WASHINGTON, D.C. 20549

 

þ		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

 

(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 þ No o

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 þ No o

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

Large Accelerated Filer þ		Accelerated Filer o		Non-Accelerated Filer o (Do not check if a smaller reporting company)		Smaller Reporting Company o

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

At June 30, 2010, there were 328,420,048 shares of Common Stock outstanding.

 

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
REVENUES AND NON-OPERATING INCOME
Sales (excluding excise taxes) and other operating revenues		$	7,732			$	6,751			$	16,991			$	13,666
Equity in income (loss) of HOVENSA L.L.C.			(6	)			(75	)			(91	)			(116	)
Other, net			24				79				70				77
Total revenues and non-operating income			7,750				6,755				16,970				13,627
COSTS AND EXPENSES
Cost of products sold (excluding items shown separately below)			5,316				4,705				11,856				9,887
Production expenses			440				444				917				853
Marketing expenses			245				245				498				502
Exploration expenses, including dry holes and lease impairment			172				312				323				505
Other operating expenses			80				43				132				91
General and administrative expenses			159				136				314				296
Interest expense			83				95				167				172
Depreciation, depletion and amortization			558				558				1,100				1,044
Total costs and expenses			7,053				6,538				15,307				13,350
INCOME BEFORE INCOME TAXES			697				217				1,663				277
Provision for income taxes			301				115				699				192
NET INCOME			396				102				964				85
Less: Net income attributable to noncontrolling interests			21				2				51				44
NET INCOME ATTRIBUTABLE TO HESS CORPORATION		$	375			$	100			$	913			$	41
NET INCOME PER SHARE ATTRIBUTABLE TO HESS CORPORATION
BASIC		$	1.15			$	.31			$	2.81			$	.13
DILUTED			1.15				.31				2.79				.13
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)			327.5				325.8				327.2				325.7
COMMON STOCK DIVIDENDS PER SHARE		$	.10			$	.10			$	.20			$	.20

See accompanying notes to consolidated financial statements.

		June 30,				December 31,
		2010				2009
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	1,363			$	1,362
Accounts receivable			3,871				3,924
Inventories			1,628				1,438
Other current assets			1,434				1,263
Total current assets			8,296				7,987
INVESTMENTS IN AFFILIATES
HOVENSA L.L.C.			590				681
Other			274				232
Total investments in affiliates			864				913
PROPERTY, PLANT AND EQUIPMENT
Total — at cost			29,539				29,871
Less reserves for depreciation, depletion, amortization and lease impairment			13,004				13,244
Property, plant and equipment — net			16,535				16,627
GOODWILL			1,218				1,225
DEFERRED INCOME TAXES			2,316				2,409
OTHER ASSETS			271				304
TOTAL ASSETS		$	29,500			$	29,465
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable		$	3,855			$	4,223
Accrued liabilities			1,956				1,954
Taxes payable			486				525
Current maturities of long-term debt			33				148
Total current liabilities			6,330				6,850
LONG-TERM DEBT			4,293				4,319
DEFERRED INCOME TAXES			2,079				2,222
ASSET RETIREMENT OBLIGATIONS			1,043				1,234
OTHER LIABILITIES AND DEFERRED CREDITS			1,225				1,312
Total liabilities			14,970				15,937
EQUITY
Hess Corporation Stockholders’ Equity
Common stock, par value $1.00 Authorized — 600,000 shares Issued — 328,420 shares at June 30, 2010;      327,229 shares at December 31, 2009			328				327
Capital in excess of par value			2,535				2,481
Retained earnings			13,105				12,251
Accumulated other comprehensive income (loss)			(1,603	)			(1,675	)
Total Hess Corporation stockholders’ equity			14,365				13,384
Noncontrolling interests			165				144
Total equity			14,530				13,528
TOTAL LIABILITIES AND EQUITY		$	29,500			$	29,465

See accompanying notes to consolidated financial statements.

		Six Months Ended
		June 30,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	964			$	85
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization			1,100				1,044
Exploratory dry hole costs and lease impairment			188				304
Provision (benefit) for deferred income taxes			(62	)			(304	)
Equity in (income) loss of HOVENSA L.L.C.			91				116
Pre-tax gain on asset sale			(58	)			—
Stock compensation expense			54				68
Changes in operating assets and liabilities and other			(471	)			(72	)
Net cash provided by operating activities			1,806				1,241
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(1,689	)			(1,389	)
Proceeds from asset sale			183				—
Other, net			(36	)			32
Net cash used in investing activities			(1,542	)			(1,357	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments of debt with maturities of 90 days or less			—				(850	)
Debt with maturities of greater than 90 days
Borrowings			—				1,247
Repayments			(157	)			(39	)
Cash dividends paid			(98	)			(98	)
Other, net			(8	)			11
Net cash (used in) provided by financing activities			(263	)			271
NET INCREASE IN CASH AND CASH EQUIVALENTS			1				155
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			1,362				908
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	1,363			$	1,063

