Hess - Q4 2020
January 27, 2021
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the 4th Quarter 2020 Hess Corporation Conference Call. My name is Andrew, and I will be your operator for today. At this time, all participants are in a listen only mode.
Speaker 1
Later, we will conduct
Speaker 0
a question and answer session. I would now like to turn the conference over to Jay Wilson, Vice President of Investor Relations. Please proceed.
Speaker 2
Thank you, Andrew. 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 section of Hess' 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 we have done in recent quarters, we will be posting transcripts of each speaker's prepared remarks on our website following the presentations. As usual, online 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 3
Thank you, Jay. I would like to welcome everyone to our Q4 conference call. I hope you and your families are well and staying healthy during challenging times. Today, I will review our continued progress in executing our strategy. Then Greg Hill will discuss our operations, and John Reilly will review our financial performance.
Our strategy has been and continues to be to grow our resource base, have a low cost of supply and sustain cash flow growth. Our differentiated portfolio is balanced between short cycle and long cycle assets with our focus on the best rocks for the best returns. The Bakken, Deepwater Gulf of Mexico and Southeast Asia are our cash engines and Guyana is our growth engine. Guyana becomes a significant cash engine as multiple phases of low cost oil developments come online, which we believe will drive our company's breakeven price to under $40 per barrel Brent and provide industry leading cash flow growth over the course of the decade. As our portfolio generates increasing free cash flow, we will first prioritize debt reduction and then increase cash returns to shareholders through dividend increases and opportunistic share repurchases.
Turning to 2020, we achieved strong operating results, overcoming difficult market conditions and the challenges of working safely in the pandemic. I am extremely proud of our workforce for delivering production in line with our original guidance despite a 40% reduction in our capital and exploratory expenditures. In response to the pandemic's severe impact on oil prices, our priorities have been to preserve cash, preserve our operating capability and to preserve the long term value of our assets. In terms of preserving cash, we came into 2020 with approximately 80% of our oil production hedged with put options for 130,000 barrels per day at $55 per barrel West Texas Intermediate and 20,000 barrels per day at $60 per barrel Brent. To enhance cash flow and maximize the value of our production, Last March April, when U.
S. Oil storage was near capacity, we chartered 3 very large crude carriers or VLCCs to store approximately 2,000,000 barrels each of May, June July Bakken crude oil production. The first VLCC cargo of 2,100,000 barrels was sold in China at a premium to Brent in September, and the second and third VLCC cargoes have been sold at a premium to Brent for delivery in the Q1 of 2021. We reduced our capital and exploratory spend for 20 20 by 40% from our original budget of $3,000,000,000 down to $1,800,000,000 The majority of this reduction came from dropping from a 6 rig program in the Bakken to 1 rig. We also reduced our 2020 cash operating costs by $275,000,000 In 2020, we strengthened the company's cash and liquidity position through a $1,000,000,000 3 year term loan initially underwritten by JPMorgan Chase.
In addition, we have an undrawn $3,500,000,000 revolving credit facility and no material debt maturities until 2023. During the Q4, we closed on the sale of our 28% interest in the Shenzi field in the Gulf of Mexico for a total consideration of $505,000,000 bringing value forward in the low price environment. In terms of preserving capability, a key for us in 2020 was continuing to operate 1 rig in the Bakken. Greg Hill and our Bakken team have made tremendous progress over the past 10 years in lean manufacturing capabilities and innovative practices, which have delivered significant cost efficiencies and productivity improvements that we want to preserve for the future. In terms of preserving the long term value of our assets, Guyana, with its low cost of supply and industry leading financial returns, remains our top priority.
On the Stabroek Block, where Hess has a 30% interest and ExxonMobil is the operator, 2020 was another outstanding year. 3 oil discoveries during the year at I and Yellowtail II brought total discoveries on the Stabroek Block to 18. The estimate of gross discovered recoverable resources on the block was increased to approximately 9,000,000,000 barrels of oil equivalent, and we continue to see multibillion barrels of future exploration potential remaining. In December, production from Liza Phase 1 reached its full capacity of 120 gross barrels of oil per day. The Liza Phase 2 development is on track to achieve first oil in early 2022 with a capacity of 220,000 gross barrels of oil per day.
Another key 2020 milestone was the sanctioning of our 3rd oil development on the Stabroek Block in September at the Payara field. Payara will have a capacity of 200 and 20,000 gross barrels of oil per day and is expected to achieve 1st oil in 2024. Turning to our plans for 2021. To protect our cash flows, we have hedged 100,000 barrels per day with $45 per barrel WTI put options and 20,000 barrels per day with $50 per barrel Brent put options. Our 2021 capital and exploratory budget is $1,900,000,000 of which more than 80% will be allocated to Guyana and the Bakken.
Our 3 sanctioned oil developments on the Stabroek Block have breakeven Brent oil prices of between 25 dollars $35 per barrel, world class by any measure. Front end engineering and design work for our 4th development the Yellowtail area is underway, and we hope to submit the development plan to the government for approval before year end. We continue to see the potential for at least 5 FPSOs to produce more than 750,000 gross barrels of oil per day by 2026 and longer term for up to 10 FPSOs to develop the current discovered recoverable resource base. We will continue to invest in an active exploration and appraisal program in Guyana in 2021, with 12 to 15 wells planned for the block. The Hassa 1 exploration well recently encountered approximately 50 feet of oil bearing reservoir in deeper geologic intervals.
