Hess - Q4 2019
January 29, 2020
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the 4th Quarter 2019 Hess Corporation Conference Call. My name is Liz, and I will be your operator for today. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to Jay Wilson, Vice President of Investor Relations. Please proceed.
Speaker 1
Thank you, Liz. Good morning, everyone, and thank you for participating in our Q4 earnings conference call. Our earnings release was issued this morning and appears on our website, www.hess.com. Today's conference call contains projections and other forward looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements.
These risks include those set forth in the Risk Factors annual and quarterly reports filed with the SEC. Also, on today's conference call, we may discuss certain non GAAP financial measures. A reconciliation of the differences between these non GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website. As usual, with me today are John Hess, Chief Executive Officer Greg Hill, Chief Operating Officer and John Reilly, Chief Financial Officer. I'll now turn the call over to John Hess.
Speaker 2
Thank you, Jay. Welcome everyone to our Q4 conference call. I will review our continued progress in executing our strategy, then Greg Hill will discuss our operating performance, and then John Reilly will review our financial results. We had an outstanding year in terms of operational performance and continued execution of our long term strategy, achieving a number of important milestones in delivering higher production and lower capital exploratory expenditures than our original guidance. With Guyana and Nabokan as our growth engines and Malaysia and the Deepwater Gulf of Mexico as our cash engines, our portfolio is on track to deliver increasing and strong financial returns, visible and low risk production growth and industry leading cash flow growth.
It is important to note that both Guyana and the Bakken will become significant gas generators over the next several years. As we have stated in our investor presentations, where we provide a financial outlook through 2025, Our portfolio is positioned to generate approximately 20% compound annual cash flow growth and more than 10% compound annual production growth. And our portfolio breakeven is projected to decrease to below $40 per barrel Brent by 2025. As our free cash flow grows, we will prioritize return of capital to shareholders, both in terms of dividends and opportunistic share repurchases. Another key element of our strategy is maintaining a strong balance sheet position and managing risk.
We ended the year with more than $1,500,000,000 in cash and cash equivalents on the balance sheet and have hedged 150,000 barrels of oil per day in 2020 using put options, with 130,000 barrels per day at $55 per barrel WTI and 20,000 barrels per day at $60 per barrel Brent. With outstanding execution throughout our portfolio, we were able to reduce our full year 2019 capital and exploratory expenditures to $2,740,000,000 down approximately $150,000,000 from our original guidance. We have kept our 2020 capital and exploratory budget to $3,000,000,000 in line with the guidance we provided at our December 2018 Investor Day. During the Q4, we closed the previously announced transaction which Hess Midstream converted to an UPCE corporate structure and acquired Hess Infrastructure Partners. As a result of the transaction, we received approximately $300,000,000 in cash and own 47% of Hess Midstream.
Turning to Guyana, where Hess has a 30% interest in the Stabroek Block and ExxonMobil as the operator. 2019 was an outstanding year in terms of both exploration and developments. On December 20, the Liza Phase 1 development achieved first production and is expected to reach its full capacity of 120,000 gross barrels of oil per day in the coming months. We recognize this pivotal moment in Guyana's history and are committed to working collaboratively with the government, our partners and the people of Guyana to build a safe and sustainable industry that fulfills the promise of shared prosperity. The Liza Unity floating production storage and offloading vessel, or FPSO, is under construction for the 2nd phase of Liza development.
It is expected to start production in Guyana by mid-twenty 22 with a production capacity of 220,000 gross barrels of oil per day. Front end engineering design for a third FPSO, the Prosperity, is underway to develop the Payara field pending government approvals and project sanctioning. Production from Payara could start as early as 2023 reaching an estimated 220,000 gross barrels of oil per day. From an exploration perspective, 2019 was a banner year with 5 new discoveries at Haimara, Tilapia, Yellowtail, Tripletail and Mako. On Monday, we announced an increase in the estimate of gross discovered recoverable resources for the Stabroek Block to more than 8,000,000,000 barrels of oil equivalent.
We continue to see multibillion barrels of exploration potential remaining. We also announced a significant oil discovery at Waru, marking the 16th discovery on the Stabroek Block. The Waru discovery will be incremental to the new resources estimate. Turning to the Bakken, our largest operated asset. Our team had a very strong year.
Full year net production in 2019 for the Bakken averaged 152,000 barrels of oil equivalent per day, well above our original guidance range of 135,000 to 100 and 45,000 barrels of oil equivalent per day and nearly 30% higher than 2018. Our Bakken performance showed the benefits of our successful transition to plug and perf completions. As a result, net oil production for 2019 was up 22% compared to 2018, and we are on track for Bakken production to average approximately 200,000 barrels of oil equivalent per day in 2021. In the deepwater Gulf of Mexico, our successful oil discovery last quarter at ESOX will be brought online next month as a low cost tieback to the Tubular Bells production facilities. Hess is the operator and holds a 57 point 14 percent interest.
Now turning to our 2019 financial results for the 4th quarter. Our adjusted net loss was $180,000,000 compared to adjusted net loss of $77,000,000 in the 4th quarter of 2018, primarily reflecting the effects of lower realized prices. Full year 2019 net production 290,000 barrels of oil equivalent per day excluding Libya, 17% higher than the pro form a 248,000 barrels of oil equivalent per day produced in 2018. In 2020, our net production is forecast to average between 330,000 and 335,000 barrels of oil equivalent per day, excluding Libya. Bakken net production is forecast to average approximately 180,000 barrels of oil equivalent per day in 2020.
