AMERADA HESS CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q


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

For the quarter ended March 31, 2004


o		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

AMERADA 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 proceeding 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 [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

At March 31, 2004, 90,018,930 shares of Common Stock were outstanding.

TABLE OF CONTENTS


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
CERTIFICATION
CERTIFICATION
CERTIFICATION
CERTIFICATION

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)
Three Months Ended March 31
(in millions, except per share data)


	2004		*2003()**
REVENUES AND NON-OPERATING INCOME
Sales (excluding excise taxes) and other operating revenues	$	4,488	$	4,254
Non-operating income
Gain on asset sales		19		47
Equity in income of HOVENSA L.L.C.		51		50
Other		4		12

Total revenues and non-operating income		4,562		4,363

COSTS AND EXPENSES
Cost of products sold		3,288		3,088
Production expenses		187		192
Marketing expenses		177		170
Exploration expenses, including dry holes and lease impairment		78		106
Other operating expenses		48		51
General and administrative expenses		76		77
Interest expense		57		74
Depreciation, depletion and amortization		226		276

Total costs and expenses		4,137		4,034

Income from continuing operations before income taxes		425		329
Provision for income taxes		144		139

Income from continuing operations		281		190
Discontinued operations
Net loss from asset sales		—		(60	)
Income from operations		—		39
Cumulative effect of change in accounting principle		—		7

NET INCOME	$	281	$	176

Preferred stock dividends		12		—

NET INCOME APPLICABLE TO COMMON STOCKHOLDERS	$	269	$	176

BASIC EARNINGS PER SHARE
Continuing operations	$	3.03	$	2.13
Net income		3.03		1.98
DILUTED EARNINGS PER SHARE
Continuing operations	$	2.77	$	2.13
Net income		2.77		1.98

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (DILUTED)		101.4		89.1

COMMON STOCK DIVIDENDS PER SHARE	$	.30	$	.30

(*) Reclassified to conform with current period presentation.

See accompanying notes to consolidated financial statements.

PART I - FINANCIAL INFORMATION (CONT’D.)

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


	March 31,
	2004			December 31,
	(Unaudited)			2003
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	492		$	518
Short-term investments		65			—
Accounts receivable		2,099			1,902
Inventories		393			579
Other current assets		147			187

Total current assets		3,196			3,186

INVESTMENTS AND ADVANCES
HOVENSA L.L.C.		1,011			960
Other		121			135

Total investments and advances		1,132			1,095

PROPERTY, PLANT AND EQUIPMENT
Total - at cost		16,352			16,100
Less reserves for depreciation, depletion, amortization and lease impairment		8,316			8,122

Property, plant and equipment - net		8,036			7,978

NOTES RECEIVABLE		272			302

GOODWILL		977			977

DEFERRED INCOME TAXES AND OTHER ASSETS		503			445

TOTAL ASSETS	$	14,116		$	13,983

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable - trade	$	1,666		$	1,542
Accrued liabilities		754			855
Taxes payable		241			199
Current maturities of long-term debt		73			73

Total current liabilities		2,734			2,669

LONG-TERM DEBT		3,855			3,868

DEFERRED LIABILITIES AND CREDITS
Deferred income taxes		1,100			1,144
Asset retirement obligations		470			462
Other		468			500

Total deferred liabilities and credits		2,038			2,106

STOCKHOLDERS’ EQUITY
Preferred stock, par value $1.00, 20,000 shares authorized
7% cumulative mandatory convertible series
Authorized - 13,500 shares
Issued - 13,500 shares ($675 liquidation preference)		14			14
3% cumulative convertible series
Authorized - 330 shares
Issued - 327 shares ($16 liquidation preference)		—			—
Common stock, par value $1.00
Authorized - 200,000 shares
Issued - 90,019 shares at March 31, 2004; 89,868 shares at December 31, 2003		90			90
Capital in excess of par value		1,612			1,603
Retained earnings		4,253			4,011
Accumulated other comprehensive income (loss)		(454	)		(350	)
Deferred compensation		(26	)		(28	)

Total stockholders’ equity		5,489			5,340

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	14,116		$	13,983

See accompanying notes to consolidated financial statements.

PART I - FINANCIAL INFORMATION (CONT’D.)

AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Three months ended March 31
(in millions)


	2004			*2003()**
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	281		$	176
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization		226			276
Exploratory dry hole costs		29			42
Lease impairment		19			15
Pre-tax gain on asset sales		(19	)		(5	)
Provision (benefit) for deferred income taxes		(44	)		45
Undistributed earnings of affiliates		(49	)		(49	)
Non-cash effect of discontinued operations		—			35
Changes in operating assets and liabilities		(49	)		(47	)

Net cash provided by operating activities		394			488

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(364	)		(341	)
Payment received on note		30			30
Increase in short-term investments		(65	)		—
Proceeds from asset sales and other		48			(2	)

Net cash used in investing activities		(351	)		(313	)

CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in debt with maturities of 90 days or less		—			(1	)
Debt with maturities of greater than 90 days
Borrowings		7			—
Repayments		(20	)		(121	)
Cash dividends paid		(67	)		(54	)
Stock options exercised		11			—

Net cash used in financing activities		(69	)		(176	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(26	)		(1	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		518			197

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	492		$	196

(*) Reclassified to conform with current period presentation.

See accompanying notes to consolidated financial statements.