Although the well did not find oil in the primary shallower target areas, the Hasso well results confirm a working petroleum system and provide valuable information about the future exploration prospectivity for this part of the block. In the Bakken, we plan to add a second rig during the Q1, which will allow us to sustain production in the range of 175,000 barrels of oil equivalent per day for several years and protect the long term cash flow generation from this important asset. As we continue to execute our strategy, our Board, our leadership team and our employees will be guided by our long standing commitment to sustainability and the Hess values. We are proud to have been recognized throughout 2020 by a number of third party organizations for the quality of our environmental, social and governance performance and disclosure. In December, we achieved leadership status in CDP's Annual Global Climate Analysis for the 12th consecutive year and earned a place on the Dow Jones Sustainability Index for North America for the 11th consecutive year.
In summary, our priorities will remain to preserve cash, preserve capability and preserve the long term value of our assets. By investing only in high return, low cost opportunities, we have built a differentiated portfolio of assets that we believe will provide industry leading cash flow growth for over the course of the decade. As our free cash flow grows, we will first prioritize debt reduction and then return of capital to shareholders, both in terms of dividends and opportunistic share repurchases. I will now turn the call over to Greg for an operational update.
Speaker 4
Thanks, John. I also hope that everyone on the call is well and staying safe. 2020 marked another year of strong performance and strategic execution for Hess, despite the challenging conditions on many fronts. In particular, I would like to call out several operational highlights from the year. First, across our company, we have implemented comprehensive COVID-nineteen health and safety measures, including health screenings and testing, extended work schedules at offshore platforms and social distancing initiatives, all based on government and public health agencies guidance.
I'm truly grateful to our Hess response team and our global workforce for their commitment to keeping their colleagues and our communities safe during this pandemic. 2nd, in the Bakken, despite dropping from 6 rigs to 1 in May, our full year net production came in well above our original guidance for the year and 27% above that of 2019. These results reflect the strong performance of our plug and perf completions, increased natural gas capture and the quality of our acreage position. 3rd, in Guyana, we made significant advances on all three of our sanctioned developments on the Stabroek Block with Liza Phase 1 reaching its full production capacity in December, Liza Phase 2 remaining on track for first oil early next year and Payara sanctioned in September with first oil expected in 2024. Continued exploration and appraisal success increased the gross recoverable resource estimate for the block to approximately 9,000,000,000 barrels of oil equivalent.
Now turning to our operations. Proved reserves at the end of 2020 stood at 1,170,000,000 barrels of oil equivalent. Net proved reserve additions in 2020 totaled 117,000,000 barrels of oil equivalent, including negative net price revisions of 79,000,000 barrels of oil equivalent, which resulted in an overall 2020 production replacement ratio of 95% and a finding in the development cost of 15.25 dollars per barrel of oil equivalent. Excluding price related revisions, our production replacement ratio was 158% with an F and D cost of $9.10 per barrel of oil equivalent. Turning to production.
In the Q4 of 2020, company wide net production averaged 309,000 barrels of oil equivalent per day, excluding Libya, above our guidance of approximately 300,000 net barrels of oil equivalent per day, driven by higher natural gas capture in the Bakken and higher natural gas nominations in Southeast Asia. For the full year 2021, we forecast net production to average approximately 310,000 barrels of oil equivalent per day excluding Libya. For the Q1 of 2021, we forecast net production to average approximately 315,000 barrels of oil equivalent per day, excluding Libya. In the Bakken, 4th quarter net production averaged 189,000 barrels of oil equivalent per day, an increase of approximately 9% above the year ago quarter and above our guidance of 180,000 to 185,000 net barrels of oil equivalent per day. For the full year 2020, Bakken net production averaged 193,000 barrels of oil equivalent per day, an increase of approximately 27% compared to 2019 and well above our original full year guidance of 180,000 barrels of oil equivalent per day despite dropping from 6 rigs to 1 in May.
We have a robust inventory of more than 1800 drilling locations in the Bakken that can generate attractive returns at current oil prices, representing approximately 60 rig years of activity. With WTI prices now in the range of $50 per barrel, we will add a second operated drilling rig during the Q1. 2 rig program will enable us to hold net production flat at approximately 175,000 barrels of oil equivalent per day and will sustain strong long term cash generation from this important asset. In 2020, our drilling and completion costs per Bakken well averaged $6,200,000 which was $600,000 or 9% lower than 2019. In 2021, we expect D and C costs to average below 6 $1,000,000 per well.
Over the full year, we expect to drill 55 gross operated wells and bring approximately 45 new wells online. This compares to 71 wells drilled and 111 wells brought online in 2020. In the Q1 of 2021, we expect to drill approximately 10 wells and bring 4 new wells online. Bakken net production is forecast to average approximately 170,000 barrels of oil equivalent per day for both the Q1 and for the full year 2021. Our full year forecast reflects the impact of a planned 45 day shutdown of the Tioga Gas Plant in the Q3, which is expected to reduce full year net production by approximately 7,500 barrels of oil equivalent per day, predominantly affecting natural gas production.
During the shutdown, we will perform a turnaround and tie in the plant expansion project completed in 2020, which will then increase capacity to 400,000,000 cubic feet per day from the plant's current 250,000,000 cubic feet per day capacity. Now moving to the offshore. In the Deepwater Gulf of Mexico, net production averaged 32,000 barrels of oil equivalent per day in the 4th quarter and 56,000 barrels of oil equivalent per day for the full year 2020. 4th quarter net production came in below our guidance of 40,000 barrels of oil equivalent per day due to the early closing of the Shenzi sale and extended hurricane recovery downtime at 2 third party operated production platforms. In 2021, no new wells are planned in the Deepwater Gulf no new wells are planned in the Deepwater Gulf of Mexico and we forecast
Speaker 3
net production from our assets
Speaker 4
to average approximately 45,000 barrels of oil equivalent per day. This includes the impact of planned maintenance shutdowns in both the second and third quarters. The Deepwater Gulf of Mexico remains a very important cash engine for the company as well as a platform for future growth. In Malaysia and the joint development area in the Gulf of Thailand, where Hess has a 50% interest, Net production averaged 56,000 barrels of oil equivalent per day in the 4th quarter 52,000 barrels of oil equivalent per day for the full year 2020. 4th quarter production was above our guidance of 50,000 barrels of oil equivalent per day because of higher natural gas nominations.