As we continue to execute our strategy, our Board, our leadership team and each of our employees will be guided by our long standing commitment to sustainability in terms of safety, protecting the environment and making a positive impact on the communities where we operate. We are most recently achieving leadership status in CDP's Global Climate Analysis for the 11th consecutive year. In summary, we are proud of our 2019 performance and look forward to continuing this momentum into 2020 future years as we execute our differentiated long term strategy. With increasing cash margins and production volumes, our cash flow through 20 25 is projected to grow at a rate that outpaces our industry peers and most companies in the S and P 500. As our portfolio generates increasing cash flow, the majority will be deployed toward increased return of capital to our shareholders through dividend increases and opportunistic share repurchases.
I will now turn the call over to Greg for an operational update.
Speaker 3
Thanks, John. 2019 marked another year of exceptional performance and strategic execution. In particular, I would like to call out 3 major operational highlights from 2019. 1st, we beat our guidance for both production and for capital and exploratory expenditures. Our 2019 net production averaged 290,000 barrels of oil equivalent per day, excluding Libya, which was above our original guidance of between 270,000 barrels of oil equivalent per day and also above our most recent guidance of approximately 285,000 barrels of oil equivalent per day.
At the same time, our 2019 capital and exploratory expenditures were $2,740,000,000 approximately $150,000,000 below our original guidance. 2nd, we continued our extraordinary run of success on the 6 point 6,000,000 Acre Stabroek Block in Guyana with 5 discoveries with the start of production from Aliza Phase 1 development in December, ahead of schedule and under budget and with the sanction of the Liza Phase 2 development, which is on track for first oil by mid-twenty 22. 3rd, in the Bakken, we successfully completed our transition to plug and perf completions, while driving down drilling and completion costs. Our plug and perf transition has on average delivered a 15% uplift in IP 180 production. At the same time, we reduced our drilling and completion costs from an average of approximately $7,500,000 per well in the Q4 of 2018 to approximately $6,500,000 in the Q4 of 2019.
By the end of 2020, we expect our D and C costs will approach $6,000,000 per well.
Speaker 4
Proved reserves
Speaker 3
at the end of 2019 stood at 1,197,000,000 barrels of oil equivalent. Net proved reserve additions and revisions in 2019 totaled 121,000,000 barrels of oil equivalent, including negative net price revisions of 35,000,000 barrels of oil equivalent, resulting in an overall 2019 production replacement ratio of 104%. The majority of the additions were in the Bakken and Guyana. Now turning to production. In the Q4 of 2019, company wide net production averaged 316,000 barrels of oil equivalent per day, excluding Libya, above our guidance of approximately 300,000 barrels of oil equivalent per day, driven by strong performance across the portfolio and in particular the Bakken.
For the full year 2020, we forecast net production to average between 330,000,335,000 barrels of oil equivalent per day excluding Libya, which is a 15% increase from 2019. In the Q1 of 2020, we forecast net production to average between 320,000,325,000 barrels of oil equivalent per day. In the Bakken, 4th quarter net production averaged 174,000 barrels of oil equivalent per day, an increase of approximately 38% above the year ago quarter and above our guidance of 165,000 net barrels of oil equivalent per day. For the full year 2019, Bakken net production averaged 152,000 barrels of oil equivalent per day, above our original guidance of between 135,000 and 145,000 barrels of oil equivalent per day and our most recent full year guidance of 150,000 barrels of oil equivalent per day. These results reflect the strong performance of our plug and perf completions and the quality of our acreage position.
For the full year 2020, we forecast Bakken net production to average approximately 180,000 barrels of oil equivalent per day, which of the Tioga Gas Plant in the Q3. During the shutdown, we will perform a turnaround and tie in the plant expansion project, which will increase capacity from 250,000,000 cubic feet per day to 400,000,000 cubic feet per day. In 2020, we expect to drill approximately 170 wells and bring approximately 175 new wells online, compared with 160 wells drilled and 156 wells brought online in 2019. In the Q1 of 2020, we expect Bakkenet production to average approximately 170,000 barrels of oil equivalent per day. Our Q1 2020 forecast reflects lower planned activity levels due to seasonally difficult winter weather conditions, where we expect to bring online approximately 30 new wells compared with 59 in the Q4 of 2019.
Net production will increase in the Bakken throughout the year, growing to approximately 200,000 barrels of oil equivalent per day by the end of 20 20. As discussed previously, we plan to drop our rig count from 6 rigs in 2020 to 4 in 2021. At this level of activity, we expect to hold production relatively flat for at least 5 years and generate approximately $750,000,000 of free cash flow annually at $55 per barrel WTI. Moving to the offshore, in the Deepwater Gulf of Mexico, net production averaged 70,000 barrels of oil equivalent per day in the 4th quarter 66,000 barrels of oil equivalent per day for the full year 2019, in line with our guidance. Our focused exploration program in the Deepwater Gulf of Mexico yielded an oil discovery in the Q4 at the ESOX-one well in Mississippi Canyon.
A dual completion was successfully run and the subsea installation is underway, which will tie back to the Tubular Bells production facility. We expect to achieve first oil in February. ESOXX is a high return, cash generative tieback opportunity that was well executed. The timeframe from discovery to first oil is expected to be less than 4 months. In 2020, we forecast net production from our deepwater Gulf of Mexico assets to average approximately 65,000 barrels of oil equivalent per day.
