Hess Corp

NYSE:HES

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen and welcome to the Second Quarter 2019 Hess Corporation Conference Call. My name is Amanda and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] 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.

[Jay Wilson, Vice President, Investor Relations]

Thank you, Amanda. Good morning everyone and thank you for participating in our second quarter 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.

Now as usual with me today are John Hess, Chief Executive Officer; Greg Hill, Chief Operating Officer; and John Rielly, Chief Financial Officer.

I will now turn the call over to John Hess.

[John Hess, Chief Executive Officer]

Thank you, Jay. Welcome to our second quarter conference call. I will provide a strategy update, Greg Hill will then discuss our operating performance and John Riley will review our financial results. In the second quarter, we continued to execute our strategy and deliver strong operational performance. With our full year production now expected to come in at the upper end of our guidance range and our capital and exploratory expenditures projected to come in under our original guidance.

Our portfolio, which is balanced between our growth engines in Guyana and the Bakken and our cash engines in the deepwater Gulf of Mexico and the Gulf of Thailand, is on track to generate industry leading cash flow growth. With a portfolio breakeven that is expected to decrease to less than $40 per barrel Brent by 2025. A key driver of our strategy is our position in Guyana. The 6.6 million acres Stabroek Block, where Hess has a 30% interest and ExxonMobil is the operator is a massive world class resource that is uniquely advantaged by its scale, reservoir quality, cost, rapid cash paybacks and strong financial returns.

In April, we announced our 13th discovery on the Stabroek Block at Yellowtail. The Yellowtail number 1 well encountered approximately 292 feet of high-quality oil bearing sandstone reservoir and is the fifth discovery in the Turbot area, which is expected to become a major development hub. Total discoveries on the Stabroek Block to-date have established the potential for at least 5 floating production storage in offloading vessels or FPSOs producing over 750,000 barrels of oil per day by 2025. Drilling and appraisal activities were completed at the Hammerhead 2 and Hammerhead 3 wells with encouraging results, including a successful drill stem test in July. These results are being evaluated for a potential future development. Exploration and appraisal drilling continues on the block at the Tripletail prospect in the greater Turbot area and at the Ranger discovery where a second well is underway. As a result of this year’s discoveries and further evaluation of previous discoveries, we have increased the estimate of gross discovered recoverable resources for the Stabroek Block to more than 6 billion barrels of oil equivalent, up from the previous estimate of more than 5.5 billion barrels of oil equivalent and we continue to see multibillion barrels of additional exploration potential.

In terms of our developments, Liza Phase 1 continues to advance. On July 18, the Liza Destiny FPSO, which has the capacity to produce up to 120,000 gross barrels of oil per day, set sail from Singapore and is expected to arrive in Guyana in September. First production is expected by the first quarter of 2020. Phase 2 of the Liza development, which was sanctioned in May, will use a second FPSO, the Liza Unity with production capacity of up to 220,000 gross barrels of oil per day. Startup is expected by mid-2022. Planning is underway for a third phase at Payara, which will use a FPSO with a capacity to produce between 180,000 to 220,000 gross barrels of oil per day. First production is on track for 2023. In the Bakken, we have a premier acreage position and a robust inventory of high-return drilling locations. We plan to continue operating 6 rigs, which is expected to grow net production to approximately 200,000 barrels of oil equivalent per day by 2021 along with a meaningful increase in free cash flow generation over this period.

Now turning to our financial results, in the second quarter, we posted a net loss of $6 million or $0.02 per share compared to a net loss of $130 million or $0.48 per share in the year ago quarter. On an adjusted basis, we posted a net loss of $28 million or $0.09 per share compared with an adjusted net loss of $56 million or $0.23 per share in the second quarter of 2018. Compared to second quarter 2018, our improved financial results primarily reflect increased U.S. crude oil production and reduced exploration expenses, which were partially offset by lower realized selling prices and higher DD&A expenses. Second quarter net production averaged 273,000 barrels of oil equivalent per day, excluding Libya, up from 247,000 barrels of oil equivalent per day in the year ago quarter.

For the full year of 2019, we forecast that net production will average between 275,000 and 280,000 barrels of oil equivalent per day, excluding Libya, which is also at the upper end of our previous guidance range. Second quarter net production in the Bakken averaged 140,000 of oil equivalent per day, up 23% from 114,000 barrels of oil equivalent per day a year ago. For the full year 2019, we now forecast that the Bakken net production will average between 140,000 and 145,000 barrels of oil equivalent per day, at the upper end of our previous guidance range.