For the full year 2021, net production from Malaysia and the JDA is forecast to average approximately 60,000 barrels of oil equivalent per day. Turning to Guyana, where Hess has a 30% interest in the Stabroek Block and ExxonMobil is the operator. In 2020, we announced 3 new discoveries, bringing the total number of discoveries to 18 and increasing our estimate of gross discovered recoverable resources to approximately 9,000,000,000 barrels of oil equivalent. And we continue to see multibillion barrels of exploration upside on the Stabroek Block and we are planning an active exploration program in 2021. In March, the operator will bring a 5th drillship, the Standard DrillMAX into theater and in April, a 6th drillship, the Noble Sam Cross.
We plan to drill 12 to 15 exploration and appraisal wells in 2021 that will target a variety of prospects and play types. These will include lower risk wells near existing discoveries, higher risk step outs and several penetrations that will test deeper Lower Campanian and Santonian intervals. This ramped up program will allow us to accelerate exploration of the block and enable optimum sequencing of future developments. In addition, the emerging deep play, which we believe has significant potential, needs further drilling to determine its commerciality and ultimate value. Over the next several months, we will participate in 2 exploration wells and 2 appraisal wells on the Stabroek Block.
The next exploration well to be drilled is Coibe-1, is located approximately 16 miles northeast of Liza. This well will target Liza type Campanian aged reservoirs and is expected to spud in February using the Stena Caron drillship. In March, we expect to spud the Longtail III appraisal well, which will provide additional data in the Turbot Longtail area, and we will drill a deeper section that will target lower Campanian and Santonian geologic intervals. The Stena drill max will drill this well. Moving to April, we expect to spud the Huarau II appraisal well utilizing the Noble Don Taylor drillship.
Success here and at Mako II, which will be drilled later this year, could move the Mako, Uaru area forward in the development queue. Then in May, we plan to spud the Whiptail 1 exploration well located approximately 12 miles east of Liza. This well will test Campanian and Santonian age reservoirs and will be drilled by the Standard Drill MAX. Turning now to our Guyana developments. In mid December, the Liza Destiny floating production storage and offloading vessel achieved its nameplate capacity of 120,000 gross barrels of oil equivalent per day and since then has been operating at that level or higher.
During 2021, the operator intends to evaluate and pursue options to increase nameplate capacity. For 2021, we forecast net production from Guyana will average approximately 30,000 barrels of oil per day with planned maintenance and optimization downtime being broadly offset by an increase in nameplate capacity. Aliza Phase 2 development remains on track for first oil in early 2022. The overall project, including the FPSO, drilling and subsea infrastructure is approximately 85% complete. We anticipate that the Liza Unity FPSO, which will have a capacity of 220,000 gross barrels of oil per day to sail from the Keppel Shipyard in Singapore to Guyana by mid year.
Payara, our 3rd sanctioned development on the Stabroek Block, will utilize an FPSO with a gross production capacity of 220,000 gross barrels of oil per day with first oil expected in 2024. The hull for the Prosperity FPSO is complete, topside construction activities are underway, and we expect integration of the hull and topsides to begin at the Keppel yard in Singapore by year end. Front end engineering and design work is ongoing for a 4th development at Yellowtail. This work will continue through 2021 and we anticipate being ready to submit a plan of development to the government of Guyana for approval in the Q4. In closing, our execution continues to be strong.
The Bakken and our offshore assets in the deepwater Gulf of Mexico and Southeast Asia are performing well and continue to generate significant cash flow. And Guyana continues to get bigger and better, all of which positions us to deliver industry leading cash flow growth and significant shareholder value over the course of the next decade. I will now turn the call over to John Reilly.
Speaker 5
Thanks, Greg. In my remarks today, I will compare results from the Q4 of 2020 to the Q3 of 2020 and provide guidance for 2021. We incurred a net loss of $97,000,000 in the Q4 of 2020 compared with a net loss of $243,000,000 in the Q3 of 2020. On an adjusted basis, which excludes items affecting comparability of earnings between periods, we incurred a net loss of 100 and $76,000,000 in the Q4 of 2020 compared to a net loss of $216,000,000 in the previous quarter. 4th quarter results include an after tax gain of $79,000,000 from the sale of our interest in the Shenzi field.
Turning to E and P. On an adjusted basis, E and P incurred a net loss of $118,000,000 in the Q4 of 2020, compared to a net loss of $156,000,000 in the previous quarter. The after tax changes and adjusted E and P results between the 4th quarter and third quarter were as follows: higher realized selling prices improved results by $18,000,000 higher sales volumes improved results by $11,000,000 Lower DD and A expense improved results by $40,000,000 Lower exploration expenses improved results by $12,000,000 Higher cash costs driven by workovers and hurricane related maintenance costs in the Gulf of Mexico reduced results by $41,000,000 All other items reduced results by $2,000,000 for an overall increase in 4th quarter results of $38,000,000 Our E and P operations were over lifted compared with production in the 4th quarter by approximately 1 point 6,000,000 barrels, resulting in an increased after tax income of approximately $15,000,000 Turning to Midstream. The Midstream segment had net income of $62,000,000 in the Q4 of 2020 compared to net income of $56,000,000 in the previous quarter. Midstream EBITDA before non controlling interest amounted to $198,000,000 in the Q4 of 2020 compared to $180,000,000 in the previous quarter.