This includes extended planned maintenance shutdowns in the 2nd quarter. At the Malaysia Thailand joint development area in the Gulf of Thailand, where Hess has a 50% interest, net production averaged 36,000 barrels of oil equivalent per day in the 4th quarter and 35,000 barrels of oil equivalent per day for the full year 2019. At the North Malay Basin, also in the Gulf of Thailand, where Hess is operator and has a 50% interest, net production averaged 28,000 barrels of oil equivalent per day in the Q4 and for the full year 2019. Combined net production from our JDA and North Malay Basin assets is forecast to average approximately 60,000 barrels of oil equivalent per day for the full year 2020. Turning to Guyana, where Hess has a 30% interest in the Stabroek Block and ExxonMobil is the operator.
In December, we announced a 15th discovery on the block at the Mako-one well located approximately 6 miles southeast of the Liza field. Mako-one drilled in 5,315 feet of water encountered approximately 164 feet of high quality oil bearing sandstone reservoir. On Monday, we announced another significant oil discovery at Huaru, which is located approximately 10 miles northeast of the Liza field. The Waru-one well drilled in 6,342 feet of water encountered approximately 94 feet of high quality oil bearing sandstone reservoir. The well was drilled in a down dip location on a large stratigraphic trap.
Further appraisal and testing is planned. Based on the 15 discoveries through year end 2019, growth discovered recoverable resources for the Stabroek Block has been increased to more than 8,000,000,000 barrels of oil equivalent, up from more than 5,000,000,000 barrels of oil equivalent only 1 year ago. The estimate. The continuing growth of the resource base on the block has been truly remarkable. Looking forward, after the Noble Tom Madden completes the evaluation of the Uaru discovery, the drillship will move to development drilling for Liza Phase 2.
Astenna Karen is currently engaged on a well test at the Yellowtail discovery, after which it will drill and test the Yellowtail 2 appraisal well. After completing the evaluation program for Mako 1, the Noble Don Taylor will next drill and test the Long Tail 2 appraisal well. Finally, the Noble Bob Douglas will continue drilling development wells. As announced on Monday, the operator intends to bring in a 5th drillship later this year. We expect the first half of twenty twenty will be dominated by appraisal activities, primarily in the Greater Turbot area.
In the second half of the year, we plan to drill several new exploration wells, including some that will test the emerging deeper plays on the Stabroek Block. Turning now to our Guyana developments. On December 20, production commenced from Liza Phase 1 development less than 5 years after the discovery of hydrocarbons and well ahead of the industry average for deepwater developments. The project also came in under budget. At sanction, Liza Phase 1 was budgeted at $4,400,000,000 gross, including the purchase of the FPSO.
We now expect the gross cost for the development to be approximately $3,500,000,000 or 21 percent below the sanction estimate. Liza Phase 1 production continues to ramp up. Current gross production is approximately 75,000 barrels of oil per day from 3 of the 5 producers available at startup. Production is expected to reach the FPSO's capacity of 120,000 barrels of oil per day in the coming months. For the full year 2020, we forecast our net production to average approximately 25,000 barrels of oil per day.
The Liza Phase 2 development is progressing to plan. On January 13, the hull for the Liza Unity FPSO, which will have a capacity of 220,000 barrels of oil per day, arrives at the Keppel yard in Singapore. Construction of all 13 deck modules is currently underway. Meanwhile in Guyana, installation of subsea flow lines and equipment is underway and development drilling is expected to begin next month. We continue to forecast first oil by mid-twenty 22.
Pending government approvals and project sanctioning, a third development at Payara is planned to utilize an FPSO with a gross production capacity of 220,000 barrels of oil per day with first oil as early as 2023. Together with Hammerhead, discoveries on the southeast portion of the block, including Turbot, Yellowtail, Longtail, Pluma, Tilapia and Tripletail will underpin future FPSOs. In closing, our execution continues to be strong. The Bakken is on a capital efficient growth trajectory. Our offshore assets in the deepwater Gulf of Mexico and Malaysia continue to generate significant free cash flow and Guyana continues to get bigger and better, all of which positions us to deliver industry leading returns, material free cash flow generation and significant shareholder value.
I will now turn the call over to John Riving.
Speaker 5
Thanks, Greg. In my remarks today, I will compare results from the Q4 of 2019 to the Q3 of 2019. We incurred a net loss of $222,000,000 in the Q4 of 2019 compared to a net loss of $212,000,000 in the Q3 of 2019. On an adjusted basis, which excludes items affecting comparability of earnings between periods, we incurred a net loss of $180,000,000 in the Q4 2019 compared to a net loss of $105,000,000 in the previous quarter. For E and P, on an adjusted basis, E and P incurred a net loss of $124,000,000 in the Q4 of 2019, compared to a net loss of $41,000,000 in the previous quarter.
The changes in the after tax components of adjusted E and P results between the Q4 and Q3 of 2019 were as follows: higher exploration costs reduced results by $56,000,000 lower realized selling prices reduced results by $13,000,000 All other items reduced results by $14,000,000 for an overall reduction in 4th quarter results of $83,000,000 For Midstream, on an adjusted basis, the Midstream segment had net income of $49,000,000 in the Q4 of 2019, compared to $39,000,000 in the previous quarter, reflecting higher throughput volumes. Midstream EBITDA on an adjusted basis and before non controlling interest amounted to $157,000,000 in the Q4 of 2019 compared to $134,000,000 in the previous quarter. For corporate, on an adjusted basis, after tax corporate and interest expenses were $105,000,000 in the Q4 of 2019 compared to $103,000,000 in the previous quarter. Now turning to our financial position. At quarter end, excluding Midstream, cash and cash equivalents were $1,540,000,000 and total liquidity was $5,400,000,000 including available committed credit facilities, while debt and finance lease obligations totaled $5,640,100,000 In December 2019, Hess Midstream completed its previously announced acquisition of Hess Infrastructure Partners with a conversion to an upsea corporate structure and incentive distribution rights simplification.