Before closing, I would like to note that we published our Annual Sustainability Report earlier this month for the 22nd year. We believe sustainability practices create value for our shareholders and position us to continuously improve our business performance. Our sustainability report is available on our company website at www.hess.com. In summary, we are successfully executing our strategy, which will deliver increasing and strong financial returns, visible and low risk production growth and significant future free cash flow.

I will now turn the call over to Greg for an operational update.

[Greg Hill, Chief Operating Officer]

Thanks, John. I would like to provide an update on our progress in 2019 as we continue to execute our strategy. Starting with production, in the second quarter, net production averaged 273,000 barrels of oil equivalent per day, excluding Libya, which was within our guidance for the quarter of 270,000 to 280,000 barrels of oil equivalent per day. Strong performance across our operated portfolio was partially offset by unplanned downtime at the Shell-operated Enchilada facility in the deepwater Gulf of Mexico, which reduced our second quarter net production by approximately 4,000 barrels of oil equivalent per day.

In the third quarter, we expect net production to average between 270,000 and 280,000 barrels of oil equivalent per day, excluding Libya, as continued ramp up of the Bakken is expected to be partially offset by planned maintenance at our JDA asset in Southeast Asia and the impact of Hurricane Barry in the Gulf of Mexico in early July. Based on our year-to-date performance and our expectation of strong production growth from the Bakken, deepwater Gulf of Mexico in Southeast Asia in the fourth quarter, we now forecast full year 2019 net production to average between 275,000 and 280,000 barrels of oil equivalent per day, which is at the upper end of our previous guidance range.

Turning now to the Bakken, capitalizing on the success of our new plug and perf completion design, we delivered a strong quarter. Second quarter Bakken net production averaged 140,000 barrels of oil equivalent per day, which was at the top end of our guidance range of 135,000 to 140,000 net barrels of oil equivalent per day and approximately 23% higher than the year-ago quarter. For the third quarter, we forecast our Bakken net production will average between 145,000 and 150,000 barrels of oil equivalent per day. For full year 2019, we now forecast Bakken net production will average between 140,000 and 145,000 barrels of oil equivalent per day, which is also at the upper end of our previous guidance range. In the second quarter, we brought 39 new wells online, and in the third quarter we expect to bring approximately 45 new wells online. For the full year of 2019, we still expect to bring approximately 160 new wells online.

Moving to the offshore, in the deepwater Gulf of Mexico, net production averaged approximately 65,000 barrels of oil equivalent per day in the second quarter, reflecting planned maintenance activities at Tubular Bells in Baldpate as well as an unplanned shutdown at the Shell-operated Enchilada facility in the deepwater Gulf of Mexico, which resulted in a 22-day shut-in of production at our Conger Field. In line with our strategy of investing in high return opportunities, we are pleased to report that the Llano 5 well in the Gulf of Mexico, where Hess has a 50% working interest, was successfully brought online in July and is expected to reach a gross production rate of between 8,000 and 10,000 barrels of oil equivalent per day in the fourth quarter. The well was drilled and completed in approximately 60 days, 2 weeks ahead of schedule. In Southeast Asia, net production averaged approximately 59,000 barrels of oil equivalent per day in the second quarter, reflecting a successfully completed planned shutdown for maintenance activities in North Malay Basin. As I mentioned earlier, we also completed a planned 2-weeks shutdown at the JDA last week and production is now back to pre-shutdown levels.

Now turning to Guyana, our exploration success on the Stabroek Block continues, with 3 new discoveries so far in 2019 at Tilapia, Haimara and Yellowtail, bringing the total number of discoveries on the block thus far to 13. We completed drilling operations on the Hammerhead-2 and 3 wells in June and July, respectively, which included a successful drill stem test on Hammerhead-3 and we are currently evaluating the results for a potential future development. Our Noble Tom Madden drillship is currently drilling the intermediate section of one of the Liza Phase 1 development wells and will then return to finish drilling in the Tripletail 1 well with results expected in October. The Stena Carron drillship recently commenced drilling of the Ranger 2 appraisal well as a follow-up to the successful Ranger 1 exploration well, which in January 2018 established a large oil-bearing carbonate structure, located approximately 60 miles northwest of the Liza field. An extensive logging and quarrying program as well as the drill stem test are planned for Ranger 2.