Turning to corporate, after tax corporate and interest expenses were $120,000,000 in the Q4 of 2020 compared to an adjusted after tax expense of 100 and $16,000,000 in the previous quarter. Turning to our financial position. At quarter end, excluding Midstream, cash and cash equivalents were approximately $1,740,000,000 and our total liquidity was $5,400,000,000 including available committed credit facilities, while debt and finance lease obligations totaled $6,600,000,000
Speaker 6
Our
Speaker 5
fully undrawn $3,500,000,000 revolving credit facility is committed through May 2023. In November 2020, we completed the previously announced sale of our 28% working interest in the Shenzi field in the Deepwater Gulf of Mexico for net proceeds of $482,000,000 Net cash provided by operating activities before changes in working capital was $532,000,000 in the Q4 of 2020, compared with $468,000,000 in the previous quarter, primarily due to higher crude oil sales volumes. In the Q4, net cash provided from operating activities after changes in working capital was $486,000,000 compared with $136,000,000 in the prior quarter. Proceeds from the September sale of the first VLCC cargo of 2,100,000 barrels of oil were received in October. We have entered into agreements to sell the 2nd and third VLCC cargoes totaling 4,200,000 barrels of oil in the Q1 of 2021.
We expect to recognize net income of approximately $60,000,000 in the Q1 from these sales, including associated hedging gains and costs. Q1 2021 net cash provided by operating activities after changes in working capital is expected to include approximately $150,000,000 of cash flow from these sales. For calendar year 2021, we have purchased WTI put options for 100,000 barrels of oil per day that have an average monthly floor price of $45 per barrel and Brent put options for 20,000 barrels of oil per day that have an average monthly price floor price of $50 per barrel. Now turning to guidance. First for E and P, we project E and P cash costs, excluding Libya, to be in the range of $10.50 to $11.50 per barrel of oil equivalent for the Q1 and for the full year 2021.
DD and A expense, excluding Libya, is forecast to be in the range of $12 to $13 per barrel of oil equivalent for the Q1 and for the full year 2021. This results in projected total E and P unit operating costs, excluding Libya, to be in the range of $22.50 to $24.50 per barrel of oil equivalent for the Q1 and for the full year 2021. Exploration expenses, excluding dry hole costs, are expected to be in the range of $30,000,000 to $35,000,000 in the Q1 and $170,000,000 to $180,000,000 for the full year 2021. The midstream tariff is projected to be in the range of $265,000,000 to $275,000,000 in the first quarter and $1,090,000,000 to $1,120,000,000 for the full year 2021. E and P income tax expense, excluding Libya, is expected to be in the range of $30,000,000 to $35,000,000 for the Q1 $80,000,000 to $90,000,000 for the full year 2021.
As highlighted earlier, we have purchased crude oil hedge positions for calendar year 2021. We expect non cash option premium amortization, which will be reflected in our realized selling prices to reduce our results by approximately $37,000,000 per quarter. Our E and P capital and exploratory expenditures are expected to be approximately $425,000,000 in the first quarter and approximately $1,900,000,000 for the full year 2021. For Midstream, we anticipate net income attributable to Hess from the Midstream segment to be in the range of $70,000,000 to $80,000,000 in the first quarter and $280,000,000 to $290,000,000 for the full year 2021. For corporate, corporate expenses are estimated to be in the range of $35,000,000 to $40,000,000 for the Q1 $130,000,000 to $140,000,000 for the full year 2021.
Interest expense is estimated to be in the range of $95,000,000 to $100,000,000 for the 1st quarter and $380,000,000 to $390,000,000 for the full year 2021. This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.
Speaker 0
Thank you. First question comes from the line of Jeanine Wai with Barclays.
Speaker 6
Hi, good morning everyone. Thanks for taking my questions. Good morning. My questions are on Guyana. My first one is the Stena Caron drillship completed appraisal work at the Redtail well.
Do you have any color on the appraisal results? And I think it was supposed to include a drill stem test, but I'm not sure on the status of that. Yes.
Speaker 4
Greg? Yes. Thank you, Janine. First of all, the results of the Redtail well and the test were very positive. And so what it does is it really confirms our excitement about the large volume of very high quality reservoir and reservoir fluids in and around what I call the Greater Tail, Yellowtail area.
And that's a big reason why Yellowtail now is going to be the focus of the 4th development, which we said in our remarks, we hope to submit a plan of development to the Guyanese government by the Q4 of this year. So very exciting results and very exciting
Speaker 6
exploration and appraisal this year. You mentioned the results depending on the results of the appraisal at Mako that that could get moved up in the queue. And I was just wondering what you're seeing at Mako that puts it ahead of maybe some of the other potential development areas? Thank you.
Speaker 4
Okay. Greg? Yes, sure, Janine. So what we said was that assuming good results at Mako and Wauru II, that remember is very close to Liza II and it's kind of in between Yellowtail and Liza 2. So we know that the reservoir quality and the crude quality is going to be very high in that region.
So that's why it will move up further in the queue because if it's what we think it is, that will be very high value barrels that we'll want to move forward.
Speaker 6
Okay. Thank you for taking
Speaker 7
my question. That could potentially
Speaker 3
be the 5th ship. Basically. Sure. Yes.