As consideration for the transaction, we received additional shares and approximately $300,000,000 in cash. We now own approximately 134,000,000 shares of Hess Midstream or approximately 47%. In the Q4 of 2019, net cash provided from operating activities was $286,000,000 or $550,000,000 before changes in working capital and items affecting comparability. While cash outlays for capital expenditures were $825,000,000 in the 4th quarter. Changes in working capital reduced cash flows from operating activities by $234,000,000 in the 4th quarter, primarily reflecting premiums paid for crude oil hedging contracts.
For calendar year 2020, our crude oil hedge positions consist of WTI put options with a notional amount of 130,000 barrels of oil per day that have an average monthly floor price of $55 per barrel and Brent put options with a notional amount of 20,000 barrels of oil per day that have an average monthly floor price of $60 per barrel. Now turning to guidance, first for exploration and production. We project E and P cash costs, excluding Libya, to be in the range of $11.50 to $12.50 per barrel of oil equivalent for the Q1 and for the full year 2020. DD and A expense, excluding Libya, is forecast to be in the range of $16.50 to 17.50 dollars per barrel of oil equivalent for the Q1 and for the full year 2020. This results in projected total E and P unit operating costs, excluding Libya, to be in the range of $28 to $30 per barrel of oil equivalent for the Q1 and for the full year 2020.
As guided earlier, capital and exploratory expenditures in 2020 are expected to be $3,000,000,000 Exploration expenses, excluding dry hole costs, are expected to be in the range of $50,000,000 to $55,000,000 in the Q1, with full year 2020 guidance expected to be in the range of $210,000,000 to $220,000,000 The midstream tariff is projected to be in the range of $225,000,000 to $235,000,000 in the Q1, with full year 2020 guidance expected to be in the range of $940,000,000 to $965,000,000 E and P tax expense, excluding Libya, is expected to be in the range of $15,000,000 to $20,000,000 for the Q1 and in the range of $80,000,000 to $90,000,000 for the full year 2020. As highlighted earlier, we have purchased crude oil hedge positions for calendar year 2020. We expect non cash option premium amortization, which will be reflected in our realized selling prices to reduce our results by approximately $70,000,000 per quarter. Now turning to Midstream, we anticipate net income attributable to Hess from the Midstream segment to be in the range of $45,000,000 to $55,000,000 in the Q1 and full year 2020 guidance is expected to be in the range of $205,000,000 to $215,000,000
Speaker 4
For corporate,
Speaker 5
corporate expenses are estimated to be in the range of $30,000,000 to $35,000,000 in the Q1 and full year 2020 guidance is expected to be in the range of $115,000,000 to $125,000,000 Interest expense is estimated to be in the range of 85 $1,000,000 to $90,000,000 for the Q1, with the full year 2020 guidance expected to be $350,000,000 to $360,000,000 The increase from 2019 is due to ceasing interest capitalization at the Liza field, which commenced production in December 2019. This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.
Speaker 0
Your first question comes from the line of Doug Leggate with Bank of America.
Speaker 6
Thanks. Good morning, everybody.
Speaker 2
Good morning, Doug.
Speaker 6
Guys, it looks like the market doesn't like the guidance too much. So I wonder if we could talk a little bit about the cadence of what's going on with downtime through the course of the year. Greg, you touched on Tioga, but I want and you obviously, you've given us a Q1 run rate for the Bakken. But can you kind of walk us through how that progresses through the year? Because clearly $174,000,000 in Q4 and a $180,000,000 average for the full year looks a little soft and maybe touch on the Gulf of Mexico plan downtime as well?
Speaker 3
Yes. Thanks, Doug. So as we mentioned, we do have the turnaround the Tioga Gas Plant. It's going to be about 45 days, and we're going to turn it around and also tie in the gas plant expansion as we mentioned. Now that's not going to have much impact, if any, on oil.
It's going to be primarily gas and the net effect of that is about 6,000 barrels of oil equivalent per day. If I turn to
Speaker 6
the Gulf of Mexico For the year, Greg, or for the quarter?
Speaker 3
Yes, for the year. Yes, for the year. Thanks, Doug. And then if I turn to the Gulf of Mexico, we have 2 major shutdowns in the second quarter, 1 at Conger and 1 at Llano, both of which are down for 30 days. We also have Penn State down for about 8 days in the second quarter.
So the net impact of that on the quarter is about 13,000 barrels a day.
Speaker 6
That starts to make a bit more sense. And I appreciate the emphasis that oil doesn't get set. So thank you for that. My follow-up is not to be too predictable is obviously on Guyana. And I know we have the Exxon Analyst Day on March 5 to the extent you can share, it seems that the appraisal activity focused around Turbot is probably, I'm guessing, is to define what the scale of that development is going to look like over time.
You've previously defined it as a major development hub, but we also know that Hammerhead has been passed to the development team for Exxon. So I'm just wondering if you can kind of walk us through your current thought on the timing of or the scale of that 2025 run rate? And John Reilly, impact the 2018 guidance you gave us of a run rate $3,000,000,000 capital program? And I'll leave it there. Thanks.
Speaker 3
Yes. Thanks, Doug. I think as we've spoken before, you're right. I mean, Hammerhead has been passed off to the development team. That notionally right now is about 140,000 barrels of oil capacity kind of vessel.