Now turning to our Guyana developments, Liza Phase 1 is progressing as planned. The Liza Destiny FPSO, with a gross production capacity of 120,000 barrels of oil per day, has departed Singapore and is expected to arrive in Guyana in September. Drilling at the Phase 1 development wells by the Noble Bob Douglas drillship is proceeding to plan and the installation of subsea umbilicals, risers and flowlines is approximately 70% complete. The project is on track to achieve first oil by the first quarter of 2020. Liza Phase 2, sanctioned in May, will utilize the Liza Unity FPSO where fabrication activities are currently underway. Liza Unity will have a gross production capacity of 220,000 barrels of oil per day and will develop approximately 600 million barrels of oil. First oil is expected by mid 2022. A third phase of development at Payara is expected to have a gross capacity of between 180,000 and 220,000 barrels of oil per day, with first oil on track for 2023.

In closing, our execution continues to be strong, and in 2019 we are positioned to deliver production at the upper end of our previous guidance range along with lower capital and exploratory expenditures than our previous guidance. Our offshore cash engines continue to generate significant cash flow, the Bakken is on a strong capital efficient growth trajectory and Guyana continues to get bigger and better, all of which position us to deliver industry leading returns, material free cash flow generation and significant shareholder value for many years to come.

I’ll now turn the call over to John Rielly.

[John Rielly, Chief Financial Officer]

Thanks, Greg. In my remarks today, I will compare results from the second quarter of 2019 to the first quarter of 2019. We incurred a net loss of $6 million in the second quarter of 2019 compared with net income of $32 million in the first quarter. On an adjusted basis, which excludes items affecting compatibility of earnings between periods, we incurred a net loss of $28 million in the second quarter of 2019. Turning to E&P. On an adjusted basis, E&P had net income of $46 million in the second quarter of 2019 compared to net income of $109 million in the previous quarter. The price and volume variances between the second quarter and first quarter were immaterial. The other changes in the after-tax components of adjusted E&P earnings between the second and first quarter of 2019 were as follows: higher operating cost, as guided, driven primary by workovers and maintenance activities at North Malay Basin and Tubular Bells decreased earnings by $27 million; higher production in severance taxes decreased earnings by $7 million; higher seismic expense in Guyana decreased earnings by $9 million; changes in foreign exchange decreased earnings by $8 million; all other items decreased earnings by $12 million for an overall decrease in second quarter earnings of $63 million.

Turning to Midstream, the Midstream segment had net income of $35 million in the second quarter of 2019 compared to $37 million in the first quarter of 2019. Midstream EBITDA, before no controlling interest, amounted to $127 million in the second quarter compared to $129 million in the previous quarter. For corporate, after-tax corporate and interest expenses were $109 million in the second quarter compared to $114 million in the first quarter of 2019.

Turning to our financial position, at quarter end, cash and cash equivalents were $2.2 billion, excluding Midstream, and total liquidity was $6.1 billion, including available committed credit facilities, while debt and finance lease obligations totaled $5.7 billion. During the second quarter, we entered into a new, fully un-drawn $3.5 billion revolving credit facility maturing in May 2023, which replaced our previous credit facility that was scheduled to mature in January 2021. Net cash provided from operating activities was $675 million, while cash expenditures for capital and investments were $640 million in the second quarter. Changes in working capital increased operating cash flows by $115 million in the second quarter.

Now turning to third quarter and full year 2019 guidance, for E&P, our E&P cash costs were $12.11 per barrel of oil equivalent, including Libya, and $12.72 per barrel of oil equivalent, excluding Libya, in the second quarter. We project E&P cash cost, excluding Libya, to be in the range of $13 to $14 per barrel of oil equivalent for the third quarter of 2019, which reflects the impact of planned maintenance shutdowns at the JDA and Baldpate, planned maintenance projects in the Bakken and the impact of Hurricane Barry. Full year 2019 cash costs, excluding Libya, are now expected to be $12.50 to $13 per barrel of oil equivalent, which is down from previous guidance of $13 to $14 per barrel of oil equivalent. DD&A expense was $17.20 per barrel of oil equivalent, including Libya, and $18.31 per barrel of oil equivalent, excluding Libya, in the second quarter.