Speaker 0
Thank you. Our next question comes from the line of Doug Leggate with Bank of America.
Speaker 8
Thanks. Good morning. Happy New Year, guys. Appreciate taking my questions. Greg, let me start with Hassa on the somewhat cryptic description John gave of the deeper horizons.
You've talked about the possibility of the Santonian and a number of other tests extending the life of some of the early phases. So I'm just wondering, is this a continuation of that Santonian trend that you saw in Hassa? And if so, why would you describe it as I guess, how would you describe it? Is that a successful well? Is that an unsuccessful well?
How have you reported it to the government?
Speaker 4
Well, I think, look, while the Hassa well one didn't encounter commercial quantities of hydrocarbons in the primary campaign objective, as we mentioned, Doug, in our opener, it did encounter approximately 50 net fee to pay in the deeper San Antonio section. So further evaluation of those deep results are going to be incorporated in our future exploration development plans for the area and we'll provide some very useful calibration for prospects and developments in the surrounding areas. So the petroleum system is working. We found 50 net feet of good oil in the Santonium. So now we need to process on what that means.
But I think it's a very positive sign, for the Santonian.
Speaker 8
So would that be reported as a discovery then to the government?
Speaker 4
No, because the well is still under evaluation.
Speaker 8
Okay. All right. My follow-up, John Reilly, you've obviously locked in some protection. Can you talk about the I don't know if you missed that in your prepared remarks, but the amortization schedule. And what's really behind my question is, it looks to us that you're going to be pretty close to cash breakeven including dividends this year.
How would you characterize that statement? Does that sound reasonable to you with what you know today? And if so, what is the incremental priority for free cash in terms of where you want the balance sheet to be? So basically, it's a free cash flow question and a balance question for 2021.
Speaker 3
Go ahead, Josh.
Speaker 5
Sure. So I think first you were saying for the hedges themselves for our 100,000 barrels a day of WTI put options that we have at $45 and then the 20,000 barrels a day for Brent production that we have at $50 the amortization of that is going to be $37,000,000 per quarter. So we like it. We've got nice protection on the downside because obviously again this is a big year for us just to kind of complete the development of Liza Phase 2 and as you know when Liza Phase 2 comes on look it's approximately 60,000 barrels a day of Brent based production. The cash costs of that Liza Phase 2 is going to be more around $10 pre any purchase of the FPSO versus the first one being at $12 just from the economies of scale.
So you can put any type of Brent price in there and take out the $10 cash cost and you can see there's going to be a significant inflection for us on cash flow once Phase 2 comes on. So for this year, Doug from a cash flow standpoint, were we looking to do? So the first thing we were looking to do was to get the hedges in place. So we have insurance on the downside. Coming into the year effectively, as I mentioned, we have $1,740,000,000 of cash at year end.
And as I said in my remarks, we're going to complete the sales of the 2 VLCCs and it's going to give us cash flow of approximately $150,000,000 in the Q1. So on a pro form a basis, we basically have $1,900,000,000 of cash going into the year. So what I want to say, I mean, I don't want to guess on oil prices, but we've got the downside protected. We're coming in with a very strong cash balance here from that standpoint. And therefore, at these higher prices, obviously, this helps with our funding program here for Guyana.
So when Phase 2 comes on depending where prices are with our insurance now, we know we're going to have a nice cash cushion at that point. And then we're going to be in this significant inflection point of getting much higher cash flow. And depending on prices there, the portfolio can just continue to generate free cash flow or for some reason prices go back down in that period. As I said, Guyana will still be generating free cash flow even at very low prices once Phase 2 comes on, like $40 type prices. And then when Payara comes on, if it was really low prices, we'd still be generating free cash flow.
So we put ourselves in a good position with a very strong cash position. Hedges protection should be a nice year with prices at this level and then a big inflection when Phase 2 starts.
Speaker 3
And to complement what John is saying, the priority once we get to that free cash flow inflection is to pay down our term loan. And then after that, the majority of the free cash flow will increase cash returns to our shareholders prioritizing the dividend first.
Speaker 8
So John, not to labor the question, so you're happy with about a $5,000,000,000 debt balance, is that the implication?
Speaker 5
Of which when if we pay down that term loan debt, yes. So as we pay down that term loan, our debt to EBITDA when the Guyana FPSOs keep coming on, we're going to drive under our 2x target fairly quickly. So yes, that's where we'd like to be, right, to get that term loan paid off. And then as John said, then we start increasing dividends and opportunistic share repurchases.
Speaker 8
Understood. Thanks again, guys.
Speaker 0
Thank you. And our next question comes from the line of Arun Jayaram with JPMorgan.
Speaker 9
Hey, good morning, gents. Good morning. Yes, John, I wanted to start off with your thoughts on the evolving regulatory landscape post the election and maybe get your perspective on potential implications to Hess from the anticipated executive orders later today on canceling new lease sales and if the government takes a more restrictive stance on permits opposed to the 60 day moratorium? And perhaps as well to John Reilly, thoughts on IDCs and how I know you have a pretty material NOL balances, but just thoughts on risk to IDCs as well?
Speaker 3
Yes. No, Arun, great question. Obviously, we also understand the President will make an announcement later today on federal lands and also some points, I think, about climate. I think it's important for everyone to realize that only about 2% of our Bakken is on federal land. So this pronouncement will not have an impact on our Bakken activities.
And in the deepwater Gulf of Mexico, as you heard Greg say earlier, that we have no drilling planned for this year in the deepwater Gulf. And it remains to be seen what he's going to say about existing acreage and drilling permits for the Deepwater. But we have no drilling plan this year. I think the most important point here is that the administration, as it makes these decisions to address climate change that they have to be not only climate literate, but energy literate. And they have to realize that oil and gas are a strategic engine for the U.