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

1. Basis of Presentation

     The financial statements included in this report reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of Hess Corporation’s (the Corporation) consolidated financial position at June 30, 2010 and December 31, 2009 and the consolidated results of operations for the three and six month periods ended June 30, 2010 and 2009 and the consolidated cash flows for the six month periods ended June 30, 2010 and 2009. 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 U.S. generally accepted accounting principles (GAAP) have been condensed or omitted from these interim financial statements. These statements, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Corporation’s Form 10-K for the year ended December 31, 2009.

     Effective January 1, 2010, the Corporation adopted the amended accounting standards that eliminated the consolidation exception for a qualifying special-purpose entity and changed the analysis necessary to determine whether consolidation of a variable interest entity is required. The adoption of these standards resulted in an increase of approximately $10 million to Property, plant and equipment and a corresponding increase to Long-term debt. The debt was subsequently repaid during the first quarter of 2010.

2. Inventories

     Inventories consist of the following (in millions):

		June 30,				December 31,
		2010				2009
Crude oil and other charge stocks		$	498			$	424
Refined products and natural gas			1,561				1,429
Less: LIFO adjustment			(850	)			(815	)
			1,209				1,038
Merchandise, materials and supplies			419				400
Total inventories		$	1,628			$	1,438

3. Refining Joint Venture

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

		June 30,				December 31,
		2010				2009
Summarized balance sheet
Cash and short-term investments		$	82			$	78
Other current assets			673				580
Net fixed assets			2,063				2,080
Other assets			27				33
Current liabilities			(1,210	)			(953	)
Long-term debt			(356	)			(356	)
Deferred liabilities and credits			(133	)			(137	)
Members’ equity		$	1,146			$	1,325

PART I — FINANCIAL INFORMATION (CONT’D.)

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2010				2009				2010				2009
Summarized income statement
Total revenues		$	3,146			$	2,640			$	5,912			$	4,663
Cost and expenses			(3,158	)			(2,787	)			(6,092	)			(4,891	)
Net income (loss)		$	(12	)		$	(147	)		$	(180	)		$	(228	)
Hess Corporation’s share, before income taxes		$	(6	)		$	(75	)		$	(91	)		$	(116	)

4. Property, Plant and Equipment

     Assets Held for Sale: In December 2009, the Corporation agreed to exchange all of its interests in Gabon and the Clair Field in the United Kingdom for additional interests in the Valhall and Hod fields offshore Norway. In March 2010, the Corporation agreed to the sale of a package of mature, non-operated natural gas production and transportation assets in the United Kingdom North Sea. These transactions are subject to various regulatory and other approvals. The Corporation has classified all of the properties to be disposed of as held for sale. At June 30, 2010, the carrying amount of these assets totaling $891 million was reported in Other current assets. In addition, asset retirement obligations and deferred income taxes totaling $467 million were reported in Accrued liabilities. In accordance with generally accepted accounting principles, properties classified as held for sale are not depreciated but are subject to impairment testing.

     Capitalized Exploratory Well Costs: The following table discloses the net changes in capitalized exploratory well costs pending determination of proved reserves for the six months ended June 30, 2010 (in millions):

Balance at January 1		$	1,437
Additions to capitalized exploratory well costs pending the determination of proved reserves			378
Reclassifications to wells, facilities and equipment based on the determination of proved reserves			(27	)
Capitalized exploratory well costs charged to expense			(6	)
Balance at end of period		$	1,782

     The preceding table excludes costs related to exploratory dry holes of $58 million which were incurred and subsequently expensed in 2010. Capitalized exploratory well costs greater than one year old after completion of drilling were $1,089 million at June 30, 2010. Approximately 56% of the capitalized well costs in excess of one year relate to the Pony and Tubular Bells projects in the deepwater Gulf of Mexico where development planning is progressing. In addition, the Corporation commenced drilling an appraisal well at Pony in the first quarter of 2010. Approximately 12% relates to Area 54 offshore Libya where commercial analysis and development planning activities are ongoing. Approximately 9% relates to Block WA-390-P offshore Western Australia where further drilling is in progress. Approximately 7% relates to Block BM-S-22 offshore Brazil where the operator plans to commence drilling a third exploration well in the second half of 2010. The remainder of the capitalized well costs in excess of one year relates to projects where further drilling is planned or development planning and other assessment activities are ongoing to determine the economic and operating viability of the projects.