DD&A expense, excluding Libya, is forecast to be in the range of $18 to $19 per barrel of oil equivalent in the third quarter of 2019, with full year guidance unchanged at $18 to $19 per barrel of oil equivalent. This results in projected total E&P unit operating cost, excluding Libya, to be the range of $31 to $33 per barrel of oil equivalent for the third quarter, and in the range of $30.50 to $32 per barrel of oil equivalent for the full year of 2019. Exploration expenses, excluding dry haul costs, are expected to be in the range of $50 million to $60 million in the third quarter and full year guidance to be in the range of $200 million to $210 million, which is in the lower end of our previous guidance. The Midstream tariff is projected to be approximately $185 million for the third quarter, with full year guidance expected to be $740 million to $750 million. The increase in the third and fourth quarter tariff expense is due to an anticipated increase in Midstream volumes driven by growing Hess production and increasing third-party throughput with the startup of the Little Missouri 4 gas processing plant in North Dakota.

The E&P effective tax rate, excluding Libya, is expected to be an expense in the range of 0% to 4% for the third quarter and for the full year. Our crude oil hedge positions remain unchanged. We have 95,000 barrels of oil per day hedged for calendar 2019, with $60 WTI put option contracts. We expect option premium amortization to be approximately $29 million per quarter for the remainder of the year. E&P capital and exploratory expenditures are expected to be approximately $800 million in the third quarter and $2.8 billion for the full year, which is down from original guidance of $2.9 billion. For the Midstream, we anticipate net income attributable to Hess from the Midstream segment to be approximately $40 million in the third quarter and in the range of $170 million to $175 million for the full year.

Turning to corporate, for the third quarter of 2019, corporate expenses are estimated to be in the range of $25 million to $30 million and full year guidance to be in the range of $110 million to $115 million. Interest expense is estimated to be in the range of $75 million to $80 million for the third quarter and full year guidance to be in the range of $315 million to $320 million.

This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

[Operator]

[Operator Instructions] Our first question comes from the line of Doug Leggate of Bank of America.

[Doug Leggate, Bank of America]

Hi thanks. Good morning everybody. I wonder if I could ask a couple on Guyana and then just one on the Bakken. On Guyana, Greg, it’s probably for you. Could you give us a little bit more color on the Hammerhead appraisals? Obviously, they’re kind of scant detailed in the release, but what does this mean for the potential of, I guess, an accelerated development? I think that had been alluded to in the past but to boost your exploration assets and then bring forward the development seems a little bit unusual. And the related question is when you describe the Yellowtail Turbot Longtail area as a major development hub, one assumes that doesn’t relate to a single FPSO. So it seems that we’re kind of stacking up development visibility here. I just wonder if you could offer us any color on why we still haven’t seen an uplift to the greater than 750,000 guidance for 2025?

[Greg Hill, Chief Operating Officer]

Yes, Doug. Thanks. So let me take your first question. So first of all, the Hammerhead well results for both Hammerhead-2 and Hammerhead-3 really demonstrated three things: first of all, both had high-quality reservoirs. The DST on Hammerhead-3 showed very good mobility. And finally, very good connectivity. And the connectivity is actually between all 3 wells. So, all 3 wells are in pressure communication so that bodes well for a development. Now we’re rolling all the results of this obviously into the development planned studies for that area. So, we’re just not ready to announce anything but we are rolling all the data in earnest into the studies as we speak.

Regarding your second question, you’re right, we do have a lot of volume now underpinned really between the Liza complex and the Turbot complex, and we’re also, in earnest, doing development studies on that area. Obviously, it’s going to be a multi-FPSO kind of situation given the amount of volume we found. And then furthermore, as we look forward between now and the end of the year, we are going to do some more exploration drilling really along that northeastern part of the Stabroek Block between Turbot or southeastern block between Turbot and Liza. And we’ll drill probably 3, potentially 4 additional wells or get them started this year, starting with Tripletail first and then 2 or 3 other prospects along that southeastern seaboard. So, continue to see a lot of upside into that area. But again, all that’s being rolled into development studies as we speak.

[Doug Leggate, Bank of America]

Thanks for the clarity, Greg. My follow-up is hopefully a quick one. You guys process a lot of third-party volumes, I believe on a payment in kind system in the Bakken. My question really relates to the oil mix relative to the NGL mix, I guess, in the liquids that you saw this quarter, it seemed that the oil mix dropped quite a bit. I wonder if you could speak to what’s going on there and further, we should read through any material change to your expectations for oil mix going forward in your development area? And I’ll leave it there.