S. Economy, especially at a time that we're trying to recover the economy from COVID. And that importance is in jobs. We have over 12,000,000 direct and indirect jobs. In terms of low energy costs for working class families, our power costs in large part because of shale gas are half what they are in Europe and in terms of national security where we're energy independent in large part because of shale oil and shale gas.
So it's just a question of finding the balance here. And hopefully, as the administration moves forward, they will extend the hand as will we define common ground to make sure we do everything we can to address climate change, but also that oil and gas play a key role in the economy's recovery. And John, you want to talk about the IDCs?
Speaker 5
Sure. So you are right, Arun, for us. So obviously, if they change what they're doing with the IDC, there will be an alternative period of recovery, I don't know, over how many years you'll pay or a different year term. For us though, while it's negative for U. S.
Oil supply in general, it's not going to have a material impact to us due to our NOL position. We do have a significant net operating loss position here. So for us paying cash taxes, anything in the near term regarding to the IDC, that will not change our profile.
Speaker 9
Great. And my follow-up is, John Reilly, the cash cost guide was a little bit lower this year than our model. So I was wondering if you could maybe get us oriented on how or where your expectations are for Liza 1 kind of cash operating costs? I think you still are paying the rental fee on the FPSO, but would love to hear what those costs are and any expectations around Liza 2 with the bigger boat?
Speaker 10
Yes.
Speaker 5
Go ahead. Yes. So for Liza Phase 1, it's $12 per barrel basically at now we're at full capacity here. That's the cash cost per barrel while we're in the rental period and you're correct. We have it in our numbers for the whole year.
Post an FPSO purchase, it'll drop down into the $8 to $9 type range for Liza Phase 1. As I mentioned, Liza Phase 2, actually the cash cost will be approximately $10 per barrel while the FPSO is being leased and then it's going to drop to $7 to 8 dollars per barrel post the purchase of the FPSO. So again for us every time an FPSO comes online, it's going to help our cash costs. And it's also, by the way, going to help our DD and A rates. So right now, at least a Phase 1, the current DD and A rate is below our portfolio average, again due to the low F and D costs.
So when Liza Phase 2 comes on, ultimately when it's up full and running here and you get to the full scale, again that F and D is very low and that's going to continue to drive our DD and A down. So again, we look forward for every FPSO to come on in Guyana.
Speaker 9
Thanks gents.
Speaker 3
Thank you.
Speaker 0
And our next question comes from the line of Brian Singer with Goldman Sachs.
Speaker 1
Thank you. Good morning.
Speaker 3
Good morning.
Speaker 4
I want to
Speaker 1
start on the Bakken. You've highlighted that the beat on production on a BOE a day basis has come from in part from gas capture and then some of the impacts of pricing on NGL contracts and percent of proceeds contracts. On a forward looking basis, I wondered if you could provide some color on what you expect oil production outlook to be in the Q1 and the full year? Where you stand in terms of gas flaring and what the upside could be from further gas capture?
Speaker 4
Greg? Yes. So let me start with flaring, Brian. So we're well below the 9% required by the state in 2020. We achieved that in particular in the Q4 and that's why our gas capture volumes increased.
This year, we plan to gather more gas and get our flaring down even lower. So as part of our continued focus on sustainability, we want to drive that gas flaring as low as possible, obviously. So you will see us continue to add the the decline in oil is purely related to the wells online. So in Q3, we had 22 wells online. In Q4, we had 12 wells online.
And in Q1, we only added in Q1 of this year, we will only put 4 wells online. So naturally, you're going to get some oil decline associated with that. However, as that second rig kicks in, which you really see the effects of in the second half of the year, that's when oil will begin to stabilize and be flat from then on with that second rig. So again, it's really just a mix issue of gas that changes your percentage on a total company basis. And then the oil is purely a function of the wells online.
But that will stabilize, the company will stabilize 175,000 barrels a day flat for a number of years.
Speaker 1
Great. Thanks. And then second question goes back to Guyana. Now that you've gotten Phase 1 ramped up to the 120,000 barrels a day and it seemed like you're hinting that that capacity could be raised this year. Can you talk about how you're planning Phase 2 and the potential speed at which that could be ramped up to full capacity, knowing some of the lessons of 2020 in terms of gas capture, etcetera?
Speaker 4
Greg? Yes, Brian, thanks for that. Certainly, I would expect the ramp up of Phase 2 to go faster, because as you say, all of those learnings have been incorporated into the ramp of into Phase 2. So I would expect it to go much smoother because remember all of our issues were associated with the gas system and those have been fixed in Phase 2.
Speaker 1
Great. Thank you.
Speaker 0
Thank you. And our next question comes from the line of Josh Silverstein with Wolfe Research.
Speaker 11
Hey, good morning, guys. Good morning. Just to ask a follow-up question on the Bakken, sorry if I just missed this, but when you guys start to stabilize the 175,000 range or around there, what does the production mix look like? Or does it still kind of change on a quarterly basis just based on some of the well timing?
Speaker 4
Greg? Yes. So of course, you'll always get there's 2 factors going on. 1, which I mentioned, which is, yes, it is a function of when wells come online. So you get some minor changes associated with that.
But then, of course, the bigger thing when I'm talking about total production on a barrel equivalent basis is really all the gas we're gathering, including third party volumes, which remember, a portion of that is subject to a percent of proceeds contracts. So a lot of times when you see those numbers moving around, particularly on the percentage of oil versus gas, it's all related to that gas gathering, including 3rd party and NGL prices, which affect your POP contracts. But oil will be flat with a 2 rig program. And then for the whole company, the 175,000 barrels a day equivalent will be flat with the 2 rigs.