PART I — FINANCIAL INFORMATION (CONT’D.)

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

5. Long-term Debt

     In December 2009, the Corporation issued $750 million of 30 year bonds and tendered for the $662 million of bonds due in August 2011. The Corporation completed the purchase of $546 million of the 2011 bonds in December 2009. The remaining $116 million of the 2011 bonds were redeemed in January 2010, resulting in a charge of approximately $11 million ($7 million after income taxes).

6. Foreign Currency Translation

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2010				2009				2010				2009
Pre-tax foreign currency gains (losses)		$	(10	)		$	35			$	(16	)		$	31

7. Retirement Plans

     Components of net periodic pension cost consisted of the following (in millions):

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2010				2009				2010				2009
Service cost		$	12			$	10			$	24			$	20
Interest cost			21				20				43				40
Expected return on plan assets			(21	)			(15	)			(42	)			(30	)
Amortization of net loss			12				14				24				28
Pension expense		$	24			$	29			$	49			$	58

     In 2010, the Corporation expects to contribute approximately $190 million to its pension plans. Through June 30, 2010, the Corporation has contributed $113 million to its pension plans.

8. Risk Management and Trading Activities

     In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the prices of crude oil, natural gas, refined products and electricity, as well as to changes in interest rates and foreign currency values. In the disclosures that follow these activities are referred to as energy marketing and risk management activities. The Corporation also has trading operations, principally through a 50% voting interest in a consolidated partnership, that are exposed to commodity price risks primarily related to the prices of crude oil, natural gas and refined products.

     Following is a description of the Corporation’s activities that use derivatives as part of their operations and strategies. Derivatives include both financial instruments and forward purchase and sale contracts. Gross notional amounts of both long and short positions are presented in the volume tables below. These amounts include long and short positions that offset in a closed position and have not reached contractual maturity. Gross notional amounts do not quantify risk or represent assets or liabilities of the Corporation, but are used in the calculation of cash settlements under the contracts.

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

     Energy Marketing Activities: In its energy marketing activities the Corporation sells refined petroleum products, natural gas and electricity principally to commercial and industrial businesses at fixed and floating prices for varying periods of time. Commodity contracts such as futures, forwards, swaps and options together with physical assets, such as storage and pipeline capacity, are used to obtain supply and reduce margin volatility or lower costs related to sales contracts with customers.

     The table below shows the gross volume of the Corporation’s energy marketing commodity contracts outstanding:

		June 30,				December 31,
		2010				2009
Commodity Contracts
Crude oil and refined products (millions of barrels)				23				34
Natural gas (millions of mcf)				1,869				1,876
Electricity (millions of megawatt hours)				228				166

     The changes in fair value of certain energy marketing commodity contracts that are not designated as hedges are recognized currently in earnings. Revenues from the sales contracts are recognized in Sales and other operating revenues, supply contract purchases are recognized in Cost of products sold and net settlements from financial derivatives related to these energy marketing activities are recognized in Cost of products sold. Net realized and unrealized pre-tax gains on derivative contracts not designated as hedges amounted to $38 million and $4 million for the three months ended June 30, 2010 and 2009, respectively, and $112 million and $81 million for the six months ended June 30, 2010 and 2009, respectively.

     At June 30, 2010, a portion of energy marketing commodity contracts are designated as cash flow hedges to hedge variability of expected future cash flows of forecasted supply transactions. The length of time over which the Corporation hedges exposure to variability in future cash flows is predominantly two years or less. For contracts outstanding at June 30, 2010, the maximum duration was four years. The Corporation records the effective portion of changes in the fair value of cash flow hedges as a component of Other comprehensive income. Amounts recorded in Accumulated other comprehensive income are reclassified into Cost of products sold in the same period that the hedged item is recognized in earnings. The ineffective portion of changes in fair value of cash flow hedges is recognized immediately in Cost of products sold.

     At June 30, 2010, the after-tax deferred losses relating to energy marketing activities recorded in Accumulated other comprehensive income were $261 million ($303 million at December 31, 2009). The Corporation estimates that approximately $186 million of this amount will be reclassified into earnings over the next twelve months. During the three months ended June 30, 2010 and 2009, the Corporation reclassified losses from Accumulated other comprehensive income of $110 million and $185 million, respectively, and $201 million and $254 million for the six months ended June 30, 2010 and 2009, respectively. The amount reflected in earnings due to hedge ineffectiveness was a gain of $1 million and a gain of less than $1 million for the three months ended June 30, 2010 and 2009, respectively, and a gain of less than $1 million and a loss of $1 million for the six months ended June 30, 2010 and 2009, respectively. The fair value of energy marketing cash flow hedges increased by $67 million and decreased by $128 million for the three months ended June 30, 2010 and 2009, respectively, and decreased by $159 million and $436 million for the six months ended June 30, 2010 and 2009, respectively. The pre-tax amount of deferred hedge losses is reflected in Accounts payable and the related income tax benefits are recorded as Deferred income tax assets on the balance sheet.