And then as you mentioned, all of the appraisal activities that are ongoing really what I call on the Eastern seaboard between Turbot and Liza, are really trying to understand, how many vessels will it take to evacuate all of that oil, which is substantial along that Eastern seaboard. So clearly, vessel 5 is going to be in that area and probably several vessels after that. But we're trying to figure all that out, How many vessels will it take? And obviously, the 5th vessel will be a large one. It will be in the 220 class like the others are.
But specific timing of the number of vessels and timing of the ones after 5, that's really what we're working on and that's kind of the heavy lift for this year, Doug, to really understand that.
Speaker 5
And then Doug, as far as our capital program, as we laid out on our Investor Day, we had 3,000,000,000 dollars this year. We do have, if you see from the Investor Day, a little bit more next year as we move on with these developments. And as we talked about, it's an approximate $3,000,000,000 And right now, there's no change to that number. We've got a nice cadence going. Exxon, as an aside, has been doing a fantastic job on the execution of Phase 1.
And now Phase 2 is the execution is going along well. And so it's they're doing a great job for Guyana and for the partners. So what we're seeing from our capital program is that $3,000,000,000 is a good number. Right now, as Greg said, we're unsure of FPSOs beyond the 5 and we'll see that. But again, that will be much later in the profile of our timing of free cash flow because as you remember, once Phase 2 comes on, will be in a good period for us when we're generating a lot of free cash flow.
Speaker 6
I appreciate that guys and I'll see you in a couple of weeks. Thank you.
Speaker 7
Okay. Thank you.
Speaker 0
Your next question comes from the line of Ryan Todd with Simmons Energy.
Speaker 8
Great, thanks. Maybe one follow-up initially on Guyana. Can you talk about on the upwards revision to the resource estimate to 8,000,000,000 barrels, was all that based on the inclusion of incremental discoveries since the last estimate? Or was there any component driven by upward revisions to estimates at prior discoveries? Maybe just can you talk about the primary drivers of what you continue to see as the significant upward pressure on resource?
Speaker 3
No, I think the absolute grand majority of that was all new discoveries. So it's just continuing to add to this extraordinary success rate, 5% in 2019 and already another one in 2020 with more to come.
Speaker 8
Great. Thanks. And then maybe a follow-up in the Bakken. I mean the Bakken continues to exceed expectations in terms of productivity and also impressive costs. Can you talk about some of the drivers of what you've seen in terms of the strong Bakken production?
And maybe you highlighted actual targeted reductions in well costs for the Bakken in 2020. What are the drivers and what are you seeing there in terms of costs in the basin?
Speaker 3
Yes. So let me start with cost first. As I mentioned in my opening remarks, I'm really proud of the team and their ability to drive cost down with lean manufacturing. So if you think about our journey in 2019, we started at 7.5% in the Q4 of 2018, 7.3% in Q1, 7% in Q2, 6.7% in Q3 and 6.5% in Q4. So that's an amazing cost reduction over 12 months, driven primarily by lean manufacturing, but also technology.
And then as we look forward to next year, obviously that flattens out a bit, part of lean manufacturing, but we still think we'll be at 6 by the end of the year. The biggest driver on that is going to be again technology and lean, but we also are seeing some softness in the sand costs and also pressure pumping. So we built some of that into our cost estimates for next year. Regarding the productivity, really a function of where we're drilling, but also the plug and perf coming in very well. So on average, IP 180s are up 15%.
But if you look at certain areas of the field, particularly in the southern part of the field, we've outperformed that 15% in those areas, and those are very good prolific areas of the Bakken. And as we look forward to our 2020 program, again, it's 175 wells, be very similar. EUR is kind of in the 1 to 1 point 2 range, IP 180s in the 110 to 120 range and IRR is at 60 percent, well above 75%. So again, a very strong program in 2020.
Speaker 0
Your next question comes from the line of Roger Read with Wells Fargo.
Speaker 9
Yes, thanks. Good morning. Maybe just to follow-up on that Bakken question and this may be premature, but given that you're continuing to see improvements, as we think about holding flat at 200,000 a day kind of end of this year onwards, any reason at this point or any optimism to think about that costing less or maybe not taking quite 4 rigs as we go forward? Or do we just need to balance that as you kind of move from, as you mentioned, the premium spots to maybe the next tier down that's incorporated
Speaker 3
in the outlook? Yes. I think it's a balance, as you said. So we're pretty confident that we can hold it flat at the $200,000,000 range for at least 5 years and probably longer. And as you mentioned, as technology improvements continue to occur, as costs potentially continue to come down, obviously, that plateau will be extended even longer.
And I will mention that in our Tier 2 acreage, we are doing a lot of trials on proppant loading, on number of entry points, on spacing. So we are not decided yet in some of those areas exactly what that's going to be. So the assumption going forward is none of that's built in. So I'm very optimistic that that will get much better as we go forward as we learn in those areas.
Speaker 9
Yes. It certainly has not been a static environment
Speaker 10
so far, right.
Speaker 9
One other question and it's got 2 parts. I apologize for doing it that way. But it's some of the pushback we've gotten post results here. One is the hedging program. So I'll just kind of put the question up to you of why hedge?
The second part is we did see debt go up in the quarter. It looks like mostly that was to take care of the midstream side of things. But I was wondering if you could clarify on those two points for us.
Speaker 5
Sure, Roger. And only do the second one first, it's just quick. The debt that went up was related to Midstream and the completion of the transaction that we spoke about, the acquisition of Hess Infrastructure Partners and the conversion to the Upsea, that was the debt. So it's just purely midstream debt. That is non recourse to Hess.