Speaker 11
Got it. Understood. Thanks for that. And then, I'm just curious on the balance sheet and asset sales. Obviously, you sold Shenzi late last quarter to help support the cash balance there and guide and development.
I know some of this will be opportunistic, but these are cash flowing engines of the company. I'm just wondering how much of the remaining portfolio you guys may want to divest or maybe market it right now. I know in the past Denmark had looked at it as an asset for sale. So just curious if there will be some ongoing divestiture program as Guyana ramps up.
Speaker 3
Yes. Obviously, in the normal course of business, as we've shown, we always look to optimize our portfolio where we see value opportunities, where there are opportunities to sell assets that meet our value expectations. Obviously, that was the case in Shenzi and there are maybe a few cases where there are some assets, other assets as you mentioned that may meet that criteria as well. So if they meet our criteria for value expectations, we'll move forward, But more commenting more than that would be inappropriate.
Speaker 11
Got it. Understood. Thanks guys.
Speaker 7
Thank you.
Speaker 0
Your next question comes from the line of Ryan Todd with Simmons Energy.
Speaker 7
Thanks. Maybe one follow-up on the Bakken to start. Can you provide any additional color on the expected trajectory, at least in general, of production in the Bakken over the course of the year? Should we expect some amount of modest decline during the first half before the second rig stabilizes production and then an exit rate that's closer to the 175,000 barrel a day long term target?
Speaker 4
Yes. Greg? Yes, I think that's fair. Yes, because really the impact of the second rig does not kick in until the second half of the year. So you will have some very moderate decline in oil.
And then as I mentioned before, on a total production basis, it will be a function of NGL prices, right? We fully expect NGL prices to normalize in the second quarter, so you get some pickup in the second, third, fourth quarter as NGL prices normalize.
Speaker 7
Okay. Thanks. And then maybe one in Guyana. I know it may be early, but given the differences in both development plan and capital budgets for Phase 2 and Phase 3 developments in Guyana. Can you talk a little bit about expectations for FPS-four, whether resource density and our infrastructure requirements, we kind of lean more one way or the other in terms of implications for the CapEx budget going forward?
Yes. Greg,
Speaker 3
you might talk about reservoir and oil quality there and the attractiveness of the economics.
Speaker 4
Yes. So and then I'll give the capital to John Reilly. But, Yellowtail, again, very high quality reservoir. And we would expect it to be between Liza II and Payara in terms of its breakeven oil price, right? So somewhere between that $25 $32 breakeven is where we anticipate Yellowtail the that's one of the reasons it's jumping forward in the queue and really being kind of the next cab off the rank, if you will, because of very high value development.
Brian, I wanted to add one thing to my Bakken comment last time. Also remember in the Q3, we have the Tioga Gas Plant turnaround. So you will see a dip in production in the Q3, but that's all gas primarily. Oil is going to be rocking along just fine.
Speaker 7
Okay. Perfect. Thanks, Greg.
Speaker 0
Thank you. And our next question comes from the line of Roger Read with Wells Fargo.
Speaker 5
Yes. Thank you. Good morning.
Speaker 3
Good morning.
Speaker 5
Just wanted to ask one question on Guyana in reference to the expectation that Phase 1 can maybe move above nameplate. I know earlier in 2020, there were some surface issues. And so as you look at the ability to go above, can you kind of give us an idea of how much of this is subsurface outperformance? How much of it is surface debottlenecking? And maybe just a more broad sort of understanding of how the wells themselves have been performing?
Speaker 4
Greg? Yes. So thanks for the question. First of all, the wells are performing extremely well. I mean, these reservoirs are some of the best in the world.
The wells continue to do as good or better than we thought. So any constraints, if you will, would have occurred in 2020 have purely been as a result of the topsides. Now for the last week, we've been operating around 127,000 barrels a day pretty steady in Phase 1. And as you mentioned, the operator now is conducting studies to put project in place to further increase that capacity. Plans are to do that in the Q3.
So we'll have a shutdown period to be able to do that. That's going to be piping changes and basically just kind of debottlenecking some tight spots that you might have in the facility. So that's why our forecasted volumes for the year 2021 or 30,000 barrels of oil met to us, because you get some pickup from that optimization that the operator is planning to do offset a little bit by the shutdown time required to do it. But this vessel will definitely have higher throughput next year.
Speaker 5
Okay, great. Thank you.
Speaker 3
Meaning this year and next year,
Speaker 7
right, Greg?
Speaker 4
Yes, sorry, 2021. Sorry, John. You caught me again. Okay. Thanks.
Yes.
Speaker 0
Our next question comes from the line of Paul Cheng with Scotiabank.
Speaker 10
Thank you. Good morning, guys. Good morning, Paul. Thank you. You're talking about the YERUTEL, yes, good quality and all that.
That's wonderful. Can you make some preliminary expectation what is the unit development cost? Is that comparable to Liza 2 or more like, piora?
Speaker 4
No. As I said, Paul, I think this development is probably going to fall between Payara and Phase 2. So somewhere closer to we believe it'd be closer to Phase 2. And so you could assume development costs be very similar somewhere between Phase 2 and Payara. These are very good reservoirs, very high deliverability, very high quality crude oil.
That's why that breakeven is in between the two. It really comes down to just how much infrastructure will you need. But won't need as much Payara, may need a little bit more than Phase 2.