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

     Corporate Risk Management: Corporate risk management activities include transactions designed to reduce risk in the selling prices of crude oil or natural gas produced by the Corporation or to reduce exposure to foreign currency or interest rate movements. Generally, futures, swaps or option strategies may be used to fix the forward selling price of a portion of the Corporation’s crude oil or natural gas production. Forward contracts may also be used to purchase certain currencies in which the Corporation does business with the intent of reducing exposure to foreign currency fluctuations. These forward contracts comprise various currencies including the British pound and Thai baht. In the first quarter of 2010, the Corporation executed interest rate swaps to convert interest payments on certain long term debt from fixed to floating rates.

     The table below shows the gross volume of the Corporate risk management derivative instruments outstanding:

		June 30,				December 31,
		2010				2009
Commodity contracts, primarily crude oil (millions of barrels)				45				54
Foreign exchange (millions of U.S. dollars)				920				872
Interest rate swaps (millions of U.S. dollars)				310				—

     During 2008, the Corporation closed Brent crude oil cash flow hedges covering 24,000 barrels per day through 2012, by entering into offsetting contracts with the same counterparty. As a result, the valuation of those contracts is no longer subject to change due to price fluctuations. There were no other open hedges of crude oil or natural gas production at June 30, 2010. Hedging activities decreased Exploration and Production Sales and other operating revenue by $133 million for both the three month periods ended June 30, 2010 and 2009 and $264 million for both the six month periods ended June 30, 2010 and 2009. There was no hedge ineffectiveness for the second quarter of 2010 and 2009.

     At June 30, 2010, the after-tax deferred losses in Accumulated other comprehensive income relating to Corporate risk management cash flow hedges were $796 million ($941 million at December 31, 2009). These deferred losses result from the closed Brent crude oil hedges referred to above. The Corporation estimates that approximately $335 million of this amount will be reclassified into earnings over the next twelve months. The pre-tax amount of deferred hedge losses is reflected in Accounts payable and the related income tax benefits are recorded as Deferred income tax assets on the balance sheet.

     The Corporation designates interest rate swaps as fair value hedges. Changes in the fair value of interest rate swaps and the hedged fixed rate debt are recorded in Interest expense. For the three and six months ended June 30, 2010, the Corporation recorded an increase of $8 million and $9 million, respectively, in the fair value of interest rate swaps and a corresponding increase in the fair value of the hedged fixed rate debt.

     Foreign exchange contracts are not designated as hedges. Gains or losses on foreign exchange contracts are recognized immediately in Other, net in Revenues and non-operating income.

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

     Net pre-tax gains (losses) on derivative contracts used for Corporate risk management and not designated as hedges amounted to the following (in millions):

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2010				2009				2010				2009
Commodity		$	(8	)		$	2			$	(7	)		$	7
Foreign exchange			(15	)			110				(52	)			107
Total		$	(23	)		$	112			$	(59	)		$	114

     Trading Activities: Trading activities are conducted principally through a trading partnership in which the Corporation has a 50% voting interest. This consolidated entity intends to generate earnings through various strategies primarily using energy commodities, securities and derivatives. The Corporation also takes trading positions for its own account.

     The table below summarizes the gross volume of derivative instruments outstanding relating to trading activities:

										June 30,				December 31,
										2010				2009
Commodity Contracts
Crude oil and refined products (millions of barrels)											3,547				2,251
Natural gas (millions of mcf)											6,130				6,927
Electricity (millions of megawatt hours)											8				6
Other Contracts (millions of U.S. dollars)
Interest rate											320				495
Foreign exchange											297				335

     Pre-tax gains (losses) recorded in Sales and other operating revenues from trading activities amounted to the following (in millions):

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2010				2009				2010				2009
Commodity		$	39			$	10			$	144			$	100
Foreign exchange			8				23				6				30
Interest rate and other			(9	)			7				(17	)			15
Total		$	38			$	40			$	133			$	145

     Fair Value Measurements: The Corporation determines fair value in accordance with the fair value measurements accounting standard (ASC 820 – Fair Value Measurements and Disclosures), which established a hierarchy that categorizes the sources of inputs, which generally range from quoted prices for identical instruments in a principal trading market (Level 1) to estimates determined using related market data (Level 3).