As far as the hedging, Roger, you know the prize we have, that from our Investor Day there with Bakken getting up to 200,000 barrels a day and bringing on Phase 2. So what we do is we look at it year by year and we put these hedges on for insurance just to ensure that we can fund that investment program because of the returns that that program will drive for us. So we're getting closer and closer Phase 2, right, is mid-twenty 22. We just want to finish this Guyana program, execute it, continue to execute that. And as Greg said, continue to execute our 6 rig program, which will drop the 4 rigs the following year.
And so we just put hedges on for insurance purposes and hopefully we don't use them.
Speaker 9
I appreciate it. Thank you.
Speaker 0
Your next question comes from Jeanine Wai with Barclays.
Speaker 11
Hi, good morning everyone.
Speaker 5
Good morning.
Speaker 11
I guess my two questions are on CapEx and Guyana. The first one is, it looks like total E and P CapEx for the quarter came in a little bit higher than expected and I believe some of that might be related to Guyana. So can you provide any color on that and any implications for Phase 2 that it may imply?
Speaker 5
It did come in for the quarter very small amount. Again, we just went out with an approximate $850,000 came in at $876,000 As Greg mentioned, with the Bakken, we did get a little bit more completions in Bakken. So a little bit is in the Bakken. A little bit of it is an acceleration in Guyana. And the rest of it is kind of just through the portfolio, really small numbers.
Again, we were just given approximate amounts. So there's no implication on that going forward. We have the $3,000,000,000 capital that we set. We are going up approximately $300,000,000 in Guyana next year versus 2019. And again, we laid that out for the continuation of Phase 1, about $400,000,000 for Phase 2 and then the rest of it for Phase 3 and future developments.
Speaker 11
Okay, great. That's really helpful. Thank you for that. My second question on Guyana, can you comment on any of the recent news headlines about the potential for contract renegotiations?
Speaker 2
Yes. Most of the news that you hear is not from reliable sources, neither the current government or opposition government. I think they both have been pretty clear that they are going to honor the PSC. So I think that's the real takeaway you should have.
Speaker 11
Okay, great. Thank you for taking my questions.
Speaker 4
Pleasure.
Speaker 0
Your next question comes from the line of David Deckelbaum with Cowen.
Speaker 12
Good morning, everyone. Thanks for taking my questions.
Speaker 10
Thanks.
Speaker 12
Just wanted to ask, you talked about having the first tanker loading attributed to Hess or allocated to Hess in March with 1,000,000 barrels. How do you see the liftings or tanker loadings progressing throughout the year? Should we always be thinking about the same sort of capacity? And what kind of cadence are you expecting throughout the year?
Speaker 5
So the cadence can move around a little bit from that on how they get allocated. But here, there's a general rule of thumb. It will be 1,000,000 barrels each lift. And for us, as you heard, Greg gave the guidance on Guyana that it's 25,000 barrels a day for the year. If you multiply that by 365,000 barrels, you're getting just about 9,000,000, a little over 9,000,000 barrels.
So we expect just from a forecast standpoint to have 9 lifts this year. I can't exactly be specific which quarters that we coming in. Our first lift, you're right, is expected in early March.
Speaker 12
Okay. I appreciate that. But it does sound like your net sales amount is approximating your production guidance for the year. So that's encouraging.
Speaker 5
That is correct. Quarter by quarter, you could get some under over list, but right, for the full year, the sales should approximate the production amount.
Speaker 12
Got it. And then just to revisit some of the Bakken guidance, I know that it's difficult to forecast with lumpiness around the quarters. But the expectation is that you'd be exiting 2020 at approximately that 200 equivalent target?
Speaker 3
Yes. We'll achieve that sometime in Q4.
Speaker 12
Okay. And then the in the Q3 with the Tioga turnaround and expansion, how is it that oil volumes are not impacted there from a logistical perspective?
Speaker 3
Well, again, they're separate systems, right? So you can the gas is separated on the pad from the oil and it goes through a separate system. So you can still produce the oil, but obviously that gas goes through the plant. So that's where the impact is going to be. So we'll do some local flaring on the pads and some flaring at the gas plant as well during that 45 day shutdown, but the oil will largely stay on.
Speaker 12
Okay. But I guess as a total program, you'd still be under the regulations for flaring at the state level?
Speaker 3
Yes, yes. There will be some restrictions that we'll have to deal with, but of course, you can get some dispensation for things like turnarounds, etcetera, so
Speaker 10
All right. I appreciate the color on that. Thank you, guys.
Speaker 0
Your next question comes from the line of Michael Hall with Heikkinen Energy Advisors.
Speaker 4
Thanks. Good morning. Just curious, a little bit of an accounting question, I guess. On the Guyana volumes, the 25,000 a day, does that include cost barrel recoveries? If so, how much?
If not, how should we think about that for 2020?
Speaker 5
It does include that. It's just part of the normal production sharing contract cost recovery barrels are included as part of our production and the partners' production.
Speaker 7
And do
Speaker 4
you have an estimate of how much of that is cost recovery by chance?
Speaker 5
I could walk you maybe through it a little bit more in detail after the call, but the contract is out there that you can see, but the way it basically works is on the revenue then 75% of the revenue goes for cost recovery for the contractors. So that's how you can factor and then you go into profit share after that.
Speaker 7
Okay. Yes, just want to
Speaker 4
make sure we're calibrating right. And then I was curious on, I guess, the Gulf of Mexico, the capital on the 2020 plan, I think we backed into around $350,000,000 or so relative to at 2018 Analyst Day, you talked about annual average capital of $150,000,000 to sustain 65 MBOE a day. So I'm just trying to line those two things up and
Speaker 7
should we be yes, how
Speaker 4
do we reconcile those 2 things? I just want
Speaker 5
to make sure that we're on the same page with the numbers. So in our release that we went out for 2020, the Gulf of Mexico capital will be approximately $135,000,000 for this year. That's we're spending from a production aspect of it. Last year, we did have a higher amount. It was approximately 290,000,000 dollars and that is because we were running full year.
