AMERADA HESS CORP - 10-Q Quarterly Report

AMERADA HESS CORPORATION
(Exact name of registrant as specified in its charter)

1185 AVENUE OF THE AMERICAS, NEW YORK, N.Y.
(Address of principal executive offices)

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

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


	Three Months					Nine months
	ended September 30					ended September 30
	2003		*2002()**			2003		*2002()**
REVENUES AND NON-OPERATING INCOME
Sales (excluding excise taxes) and other operating revenues	$	3,230	$	2,724		$	10,683	$	8,345
Non-operating income (expense)
Gain on asset sales		—		68			39		129
Equity in income (loss) of HOVENSA L.L.C		43		(6	)		108		(50	)
Other		23		12			42		62

Total revenues and non-operating income		3,296		2,798			10,872		8,486


COSTS AND EXPENSES
Cost of products sold		2,194		1,650			7,423		5,175
Production expenses		207		197			589		522
Marketing expenses		171		144			508		500
Exploration expenses, including dry holes and lease impairment		59		103			253		206
Other operating expenses		44		40			144		122
General and administrative expenses		70		70			252		192
Interest expense		73		61			224		194
Depreciation, depletion and amortization		253		274			799		853
Asset impairment		—		318			—		318


Total costs and expenses		3,071		2,857			10,192		8,082


Income (loss) from continuing operations before income taxes		225		(59	)		680		404
Provision for income taxes		79		46			282		249


Income (loss) from continuing operations		146		(105	)		398		155

Discontinued operations
Net gain from asset sales		—		—			116		—
Income (loss) from operations		—		(31	)		53		(2	)
Cumulative effect of change in accounting principle		—		—			7		—


NET INCOME (LOSS)	$	146	$	(136	)	$	574	$	153


BASIC EARNINGS PER SHARE
Continuing operations	$	1.65	$	(1.19	)	$	4.49	$	1.75
Net income (loss)		1.65		(1.54	)		6.48		1.74

DILUTED EARNINGS PER SHARE
Continuing operations	$	1.64	$	(1.19	)	$	4.47	$	1.73
Net income (loss)		1.64		(1.54	)		6.45		1.72

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING		89.1		88.3			89.1		89.3

COMMON STOCK DIVIDENDS PER SHARE	$	.30	$	.30		$	.90	$	.90

AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions of dollars, thousands of shares)


	September 30,
	2003			December 31,
	(Unaudited)			2002
A S S E T S
CURRENT ASSETS
Cash and cash equivalents	$	339		$	197
Accounts receivable		1,502			1,972
Inventories		560			492
Other current assets		137			95

Total current assets		2,538			2,756


INVESTMENTS AND ADVANCES
HOVENSA L.L.C.		950			842
Other		98			780

Total investments and advances		1,048			1,622


PROPERTY, PLANT AND EQUIPMENT
Total — at cost		16,384			16,149
Less reserves for depreciation, depletion, amortization and lease impairment		8,442			9,117

Property, plant and equipment — net		7,942			7,032


NOTES RECEIVABLE		302			363


GOODWILL		977			977


DEFERRED INCOME TAXES AND OTHER ASSETS		404			512


TOTAL ASSETS	$	13,211		$	13,262


L I A B I L I T I E S A N D S T O C K H O L D E R S ’ E Q U I T Y

CURRENT LIABILITIES
Accounts payable — trade	$	1,098		$	1,401
Accrued liabilities		679			830
Taxes payable		209			306
Notes payable		—			2
Current maturities of long-term debt		189			14

Total current liabilities		2,175			2,553


LONG-TERM DEBT		4,301			4,976


DEFERRED LIABILITIES AND CREDITS
Deferred income taxes		1,083			1,044
Asset retirement obligations		464			—
Other		474			440

Total deferred liabilities and credits		2,021			1,484


STOCKHOLDERS’ EQUITY
Preferred stock, par value $1.00, 20,000 shares authorized
3% cumulative convertible series
Authorized - 330 shares
Issued - 327 shares ($16 million liquidation preference)		—			—
Common stock, par value $1.00
Authorized - 200,000 shares
Issued - 89,876 shares at September 30, 2003; 89,193 shares at December 31, 2002		90			89
Capital in excess of par value		963			932
Deferred compensation		(30	)		—
Retained earnings		3,975			3,482
Accumulated other comprehensive loss		(284	)		(254	)

Total stockholders’ equity		4,714			4,249


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	13,211		$	13,262

AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Nine months ended September 30
(in millions)


	2003			*2002()**
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	574		$	153
Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization		799			853
Asset impairment		—			318
Exploratory dry hole costs		107			97
Lease impairment		47			33
Pre-tax gain on asset sales		(244	)		(103	)
Provision (benefit) for deferred income taxes		170			(70	)
Undistributed earnings of affiliates		(121	)		52
Non-cash effect of discontinued operations		46			236
Changes in operating assets and liabilities		(219	)		(142	)

Net cash provided by operating activities		1,159			1,427


CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(1,015	)		(1,207	)
Payment received on note		61			48
Proceeds from asset sales and other		525			363

Net cash used in investing activities		(429	)		(796	)


CASH FLOWS FROM FINANCING ACTIVITIES
Debt with maturities of 90 days or less — decrease		(2	)		(574	)
Debt with maturities of greater than 90 days Borrowings		—			602
Repayments		(478	)		(569	)
Cash dividends paid		(108	)		(107	)
Stock options exercised		—			28

Net cash used in financing activities		(588	)		(620	)


NET INCREASE IN CASH AND CASH EQUIVALENTS		142			11

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		197			37


CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	339		$	48


Note 1	-	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 the Corporation’s consolidated financial position at September 30, 2003 and December 31, 2002, and the consolidated results of operations for the three- and nine-month periods ended September 30, 2003 and 2002 and the consolidated cash flows for the nine-month periods ended September 30, 2003 and 2002. 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 2002 Annual Report to Stockholders, which have been incorporated by reference in the Corporation’s Form 10-K for the year ended December 31, 2002, as updated by Form 8-K filed on November 6, 2003. Certain information in the financial statements and notes has been reclassified to conform with current period presentation.