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

     When Level 1 inputs are available within a particular market, those inputs are selected for determination of fair value over Level 2 or 3 inputs in the same market. To value Level 2 and 3 derivatives the Corporation uses observable inputs for similar instruments that are available from exchanges, pricing services or broker quotes. These observable inputs may be supplemented with other methods, including internal extrapolation, that result in the most representative prices for instruments with similar characteristics. Multiple inputs may be used to measure fair value, however, the level of fair value for each financial asset or liability presented below is based on the lowest significant input level within this fair value hierarchy.

     The following table provides the Corporation’s financial assets and (liabilities) that are measured at fair value based on this hierarchy (in millions):

														Collateral and
														counterparty
		Level 1				Level 2				Level 3				netting				Balance
June 30, 2010
Assets
Derivative contracts
Commodity		$	184			$	1,482			$	405			$	(102	)		$	1,969
Foreign exchange			—				6				—				—				6
Other			1				10				—				—				11
Collateral and counterparty netting			(172	)			(173	)			(18	)			(151	)			(514	)
Total derivative contracts			13				1,325				387				(253	)			1,472
Other assets measured at fair value on a recurring basis			33				11				3				(1	)			46
Total assets		$	46			$	1,336			$	390			$	(254	)		$	1,518
Liabilities
Derivative contracts
Commodity		$	(314	)		$	(2,410	)		$	(365	)		$	102			$	(2,987	)
Foreign exchange			—				(1	)			—				—				(1	)
Other			—				(10	)			—				—				(10	)
Collateral and counterparty netting			172				173				18				365				728
Total derivative contracts			(142	)			(2,248	)			(347	)			467				(2,270	)
Other liabilities measured at fair value on a recurring basis			—				(28	)			(2	)			1				(29	)
Total liabilities		$	(142	)		$	(2,276	)		$	(349	)		$	468			$	(2,299	)

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

														Collateral and
														counterparty
		Level 1				Level 2				Level 3				netting				Balance
December 31, 2009
Assets
Derivative contracts
Commodity		$	46			$	1,137			$	119			$	(40	)		$	1,262
Other			—				3				—				—				3
Collateral and counterparty netting			—				(1	)			—				(326	)			(327	)
Total derivative contracts			46				1,139				119				(366	)			938
Other assets measured at fair value on a recurring basis			37				21				5				—				63
Total assets		$	83			$	1,160			$	124			$	(366	)		$	1,001
Liabilities
Derivative contracts
Commodity		$	(151	)		$	(2,880	)		$	(36	)		$	40			$	(3,027	)
Foreign exchange			—				(23	)			—				—				(23	)
Other			—				(8	)			—				—				(8	)
Collateral and counterparty netting			—				1				—				280				281
Total derivative contracts			(151	)			(2,910	)			(36	)			320				(2,777	)
Other liabilities measured at fair value on a recurring basis			—				(66	)			(4	)			—				(70	)
Total liabilities		$	(151	)		$	(2,976	)		$	(40	)		$	320			$	(2,847	)

     The following table provides changes in financial assets and liabilities that are measured at fair value based on Level 3 inputs (in millions):

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2010				2009				2010				2009
Balance at beginning of period		$	(46	)		$	(165	)		$	84			$	149
Unrealized gains (losses)
Included in earnings			(45	)			(12	)			58				50
Included in other comprehensive income			94				(19	)			80				(224	)
Purchases, sales or other settlements during the period			84				16				42				16
Transfers into Level 3			1				(22	)			(158	)			(52	)
Transfers out of Level 3			(47	)			(13	)			(65	)			(154	)
Balance at end of period		$	41			$	(215	)		$	41			$	(215	)

     Effective January 1, 2010, the Corporation’s policy is to recognize transfers in and transfers out as of the end of the reporting period. During the six months ended June 30, 2010, transfers into Level 1 and Level 2 were gains of $28 million and $129 million, respectively, and transfers out of Level 1 and Level 2 were a loss of $66 million and a gain of $132 million, respectively. The majority of transfers into Levels 1 and 2 resulted from instruments that became more actively traded as they moved closer to maturity. The majority of transfers into Levels 2 and 3 were due to the increased significance of the lower level inputs to the instrument’s fair value.

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

     In addition to the financial assets and liabilities disclosed in the tables on pages 10 and 11, the Corporation had other short-term financial instruments, primarily cash equivalents and accounts receivable and payable, for which the carrying value approximated their fair value at June 30, 2010 and December 31, 2009. Long-term debt had a carrying value of $4,326 million compared with a fair value of $5,086 million at June 30, 2010, and a carrying value of $4,467 million compared with a fair value of $5,073 million at December 31, 2009.