PART I - FINANCIAL INFORMATION (CONT’D.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 March 31, 2004 and December 31, 2003, and the consolidated results of operations and the consolidated cash flows for the three-month periods ended March 31, 2004 and 2003. 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 2003 Annual Report to Stockholders, which have been incorporated by reference in the Corporation’s Form 10-K for the year ended December 31, 2003. Certain information in the financial statements and notes has been reclassified to conform with current period presentation.

Note 2	-	In 2003, the Corporation took initiatives to reshape its portfolio of exploration and production 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 $69 million before income taxes, which the Corporation reported as a loss on asset sale in discontinued operations in the first quarter of 2003. Discontinued operations in the first quarter of 2003 also included $18 million (before income taxes) of income from operations prior to the exchange.

		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. Discontinued operations in the first quarter of 2003 included $41 million before income taxes of income from operations from these assets.

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


	At			At
	March 31,			December 31,
	2004			2003
Crude oil and other charge stocks	$	117		$	138
Refined and other finished products		392			567
Less LIFO adjustment		(283	)		(293	)

		226			412
Materials and supplies		167			167

Total inventories	$	393		$	579

PART I - FINANCIAL INFORMATION (CONT’D.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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):


	At			At
	March 31,			December 31,
	2004			2003
Summarized balance sheet
Current assets	$	1,019		$	882
Net fixed assets		1,813			1,818
Other assets		38			37
Current liabilities		(451	)		(441	)
Long-term debt		(392	)		(392	)
Deferred liabilities and credits		(75	)		(56	)

Partners’ equity	$	1,952		$	1,848


	Three months
	ended March 31
	2004		2003
Summarized income statement
Total revenues	$	1,647	$	1,392
Costs and expenses		1,543		1,290

Net income	$	104	$	102

Amerada Hess Corporation’s share	$	51	$	50


Note 5	-	During the quarter ended March 31, 2004, the Corporation capitalized interest of $16 million on major development projects ($13 million during the corresponding period of 2003).

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


	Three months
	ended March 31
	2004			2003
Current	$	188		$	113
Deferred		(44	)		26

Total	$	144		$	139

PART I - FINANCIAL INFORMATION (CONT’D.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 7	-	Pre-tax foreign currency losses from continuing operations amounted to $17 million in the quarter ended March 31, 2004 and $4 million in the quarter ended March 31, 2003.

Note 8	-	The Corporation records compensation expense for nonvested common stock awards (restricted stock) 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 (in millions, except per share data):


	Three months
	ended March 31
	2004			2003
Net income	$	281		$	176
Add stock-based employee compensation expense included in net income, net of taxes		2			2
Less total stock-based employee compensation expense, net of taxes (*)		(2	)		(2	)

Pro forma net income	$	281		$	176

Net income per share as reported
Basic	$	3.03		$	1.98

Diluted	$	2.77		$	1.98

Pro forma net income per share
Basic	$	3.03		$	1.98

Diluted	$	2.77		$	1.98

(*) Represents nonvested common stock and stock option expense determined using the fair value method.

PART I - FINANCIAL INFORMATION (CONT’D.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 9		-		The weighted average number of common shares used in the basic and diluted earnings per share computations are as follows (in thousands):


	Three months
	ended March 31
	2004		2003
Common shares - basic		88,693		88,614
Effect of dilutive securities (equivalent shares)
Convertible preferred stock		12,204		205
Nonvested common stock		495		221
Stock options		54		25

Common shares - diluted		101,446		89,065


				Earnings per share are as follows:


	Three months
	ended March 31
	2004		2003
Basic
Continuing operations	$	3.03	$	2.13
Discontinued operations		—		(0.23	)
Cumulative effect of change in accounting principle		—		0.08

Net income	$	3.03	$	1.98

Diluted
Continuing operations	$	2.77	$	2.13
Discontinued operations		—		(0.23	)
Cumulative effect of change in accounting principle		—		0.08

Net income	$	2.77	$	1.98


Note 10		-		Comprehensive income was as follows (in millions):


	Three months
	ended March 31
	2004			2003
Net income	$	281		$	176
Net change in cash flow hedges		(97	)		(8	)
Change in foreign currency translation adjustment		(7	)		(4	)

Comprehensive income	$	177		$	164

PART I - FINANCIAL INFORMATION (CONT’D.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		The Corporation reclassifies hedging gains and losses included in other comprehensive income to earnings at the time the hedged transactions are recognized. Hedging reduced exploration and production results by $118 million before income taxes in the first quarter of 2004. Hedging reduced exploration and production results by $164 million before income taxes for the corresponding period of 2003.

		At March 31, 2004, accumulated other comprehensive income (loss) included after-tax deferred losses of $329 million ($285 million of unrealized losses and $44 million of realized losses) related to crude oil and natural gas contracts used as hedges. In its energy marketing business, the Corporation has entered into cash flow hedges to fix the purchase prices of natural gas, heating oil, residual fuel oil and electricity related to contracted future sales. At March 31, 2004, the net after-tax deferred gain in accumulated other comprehensive income from these hedge contracts was $48 million.

Note 11	-	The Corporation’s results by operating segment were as follows (in millions):


	Three months
	ended March 31
	2004			2003
Operating revenues
Exploration and production (*)	$	934		$	816
Refining and marketing		3,623			3,548

Total	$	4,557		$	4,364

Net income
Exploration and production	$	207		$	120
Refining and marketing		112			136
Corporate, including interest		(38	)		(66	)

Income from continuing operations		281			190
Discontinued operations		—			(21	)
Income from cumulative effect of accounting change		—			7

Total	$	281		$	176

(*) Includes transfers to affiliates of $69 million during the three-months ended March 31, 2004 and $110 million for the corresponding period of 2003.

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