Note 2	-	In the first nine months of 2003, the Corporation took initiatives to reshape its portfolio of exploration and production segment assets to reduce costs, lengthen reserve lives, provide capital for investment and reduce debt.

		In the first quarter of 2003, the Corporation exchanged its crude oil producing properties in Colombia (acquired in 2001 as part of the Triton acquisition), plus $10 million in cash, for an additional 25% interest in natural gas reserves in the joint development area of Malaysia and Thailand. The exchange resulted in a charge to income of $51 million before income taxes, which the Corporation reported as a loss from discontinued operations in the first quarter of 2003. The loss on this exchange included a $43 million pre-tax adjustment of the book value of the Colombian assets to fair value resulting primarily from a revision in crude oil reserves. The loss also included $26 million from the recognition in earnings of the value of related hedge contracts at the time of the exchange. These items were partially offset by pretax earnings in Colombia prior to the exchange of $18 million. At the time of the exchange, the exploration and production segment included the net book value of fixed assets in Colombia of $670 million and a related deferred income tax liability of $142 million.

		In this exchange transaction, the Corporation acquired the 50% interest in a corporate joint venture that it did not already own. Prior to the exchange, the Corporation accounted for its 50% interest in the corporate joint venture using the equity method. Because of the exchange, the joint venture became a wholly owned subsidiary and now is consolidated.

		In the second quarter of 2003, the Corporation sold producing properties in the Gulf of Mexico shelf, the Jabung Field in Indonesia and several small United Kingdom fields. The aggregate proceeds from these sales were $445 million and the pre-tax gain from disposition was $248 million. With respect to the assets sold in the second quarter of


		2003, the net book value of fixed assets at the time of sale was approximately $295 million and the related dismantlement and deferred tax liabilities were approximately $160 million. Income from operations of these assets prior to sale amounted to $40 million in the first nine months of 2003.

		Sales and other operating revenues (net of intercompany sales) from discontinued operations were $97 million and $291 million in the first nine months of 2003 and 2002, respectively. The net production from fields sold or exchanged in 2003 at the time of disposition was approximately 45,000 barrels of oil equivalent per day.

		During the third quarter of 2003, the Corporation completed the exchange of its 25% equity investment in Premier Oil plc for a 23% interest in Natuna Sea, Block A, in Indonesia.

		On October 1, 2003, the Corporation exchanged 14% interests in the Scott and Telford fields in the United Kingdom for an additional 22.5% interest in the Llano Field in the Gulf of Mexico and $17 million in cash. The exchange increases the Corporation’s working interest in the Llano Field to 50% and decreases its interest in the Scott Field to 21% and the Telford Field to 17%

Note 3	-	Inventories consist of the following (in millions):


Note 8	-	The Corporation records compensation expense for nonvested common stock awards ratably over the vesting period, which is generally five years. The Corporation uses the intrinsic value method to account for employee stock options. Because the exercise prices of employee stock options equal or exceed the market price of the stock on the date of grant, the Corporation does not recognize compensation expense.

		The Corporation uses the Black-Scholes model to estimate the fair value of employee stock options for pro forma disclosure. Using the fair value method, stock option expense would be recognized over the one-year vesting period. The following pro forma financial information presents the effect on net income and earnings per share as if the Corporation used the fair value method for stock options granted during the previous year (in millions, except per share data):


PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements.
		STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)
		CONSOLIDATED BALANCE SHEET
		STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
SECTION 302 CERTIFICATION OF CEO
SECTION 302 CERTIFICATION OF CFO
SECTION 906 CERTIFICATION OF CEO
SECTION 906 CERTIFICATION OF CFO


	At			At
	September 30,			December 31,
	2003			2002
Crude oil and other charge stocks	$	132		$	99
Refined and other finished products		512			497
Less: LIFO adjustment		(257	)		(261	)

		387			335
Materials and supplies		173			157

Total inventories	$	560		$	492


	At			At
	September 30,			December 31,
	2003			2002
Summarized balance sheet
Current assets	$	732		$	520
Net fixed assets		1,835			1,895
Other assets		37			40
Current liabilities		(310	)		(335	)
Long-term debt		(399	)		(467	)
Deferred liabilities and credits		(68	)		(45	)

Partners’ equity	$	1,827		$	1,608


Note 5	-	During the three- and nine-month periods ended September 30, 2003, the Corporation capitalized interest of $9 million and $31 million, respectively, on major development projects ($26 million and $75 million during the corresponding periods of 2002).

Note 6	-	The provision for income taxes from continuing operations consisted of the following (in millions):

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


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


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


	Three months					Nine months
	ended September 30					ended September 30
	2003		2002			2003		2002
Summarized income statement
Total revenues	$	1,506	$	1,054		$	4,070	$	2,622
Costs and expenses		1,419		1,065			3,851		2,720

Net income (loss)	$	87	$	(11	)	$	219	$	(98	)

Amerada Hess Corporation’s share	$	43	$	(6	)	$	108	$	(50	)


Note 7		-		Foreign currency gains (losses) amounted to the following (in millions):