Speaker 10
Okay. And you mentioned about the 2 rig Bakken program. Two questions on there. First, what is the oil production that you will be able to do based on that? I mean, we understand the gas will swing due to the capture rate, but you're saying that oil would be pretty steady.
So what's that number that you expect? And whether that based on where you see today, yes, we need that the program that you expect for the next several years that even with a change in the commodity prices, how that impact that program?
Speaker 4
Well, let me start with your second question first, Paul. As we've said, our plan is to hold 2 rigs through 2021. Now assuming oil prices improve in the future, what we'd like to do is eventually get the rig count to 4 in the Bakken. By getting the rig count to 4, we'll not only generate significant amount of cash flow, but we'll also be able to hold production in the Bakken broadly flat at around 200,000 barrels a day equivalent for almost 10 years. Why would we want to do that?
Because we have 1800 well locations left that at current prices generate very high returns. Now then if I look at this year's program in particular, remember I'm going to bring 45 wells online this year. The program is very similar to last year in that the IP 180s will be the same as last year, 120,000 barrels of oil, IP 180, very good wells. And at current returns, if you look at the IRR of that program this year of those 45 wells, it's 95% rate of return. And so I've got another after this year, I'll have another 17 50 wells that are in those very high returns that of course I want to get I'd like to develop.
But I think it was we've said before Paul, the role of the Bakken in the portfolio is to be a cash generator. So the rate at which we invest in the Bakken will be a function of corporate cash flow needs. But you can see the pent up potential in the Bakken is very large with some very good return opportunities.
Speaker 3
And to be clear to everyone on the phone, the oil cut at the wellhead really not has not changed. No. What the oil cut changes is downstream, how much gas we capture, how many wells we're bringing online and what the NGL prices are. So the quality of oil at the wellhead is the same. That percent hasn't changed.
What changes in the corporate accounting is due to what happens downstream as I mentioned.
Speaker 10
Hey, Craig. So what is that oil production that you expect the 2 week program can do?
Speaker 4
Well, I think broadly, once this levels out, I think broadly you can expect oil around 90,000 barrels a day in the 3rd Q4.
Speaker 10
Okay. And the next one is for John Varley. John, your DD and A expectation for the year is really low compared to your Q4. Your Q4 ex NIBR, you probably do close to $16 and you're expecting it going to be a $12 to $13 for the Q1 as well as for the full year. So where are we seeing that big drop in your unit DD and A?
Speaker 2
Sure, Paul.
Speaker 5
Yes, thanks, John. The driver of this is the increase in our year end 2020 proved developed reserves. So you saw our reserve replacement, but I guess another aspect of this is that our proved developed reserves are up to about 70% of our proved reserves. So it's up 13% over year on year excluding the asset sales. So you've got Bakken, obviously proved developed reserves adds still net even after price revisions.
You have Guyana again picking proved developed reserves here as more and more wells and the performance from Phase 2. And then you've got some a good amount of transfers from PUDs that moved into proved developed reserves, approximately 100,000,000 barrels there and it's offset obviously by current production. So it's really the driver of proved developed reserves increasing significantly from last year and then you have a combination of year over year production mix. So as I mentioned, Guyana right now, it is below our portfolio average. And so Guyana's production is increasing.
So that's going to overall drive down the DD and A rate. And again, Bakken's DD and A rate, while still higher is coming down from 2020 just due to the proved developed adds. So again, a good year for reserve
Speaker 10
adds. Final question on the Gulf of Mexico, how many permits that you currently in hand? If you have any?
Speaker 4
Paul, we don't need any permits this year at all. We're not planning any activities. I understand
Speaker 10
that you're not going to do anything, but I just want to see that if you have any permit that in hand, given that the permit can last for 2 years and then possible that for extension?
Speaker 3
No. Let's see where the President comes out on what his drilling regulations are. And then right now, we don't have any permits in hand because we don't have any need for the next year. Right.
Speaker 10
Okay. Thank you.
Speaker 0
Thank you. And our next question comes from the line of Bob Brackett with Bernstein Research.
Speaker 7
Good morning, all. Good morning, Bob. I'll risk a bit of
Speaker 3
a long winded question. So the Liza FPSO Destiny had a mid year 2019 departure from Singapore and a single installation campaign, which resulted in 1st oil on December 20, 2019, the same year. You've mentioned that Liza Unity FPSO has a mid year 2021 departure from Singapore. It has 2 installation campaigns and obviously more risers and umbilicals. How should I contrast the timeline of hookup integration commissioning and then ultimately the shape of the production ramp for Unity versus Destiny?
Speaker 4
Go ahead, Greg. Yes. So Bob, you're right. I mean there's 2 installation programs. That's why officially First Oil is early 2022.
Now because of those two programs, there is still some contingency in the project. So if everything goes right, you could maybe get that vessel on just a little bit earlier, right. So all going very well, as I said in my remarks, Project is 85% complete. Vessel due to sail away, early in the summer, get it on location and then do that very active hookup program that will put a square little bit first oil in the early part of 2022. Now the ramp, as I mentioned earlier, we anticipate that ramp will go much smoother, of course than Phase 1.
And that's because all of the learnings, which were in the gas system, remember, all of the learnings have been applied to the gas system on Phase 2 because of very similar equipment as in Phase 1. So very much expect the ramp broadly would occur over say a 3 month period because you're going to you bring things on and you measure dynamics, you got vibration sensors everywhere. That's a pretty normal cadence to bring something like that on is over a 3 month period. Great. Thanks for that.
Speaker 3
Thank
Speaker 0
you. Thank you very much. This concludes today's conference. Thank you for your participation and you may now disconnect. Have a great day.