     The table below reflects the gross and net fair values of the Corporation’s risk management and trading derivative instruments (in millions):

		Accounts				Accounts
		Receivable				Payable
June 30, 2010
Derivative contracts designated as hedging instruments
Commodity		$	456			$	(829	)
Other			9				(1	)
Total derivative contracts designated as hedging instruments			465				(830	)
Derivative contracts not designated as hedging instruments
Commodity			11,438				(12,082	)
Foreign exchange			18				(13	)
Other			19				(27	)
Total derivative contracts not designated as hedging instruments			11,475				(12,122	)
Gross fair value of derivative contracts			11,940				(12,952	)
Master netting arrangements			(10,317	)			10,317
Cash collateral (received) posted			(151	)			365
Net fair value of derivative contracts		$	1,472			$	(2,270	)
December 31, 2009
Derivative contracts designated as hedging instruments
Commodity		$	748			$	(1,166	)
Derivative contracts not designated as hedging instruments
Commodity			9,145				(10,493	)
Foreign exchange			3				(26	)
Other			12				(14	)
Total derivative contracts not designated as hedging instruments			9,160				(10,533	)
Gross fair value of derivative contracts			9,908				(11,699	)
Master netting arrangements			(8,653	)			8,653
Cash collateral (received) posted			(317	)			269
Net fair value of derivative contracts		$	938			$	(2,777	)

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

     Credit Risk: The Corporation is exposed to credit risks that may at times be concentrated with certain counterparties or groups of counterparties. Accounts receivable are generated from a diverse domestic and international customer base. The Corporation’s net receivables at June 30, 2010 are concentrated with counterparties as follows: Integrated Oil Companies – 18%, Government Entities – 17%, Manufacturing – 13% and Education and Health Services – 11%. The Corporation reduces its risk related to certain counterparties by using master netting arrangements and requiring collateral, generally cash or letters of credit. The Corporation records the cash collateral received or posted as an offset to the fair value of derivatives executed with the same counterparty. At June 30, 2010 and December 31, 2009, the Corporation is holding cash from counterparties of $151 million and $317 million, respectively. The Corporation has posted cash to counterparties at June 30, 2010 and December 31, 2009 of $365 million and $269 million, respectively.

     At June 30, 2010, the Corporation had a total of $2,276 million of outstanding letters of credit, primarily issued to satisfy margin and collateral requirements. Certain of the Corporation’s agreements also contain contingent collateral provisions that could require the Corporation to post additional collateral if the Corporation’s credit rating declines. As of June 30, 2010, the net liability related to derivatives with contingent collateral provisions was approximately $1,922 million before cash collateral posted of approximately $357 million. At June 30, 2010, all three major credit rating agencies that rate the Corporation’s debt had assigned an investment grade rating. If two of the three agencies were to downgrade the Corporation’s rating to below investment grade, as of June 30, 2010, the Corporation would be required to post additional collateral of approximately $307 million.

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2010				2009				2010				2009
Common shares – basic			325,383				323,975				325,037				323,676
Effect of dilutive securities
Restrictive common stock			1,251				986				1,341				1,128
Stock options			848				818				815				885
Common shares – diluted			327,482				325,779				327,193				325,689

     The Corporation issued 2,738,625 stock options and 927,470 shares of restricted stock in the first six months of 2010 (3,050,250 and 1,022,050 shares, respectively, for the same period in 2009). The table above excludes the effect of 4,224,000 shares and 4,230,000 shares related to out-of-the money options for the three and six months ended June 30, 2010, respectively (3,546,000 and 4,073,000 shares, respectively, for the same periods in 2009).

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

     The table below summarizes changes in equity (in millions):

		Hess				Non-
		Stockholders’				controlling
		Equity				Interests				Total Equity
Balance at January 1, 2010		$	13,384			$	144			$	13,528
Net Income			913				51				964
Deferred gains (losses) on cash flow hedges, after tax
Effect of hedge losses recognized in income			368				—				368
Net change in fair value of cash flow hedges			(182	)			—				(182	)
Change in post retirement plan liabilities, after tax			15				—				15
Change in foreign currency translation adjustment and other			(129	)			(4	)			(133	)
Comprehensive income			985				47				1,032
Activity related to restricted common stock awards, net			28				—				28
Employee stock options, including income tax benefits			38				—				38
Cash dividends declared			(66	)			—				(66	)
Noncontrolling interests, net			(4	)			(26	)			(30	)
Balance at June 30, 2010		$	14,365			$	165			$	14,530
Balance at January 1, 2009		$	12,307			$	84			$	12,391
Net Income			41				44				85
Deferred gains (losses) on cash flow hedges, after tax
Effect of hedge losses recognized in income			419				—				419
Net change in fair value of cash flow hedges			(532	)			—				(532	)
Change in post retirement plan liabilities, after tax			19				—				19
Change in foreign currency translation adjustment and other			2				(8	)			(6	)
Comprehensive income (loss)			(51	)			36				(15	)
Activity related to restricted common stock awards, net			27				—				27
Employee stock options, including income tax benefits			42				—				42
Cash dividends declared			(66	)			—				(66	)
Noncontrolling interests, net			—				(1	)			(1	)
Balance at June 30, 2009		$	12,259			$	119			$	12,378