[John Rielly, Chief Financial Officer]

Sure, Doug. Thanks for that. And no, there shouldn’t be any change in our mix going forward. So, let me just talk first at a high-level our Bakken asset. It is doing really well and it’s in terms of, I’ll call it, production overall production, capital and cost and specifically, oil production. So, what we had during the quarter, April and May were tough weather months and well availability was low, but June was really strong and July has been really strong. So, what we can tell you is we’ve always said we’re in this low to mid-60s oil cut, so let me just say 63%, 64%. You can feel comfortable using that number on our third quarter production guidance that we gave for Bakken. And you can see there that we’re going to have a very strong oil production increase from the second to the third quarter. So then specifically, let me get to your point on the second quarter, what happened.

As I mentioned, April and May were tough weather months, so well availability was low and that affected both oil and gas. Then if you look at our first quarter, we had a high oil cut of like 66% in that and it does get into the timing of gas capture, so we had additional gas capture in the second quarter. So, all else being equal, I would’ve said our overall production would have been in the 136,000 to 137,000 area, with an oil cut percentage in that 63% to 64%. But now it gets to your, call it, payment in kind on the gas processing fee. So, we do have a percentage of our contracts at the Tioga Gas Plant that are percentage of proceeds or POP contracts. And so, what happened, obviously, between the first and second quarter with lower NGL and gas prices, we received more volumes for those contracts. So, all else being equal, we probably picked up 3,000 to 4,000 barrels a day of NGL sand gas, if you want call it barrels, in the second quarter. So that’s why the oil cut is showing where it is. But let me just say, going forward we’ve always said we’re going to maintain this low to mid-60% oil cut all the way up to 200,000 barrels a day, so we are right on track for the 200,000 barrels a day. The Bakken asset team is executing really well and the plug and perf wells are doing really well. So, we’re excited about the asset and the third quarter looks good.

[Doug Leggate, Bank of America]

Appreciate on the detailed answer John. Thanks so much.

[Operator]

Thank you. And our next question comes from the line of Bob Brackett of Bernstein Research. Your line is open.

[Bob Brackett, Bernstein Research]

Good morning. Quick question on the [indiscernible] prospect in the Guam, can you give us an update on the status of that?

[John Hess, Chief Executive Officer]

Yes, Bob, so we are poised to begin drilling that in the third quarter so we will spud that well in the third quarter. And that’s a tieback. If successful, that’ll be a tieback Tubular Bells.

[Bob Brackett, Bernstein Research]

Okay. And then a follow-up on Ranger 2, can you talk about what the purpose of the appraisal is? It looks like that well sits pretty high up on the structure as opposed to the edge of the structure. Are you looking at sort of the reservoir quality or what are you testing for?

[John Hess, Chief Executive Officer]

Well, I think, Bob, you know the Ranger 1 well was drilled on the leeward side. It was drilled in a relatively safe position from a drilling standpoint. The Ranger 2 well, we’re actually going to move to the windward side of the historic carbonate reef. So, we expect higher porosity because that’s the portion of the reef that was subjected to wave action and also rainwater, et cetera. So, we’re looking for reservoir quality there. We want to do a DST and that will help us also establish connectivity.

[Bob Brackett, Bernstein Research]

Great. Thank you for that.

[Operator]

Thank you. And our next question comes from the line of Roger Read of Wells Fargo. Your line is open.

[Roger Read, Wells Fargo]

Yes, thank you good morning. Just wondering if we could come back to the change in the CapEx guidance and maybe give us an idea of where the efficiencies are flowing through the roughly $100 million decline?

[John Rielly, Chief Financial Officer]

Roger, I wish I had an easy just one-off way but it really is across our portfolio, so it’s been good execution. So, this is in Bakken, it’s in Southeast Asia, Guyana, costs have been quite good. So, it really is across the portfolio. Same thing on the cash cost, the reduction there from the $13 to $14 per BOE down to the $12.50 to $13 BOE. We’re seeing it across the portfolio. I guess probably on the capital the biggest piece would be the Bakken but it really is across the portfolio.

[Roger Read, Wells Fargo]

So, we’ll just call it a potpourri or something like that?

[John Rielly, Chief Financial Officer]

Yes. That’s a good name.

