Hess Corporation (NYSE:HES) plans to spend billions in 2012 on production and development expenditures in various unconventional plays in the onshore United States. The company will focus this capital mostly on the Bakken formation in North Dakota. (To know more about oil and gas, read Oil And Gas Industry Primer.)
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2012 Capital Budget
Hess Corporation has budgeted $6.8 billion for capital spending in 2012, with approximately $2.5 billion, or 37%, allocated towards unconventional plays. The company plans to spend an additional $3.4 billion on production and development activities in the Gulf of Mexico, offshore Africa and Norway. The balance of the 2012 capital will be directed towards exploration activity in a number of prospective areas across its global portfolio.
Hess Corporation's main focus in the unconventional area will continue to be the Bakken play in North Dakota, where the company made several large acquisitions in 2010. These include the purchase of American Oil & Gas Inc., which added 85,000 net acres to its position. The company also picked up an additional 167,000 net acres from TRZ Energy, LLC for $1.05 billion.
Hess Corporation wasted no time after closing on these deals in December 2010, and operated 15 rigs in the Bakken in 2011 and also made substantial investments in infrastructure to process and transport production. The company plans to add an additional rig here in 2012.
This investment yielded results quickly for Hess Corporation and the company reported net production of 39,000 barrels of oil equivalent (BOE) per day from the Bakken as of October 2011. The company estimates that production will average 60,000 BOE per day in 2012 and 120,000 BOE per day by 2015.
Hess Corporation entered another emerging unconventional play in 2011 through a joint venture with CONSOL Energy (NYSE:CNX) in the Utica Shale in Ohio. The company purchased a 50% share in 200,000 net acres for total consideration of $593 million. Hess Corporation also purchased an additional 85,000 net acres in the Utica Shale from various parties for $750 million.
Hess Corporation will operate part of the acreage in this joint venture and plans to continue appraisal drilling here in 2012.
Eagle Ford Shale
Hess Corporation also has a position in the Eagle Ford Shale and has been conducting appraisal drilling as it works towards delineating its acreage in this play. The company has drilled 22 wells into the Eagle Ford Shale through the third quarter of 2011, and brought eight wells onto production with average initial production rates of approximately 500 BOE per day.
Hess Corporation is involved with other oil and gas projects, including several in the Gulf of Mexico that will require capital in 2012. The company is the operator of the Tubular Bells field, and is partnering with Chevron (NYSE:CVX) here. The companies expect first production from this field in 2014.
Hess Corporation has also allocated capital for additional drilling at the Shenzi Field in the deepwater Gulf of Mexico. This field is operated by BHP Billiton (NYSE:BHP) and has been producing since 2009.
Hess Corporation has budgeted $800 million for exploration in 2012, with wells planned in Brunei, Ghana, Indonesia and the Gulf of Mexico. The company plans to drill three exploration wells on the Deepwater Tano Cape Three Points Block in Ghana, with the first well scheduled for the first quarter of 2012.
The Bottom Line
Hess Corporation has spent a considerable amount of capital to set up positions in several onshore unconventional plays in the United States. The company must now focus on execution and leverage these plays to help generate profitable growth going forward. (For additional reading, check out A Guide To Investing In Oil Markets.)
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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.
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