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

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2010				2009				2010				2009
Operating revenues
Exploration and Production		$	2,252			$	1,825			$	4,393			$	3,027
Marketing and Refining			5,513				4,952				12,670				10,693
Less: Transfers between affiliates			(33	)			(26	)			(72	)			(54	)
Total(*)		$	7,732			$	6,751			$	16,991			$	13,666

Net income (loss) attributable to Hess Corporation
Exploration and Production		$	488			$	215			$	1,039			$	151
Marketing and Refining			(19	)			(30	)			68				72
Corporate, including interest			(94	)			(85	)			(194	)			(182	)
Total		$	375			$	100			$	913			$	41

		June 30,				December 31,
		2010				2009
Exploration and Production		$	22,241			$	21,810
Marketing and Refining			6,320				6,388
Corporate			939				1,267
Total		$	29,500			$	29,465

     In July 2010, the Corporation agreed to acquire American Oil & Gas Inc. (American Oil & Gas) through the issuance of approximately 8.6 million shares of the Corporation’s common stock in order to increase its acreage position in the Bakken oil play in North Dakota by approximately 85,000 net acres. The transaction, which has been approved by the Boards of Directors of both companies, is subject to certain closing conditions, including the approval of American Oil & Gas shareholders, and is expected to be completed in the fourth quarter.

PART I — FINANCIAL INFORMATION (CONT’D.)

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.

     Overview

     Hess Corporation (the Corporation) is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. The M&R segment manufactures refined petroleum products and purchases, trades and markets refined petroleum products, natural gas and electricity. The Corporation reported net income of $375 million in the second quarter of 2010, compared with $100 million in the second quarter of 2009.

     Exploration and Production: E&P reported earnings of $488 million for the second quarter of 2010, compared with $215 million in the second quarter of 2009. In the second quarter of 2010, the Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $64.81 per barrel compared with $49.27 per barrel in the second quarter of 2009. The Corporation’s average worldwide natural gas selling price was $5.57 per thousand cubic feet (mcf) in the second quarter of 2010 compared with $4.56 per mcf in the second quarter of 2009. Worldwide crude oil and natural gas production was 415,000 barrels of oil equivalent per day (boepd) in the second quarter of 2010, an increase of 8,000 boepd from the same period in 2009.

     The following is an update of E&P activities:

	•		The Corporation announced its intent to preempt the acquisition of another partner’s share of the Valhall and Hod fields offshore Norway for $496 million in cash, which represents an additional 7.85% interest in the Valhall Field and 12.5% interest in the Hod Field. This preemption along with the asset swap agreed in December 2009, whereby the Corporation agreed to exchange all of its interests in Gabon and the Clair Field in the United Kingdom for an additional 28% in the Valhall Field and 25% in the Hod Field, will result in the Corporation’s share of the Valhall and Hod fields increasing to 64.05% and 62.50%, respectively. Both transactions are expected to close by the end of the third quarter.
	•		In North Dakota, net production from the Bakken oil play reached 16,000 boepd. The Corporation added three additional rigs during the second quarter increasing the total to eight rigs drilling in the Bakken.
	•		In May, the Corporation announced a partnership under which it will invest up to $65 million in an initial exploration phase and have the option to earn a 50% working interest and become the operator in more than one million gross acres in the Paris Basin in France. An initial six well program will commence in the fourth quarter and will continue through 2011.
	•		Two exploration wells were completed during the quarter on the 100% owned Block WA-390-P in the Northwest Shelf of Australia, resulting in one discovery and one dry hole. The Corporation has now drilled 14 of the 16 commitment wells on this block resulting in 11 natural gas discoveries.

PART I — FINANCIAL INFORMATION (CONT’D.)

     Overview (continued)

     Marketing and Refining: M&R generated a loss of $19 million for the second quarter of 2010, compared with a loss of $30 million in the second quarter of 2009. During the second quarter of 2010, the Port Reading refining facility in New Jersey was shutdown for 41 days for a scheduled turnaround. The Corporation’s turnaround expenses in the second quarter totaled approximately $27 million, after income taxes.