We had 2 rigs running for Stampede, which will be coming off contract here basically in the Q2. So there's lower Gulf of Mexico spend. And so as you know, we will be tying in ESOXX, which again helps and keeps us at that 65,000 barrels a day that we've talked about.
Speaker 3
And then as we did mention, going forward, you can expect about $150,000,000 to $200,000,000 of CapEx per annum for infill and tieback wells. So and this is our objective in the 10, that was about 6,000 barrels a day. And we've been very successful doing that. If you look at Conger 10, that was about 6,000 barrels a day. Penn State 6, about 14,000 barrels a day.
LON05, about 8, and ESOX is anticipated to be a very good well. We see 4 to 6 more things that we'd like to drill in the next couple of years, in our expectation of keeping those hubs full. Then beyond that, of course, it will be greenfield. So we'll drill a greenfield exploration well probably 1 a year, on average, over the next several years, again, trying to maintain that production or potentially even growing it, with a new hub.
Speaker 4
Okay. Yes, I guess that's helpful. And I guess to maybe make sure I'm thinking about the numbers right here. So I mean I was trying to connect $1,730,000,000 of total U. S.
Capital for the release with the $1,375,000,000 in the Bakken and the remainder being in the Gulf of Mexico. I'm assuming some of that being for exploration. So I guess what's being spent in the U. S. Outside of the Bakken and the Gulf of Mexico, if anything?
And how would you break out the $1,730,000,000 between the Bakken and the Gulf of Mexico? Just seems like those 2 don't that doesn't all add up.
Speaker 5
So you have $1,730,000,000 saying in the U. S, right? So you have 1730, back out to Bakken, which is 1,375, right, in production. Right. And you're going to back out $135,000,000
Speaker 4
for the Gulf of
Speaker 5
Mexico, right? So then the rest of that amount is in exploration. That can be wells being drilled or seismic being spent. So that approximate $200,000,000 that you have left relates to exploration.
Speaker 4
Sure. Okay. And that exploration is all in the Gulf?
Speaker 5
In the Gulf, correct, at U. S. Peace, correct.
Speaker 7
Okay. Thank you.
Speaker 0
Your next question comes from the line of Paul Cheng with Scotiabank.
Speaker 10
Hey, guys. Good morning. Good morning. I have to apologize that I joined Lei. So my question has already been answered.
Just let me know, so I will just look at the transcript. John, I think 2 quick questions for you on the accounting. The hedging premium amortization, the $70,000,000 a quarter, is that pre tax and after tax? And also from an accounting standpoint, since in Guyana, you have the government going to pick up the income tax. So when you guys report it, are you going to report that the corresponding tax as a gross up and then that you reported also the tax or that you just don't report any tax at all?
How is the accounting treatment going to be?
Speaker 5
Okay. So first on the hedges, it is pretax and post tax. So that will be the same amount because we have a valuation allowance against our net operating losses in the U. S. So that will be the same number.
In Guyana, we do pay taxes. It's in the entitlement of our contracts. So the taxes are embedded in our entitlement, effectively reducing our entitlement. And therefore, what we do then with our entitlement for financial reporting purposes is disaggregate that and then show the tax and gross it up from relating to that. I can walk you through that more after the call, but that is how we are doing that.
Speaker 10
Yes, because I think that's how Apache has done in Egypt. I just want to make sure that that's the same methodology because that's how we're modeling right now.
Speaker 5
Yes, that is how it would work and happy to discuss that further. We can do
Speaker 7
that. Okay.
Speaker 10
And Greg, when I'm looking at your production guidance, that seems conservative. Is there any area that maybe we have a bit of more of the upside?
Speaker 3
I think you probably missed the start of the call where we kind of went through the shutdowns. Again, Tayo gas plant down 45 days and then a heavy maintenance period in the Gulf of Mexico where we have 2 of our big assets down 30 days in the second quarter. So that's really kind of what reduced our normal capacity of our production was those 2 shutdowns.
Speaker 10
Okay. I will read the transcript. And then the final one, have you guys booked any additional reserve related to the Niza 1 last year?
Speaker 5
We booked a minor amount for the wells that we were drilled here. Again, rule of thumb is, Paul, probably we've got a third of the reserves on the books right now for Phase 1. And then as we get the dynamic data, see how the injection goes, we'll begin to pick up additional reserves. Okay.
Speaker 10
All right. Will do. Thank you.
Speaker 0
Your next question comes from the line of Pavel Molchanov with Raymond James.
Speaker 13
Guys, thanks for taking the question. So this year, after about 5 years, you will begin to drill on a brand new exploration block in Guyana. And given your experience on Stabroek, I'm curious what kind of expectations should we be thinking about in terms of pre drill estimates and the geology of this new acreage that you're going to be getting underway?
Speaker 3
No, I think you're referring to the Kiteur block, which is outboard of Stabroek, which we have a 15% interest in Exxon, the operator. See very similar play types that exist on the Liza block or on the Stabroek block. And in fact, we'll spud our first well, a well called Tananger this year on that block. So stay tuned.
Speaker 13
Okay. All right. Fair enough. And a question about Hess Midstream. So now that the Bakken is very close to it, if not reaching plateau,
Speaker 10
what's going to
Speaker 13
be the drop down model for the MLP if the underlying production is essentially flat lining?
