quick ones. There's been no mention of potential restructuring charges, could you address that John Rielly?
JohnRielly - Hess Corp - SVP & CFO
Sure,as part of this transition, there clearly will be restructuring charges, and I think, as John had mentioned earlier, with the cost savings program thiswe're looking at, I would tell you that we would look to see that beginning to flow through in 2014, because there will be costsassociated with theasset sales, restructuring costs, and actually just costs associated with putting the cost reduction programs in place. So that will come about. It'sa little early right now. I think as we get through our first quarter earnings call, we'll begin to have a little bit more of a view on that, and we can provideupdates on that.
JohnHerrlin - Societe Generale - Analyst
Okay.That's fine. How about the tax efficiency of the international sales? You mentioned domestic ones, what about international?
JohnRielly - Hess Corp - SVP & CFO
Andright now, I would tell you John, I do see some tax leakage on the international sales, I would say it's small in relation to the aggregate proceeds andgain that we will seethere. It's going to dependon the buyer and how the sale is structured, and I mean, I'll have a better idea of that as we getfurther into the process.
JohnHerrlin - Societe Generale - Analyst
Okay.Last one for me is on, kind of, head counts, and this may be premature too, you ended last year with close to 15,000 employees, like 14,700 somethinglike that. How will the new Hess look pro forma everything? How much smaller are you getting?
JohnHess - Hess Corp - Chairman of the Board & CEO
Aswe reshape our portfolio business,we'll give you an update onthat. I might tell you that approximately half of those employees are associated withthe retail business, and obviously as we exit the retail business, they will not with the E&P company. But more definition than that, you know, letus get our plans in place, and as soon as we can give definition, we will.
JohnHerrlin - Societe Generale - Analyst
Thanks,John.
Operator
BlakeFernandez, Howard Weil.
BlakeFernandez - Howard Weil Incorporated - Analyst
Folks,good morning. John Rielly, just to ensure that our estimates are aligned with the way you're giving reporting going forward, is it fair to say theassets being marketed, are those going to be stripped out as, I guess, assetsbeing held for sale?
JohnRielly - Hess Corp - SVP & CFO
That'sa great question, Blake, and we are looking at that right now. I can't tell you the exact formatof how the reporting would be, but we are lookingat it. Again it depends on some of the structures that we do, but what I would tell you is, nomatter what the actual statements go in per GAAP,we will give you a pro forma reporting. So we'll be able to give the guidance and the numbers associated as if these assets were not in the portfolio.
BlakeFernandez - Howard Weil Incorporated - Analyst
Okay.Great. The second question I had, I think you addressed the fact that you're in [like] the initial phases of evaluating the retail, whether it's a spinor sale or et cetera. Is that also the case for the Bakken midstream? In other words, is it MLPa consideration or is it anoutright sale?
JohnHess - Hess Corp - Chairman of the Board & CEO
Yes,we are going look at all the options, and what's going to be behind it, is maximizing shareholder value.
BlakeFernandez - Howard Weil Incorporated - Analyst
Okay.Great. The last question I had, and I think this may have tied in with the previous question, but I'm just -- is there a fourth phase to come here downthe road? Or are we really, kind of, at the final phases of the -- of shaking the portfolio here?
JohnHess - Hess Corp - Chairman of the Board & CEO
No,this is the -- fair question. This is a culmination of a multi year strategy to transformHess intoa pure E&P play. Any asset sales or acquisitions afterthis, are totally to upgrade the portfolio. So this is the culmination right here, becoming a pure play E&P company.
BlakeFernandez - Howard Weil Incorporated - Analyst
Okay.Thank you very much.
Operator
Thankyou ladiesand gentlemen, we have no further questions, and I'll thank you for your participation in today's conference. This now concludes yourpresentation. You may now disconnect. Have a good day.
DISCLAIMER
ThomsonReuters reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes.
Inthe conference calls upon which Event Transcripts arebased, companies may make projectionsor other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon currentexpectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specificallyidentified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptionscould prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION,THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANYRESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'SCONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
©2013, ThomsonReuters. All Rights Reserved.