     Other Matters: In April 2010, an accident occurred on a deepwater drilling rig at the BP operated Macondo prospect in the Gulf of Mexico, resulting in loss of life, the sinking of the rig, a significant crude oil spill and a subsequent moratorium on drilling in the Gulf of Mexico. The Corporation was not a participant in the well. The impact to the Corporation of the drilling moratorium was minimal in the second quarter. In June, the Corporation’s only operated rig in the Gulf of Mexico, the Stena Forth, left the Pony prospect on Green Canyon 469, where it was being used to drill an appraisal well, as part of a preexisting farm-out agreement with another operator. The Corporation anticipates completing the Pony appraisal well as soon as practicable following the lifting of the moratorium. Additionally, the drilling of a production well at the Shenzi Field, in which the Corporation has a 28% interest, was suspended as a result of the moratorium, which is expected to have only a very modest impact on the Corporation’s 2010 production.

     In July 2010, the Wall Street Reform and Consumer Protection Act was signed into law. This law will establish new regulations affecting activities in the financial markets including the use of over the counter derivatives. The Corporation is currently evaluating the potential impact, if any, that this legislation could have on future operations. Based on a preliminary assessment, this legislation is not expected to have a material impact on the Corporation’s future operations.

     Results of Operations

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Exploration and Production		$	488			$	215			$	1,039			$	151
Marketing and Refining			(19	)			(30	)			68				72
Corporate			(42	)			(26	)			(90	)			(75	)
Interest expense			(52	)			(59	)			(104	)			(107	)
Net income attributable to Hess Corporation		$	375			$	100			$	913			$	41
Net income per share (diluted)		$	1.15			$	.31			$	2.79			$	.13

PART I — FINANCIAL INFORMATION (CONT’D.)

     Results of Operations (continued)

     Items Affecting Comparability of Earnings Between Periods

     The following table summarizes, on an after-tax basis, items of income (expense) that are included in net income and affect comparability between periods (in millions). The items in the table below are explained and the pre-tax amounts are shown on pages 21 and 24.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Exploration and Production		$	—			$	(31	)		$	58			$	(44	)
Corporate			—				—				(7	)			(16	)
Total		$	—			$	(31	)		$	51			$	(60	)

     In the discussion that follows, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings. Management believes that after-tax amounts are preferable to pre-tax amounts for explaining variances in earnings, since they show the entire effect of a transaction. After-tax amounts are determined by applying the appropriate income tax rate in the applicable tax jurisdiction to pre-tax amounts.

     Comparison of Results

     Exploration and Production

     Following are summarized income statements of the Corporation’s E&P operations (in millions):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Sales and other operating revenues(*)		$	2,059			$	1,699			$	4,173			$	2,830
Non-operating income			14				57				68				65
Total revenues and non-operating income			2,073				1,756				4,241				2,895
Costs and expenses
Production expenses, including related taxes			441				444				918				853
Exploration expenses, including dry holes and lease impairment			172				312				323				505
General, administrative and other expenses			64				61				131				117
Depreciation, depletion and amortization			534				538				1,053				1,003
Total costs and expenses			1,211				1,355				2,425				2,478
Results of operations before income taxes			862				401				1,816				417
Provision for income taxes			374				186				777				266
Results of operations attributable to Hess Corporation		$	488			$	215			$	1,039			$	151

     Results of Operations (continued)

     After considering the items affecting comparability between periods, the remaining changes in E&P earnings are primarily attributable to changes in selling prices, sales volumes and costs and expenses as discussed below.

Selling prices: Higher average realized selling prices of crude oil and natural gas increased E&P revenues by approximately $490 million and $1,250 million in the second quarter and first half of 2010, respectively, compared with the corresponding periods of 2009. The Corporation’s average selling prices were as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Average selling prices
Crude oil — per barrel (including hedging)
United States			$	72.99			$	55.53			$	73.68			$	49.56
Europe				56.21				47.41				55.72				41.09
Africa				63.54				47.16				62.96				40.29
Asia and other				78.01				55.84				75.99				51.50
Worldwide				64.81				49.27				64.22				42.62
Crude oil — per barrel (excluding hedging)
United States			$	72.99			$	55.53			$	73.68			$	49.56
Europe				56.21				47.41				55.72				41.09
Africa				77.03				57.13				76.50				51.58
Asia and other				78.01				55.84				75.99				51.50
Worldwide				70.15				54.03				69.61				47.84
Natural gas liquids — per barrel
United States			$	45.84			$	31.03			$	48.50			$	30.12
Europe				54.61				36.51				57.00				36.61
Asia and other				60.89				35.92				62.11				35.92
Worldwide				48.10				32.97				50.51				32.25
Natural gas — per mcf
United States			$	3.65			$	3.26			$	4.12			$	3.61
Europe				5.35				4.53				5.38				5.56
Asia and other				6.09				4.82				6.23				4.76
Worldwide				5.57				4.56				5.75				4.82