Speaker 5
So for Hess Midstream now, it's not an MLP and all the assets in North Dakota have been acquired by the Midstream because we completed that transaction in the Q4. So they now have all the gathering facility there in the Tioga Gas Plant. So from the old drop down model that won't be happening going forward. So what you do have here is this growth that we have. So in the Bakken, obviously, as we're going from 180,000 to 200,000 barrels a day, we're going to they're going to pick up that growth, the Hess Midstrom will picking up that.
Then as you know, the flaring regulations get tighter and tighter as we move on in North Dakota. And so what Hess Midstream is doing now is they've completed the LM4 plant and so picked up additional gas processing capacity there. We're doing the expansion of the Tioga Gas Plant and so that's going up to 400,000,000 cubic feet a day. And it is looking to pick up 3rd party business as these flaring regulations get tighter and tighter. And we are in a good infrastructure position, in a good position to pick up that.
So there's a lot of growth going from there and they'll look for other opportunities up there in North Dakota.
Speaker 10
All right. Appreciate it, guys.
Speaker 0
Your next question comes from the line of Brian Singer with Goldman Sachs.
Speaker 14
Thank you. Good morning.
Speaker 8
Good morning.
Speaker 14
Can you talk about the benefits and risks of in Guyana of co development of FPSOs and how discussions and plans with the operator are evolving, if at all, as you ramp up the first FPSO and you gain greater insight into the reservoir and processes? How on the table is this when you look out to FPSOs 3, 4, 5 or beyond?
Speaker 3
No, I think Brian, the current strategy, which we agree with, is to design 1, build many, because you can get such leverage of learnings as you go from vessel 1 to 2 to 3, right? Now what is likely going to happen is the timeframe between those vessels will begin to collapse. So from a cadence of maybe 1 a year, maybe it becomes every 9 months or potentially even every 6 months as you get out in time. That's what those synergies will do for you. So that's what we really see.
We don't really see doubling or tripling up because that's very inefficient, but rather design 1, build many, but continue to collapse the timeframe based on efficiencies.
Speaker 2
Yes. And just to embellish on that, it's really a phased approach to be capital efficient. ExxonMobil has done a great job optimizing the development, lowering the costs. The learnings from Ship 1 help us in Ship 2 and that will continue in Ship 3. So we're really looking at a phased approach, but as Greg said, maybe with more compression of the timeframe.
And I just want to remind everyone, the 8,000,000,000 barrels of oil equivalent we talked about, we've had 16 successes. So it's basically 500,000,000 dollars per discovery. And that's world class. And it's got very low cost, very high returns, and ExxonMobil is doing a great job moving the project forward.
Speaker 14
Great. Thanks. And then, John, in your opening comments, you talked about free cash or cash flow over time going to dividend increases and opportunistic share repurchase. Is there any change in the timing of when you would expect to consider that? Is that still when you get more into free cash flow mode post or with the startup of Phase 2 in Guyana?
Or is that something that we could see earlier or later than that?
Speaker 5
No, I would say right now stick with our guidance that it's going to be timed with Phase 2 coming online when again that is the big inflection point for us from a free cash flow and earnings standpoint.
Speaker 2
And the priority will be on increasing the dividend as the first call.
Speaker 13
Great. Thank you.
Speaker 0
Your next question comes from the line of Ben Lovagno with Mizuho Securities. Mr. Lagliano, your phone may be on mute.
Speaker 15
Hello. Hi, sorry. It's Paul Stankey here. Can you hear me?
Speaker 5
Yes, we can hear you, Paul.
Speaker 15
Yes, sorry about that. I got myself on mute. Guys, you put out a note on the ESG in oil and gas, and you have tested very, very well in terms of certainly your disclosures. Can you talk a little bit about some of the areas where you think you can still get better? And I'm specifically thinking about flaring.
And beyond that, could you talk about the impact of Guyana and how that will change some of the metrics that you do such a great job of disclosing? Thanks.
Speaker 2
Yes. Thank you, Paul. Obviously, ESG sustainability is core value for the company. We've been doing a sustainability report for 22 years. We're honored and proud to be an industry leader.
We want to make sure we continue that leadership role. As we look at our flaring, let's say, in the Bakken, we're ahead of the state limits, and we have a program in place to continue that. And we're looking at updating our sustainability efforts in terms of the environment, and we'll be coming out with some new targets within the year for the next 5 years. So that's a work in progress, but we always want to stay ahead of the regulations. And in terms of Guyana, the gas is basically reinjected.
And again, ExxonMobil does a great job minimizing the flaring in startup, etcetera. But the majority of glass is reinjected, so there's really not an issue there. And one of the things we're going to be looking at in Guyana is how can we help the country going forward in social responsibility, which is something that's very important to our company and our board and every employee.
Speaker 15
Got it, John. Thanks very much for that. And then a follow-up on the previous hedging question, totally different subject. How do you expect that, hedging program that has sort of changed around a little bit over time at Hess. I wonder how you expect Guyana to affect that going forward and whether or not you'll have a different hedging strategy, let's say, in perhaps 5 years' time?
Thanks.
Speaker 5
Sure. I mean, we do look at it, Paul, year to year and make our decisions on our hedging requirements. And right now, obviously, with the investment still going in for Guyana until we get to that Phase 2, we wanted to put a significant amount of insurance on to ensure we fund that. As we move forward and we get to more free cash flow, we'll still be obviously have a heavy oil portion in our portfolio. We'll make those decisions year to year and we could make some different decisions at that point in time.
Speaker 15
Thank you, guys.
Speaker 0
Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.