[Roger Read, Wells Fargo]

Alright. And then kind of like the rest of the crowd here, I guess let’s talk Guyana. As you think about the continued E&A process alongside the development, I mean, should we think about you being able to achieve as you go out, I believe to 2025 for the exploration program, being able to achieve everything you want on exploration with the existing rig fleet or do you think we’ll see expansions there as, I guess, we all would like to see parallel development, continued execution on the original 5 FPSOs that are highlighted and then the ability to achieve all the exploration?

[Greg Hill, Chief Operating Officer]

Yes. So, Roger, we do plan to add a fourth drillship to the theater and that will be initially focused on exploration on the Stabroek Block in the fourth quarter. Obviously, as we begin to get into Phase 2 drilling, etcetera, there will be a couple of rigs drilling development wells at that point in time. But these rigs are going to be flexible. They’re going to move from E&A work depending on success, might move over to development for a while, come back the E&A. So, we are developing a great plan to get everything we want to get done from an E&A standpoint in time before exploration of the block. So we are developing a plan to do all of that.

[Roger Read, Wells Fargo]

Alright. Thank you.

[Operator]

Thank you. And our next question comes from the line of Brian Singer of Goldman Sachs. Your line is open.

[Brian Singer, Goldman Sachs]

Thank you. Good morning.

[Greg Hill, Chief Operating Officer]

Good morning.

[Brian Singer, Goldman Sachs]

Just a couple of additional follow-up questions on Guyana and the first does relate to exploration. You mentioned that some of the wells that are going to be drilled are in the southeast corridor upcoming. Can you just talk a little bit more beyond Ranger and there if you see any step out locations that you plan to drill with this fourth rig or otherwise over the next year? And specifically, away from the either between Ranger and Liza or a step out away from Ranger into potentially new structures carbonates or not?

[Greg Hill, Chief Operating Officer]

No. So let me just, again, lay out the kind of drilling sequence for the next 6 months. So, first of all, we’re going to drill the Ranger 2 appraisal well and then follow that with an extensive logging and quarrying program and DST. So, the rig will be on that location for a fair amount of time. The next rig will spud go back to the Tripletail well, so that’s going to be the first exploration well in the second half of the year. And then beyond that, we anticipate 2 or 3 additional exploration wells that spud before the end of the year. With, as I mentioned earlier, the focus really being on drilling out the southeast part of the block between Turbot and Liza. So, really defining that southeastern corridor of the block and obviously, that is so that we can plan our developments down there, how many ships and how do we sequence them, et cetera. And then looking beyond that, of course, in 2020, we’ll spud a well in Kaieteur block as well and then also on the Hess side, we’ll have a Block 42 well in Suriname in 2020 also. But I think it’s important that we continue to add to the inventory of exploration prospects on the block that represent multibillion barrels of upside. So, there is going to be an extensive E&A program over the next several years in Guyana for sure.

[Brian Singer, Goldman Sachs]

That’s great. And my follow-up is, with regards to some of the discoveries that at least initially should get connected that you’ve made like Haimara. Can you just talk about any new data or planning you’ve seen and how you think about monetization there?

[Greg Hill, Chief Operating Officer]

No. I think that’s being rolled into our overall block development plans. And when and how Haimara plays in, not sure yet, it’s certainly in the queue. But as far as sequencing, not clear yet. And part of it is we want to appraise some more and explore some more in and around that Haimara hub in the next 18 months, we’ll say.

[Brian Singer, Goldman Sachs]

Great thank you.

[Operator]

Thank you. And our next question comes from the line of Paul Sankey of Mizuho. Your line is open.

[Paul Sankey, Mizuho]

Hi good morning everyone. Greg, I guess this is very much a variation on the theme in terms of the exploration success and the, sort of, luxury problem you have in Guyana. Is there a point at which there is simply too much inventory and you change plans accordingly or is the very long-term potential nature of this development really mean the levels of activity that you’ve really quite clearly outlined are fairly stable and are really anticipating major discoveries, therefore, plans don’t change?

[Greg Hill, Chief Operating Officer]

Yes, Paul, excellent question. No, we’re taking a phased approach here, which we think is the most capital-efficient one and it will maximize our financial returns. So actually, from a financial return perspective, the roadmap that we’ve laid out, which is getting Liza 2 on in mid-2022 after Liza 1, which actually is running ahead of schedule, on in the first quarter of 2020, that will be followed by Payara in 2023 and then the exploration and appraisal program that Greg’s talking about is going to give us further definition about a fourth ship, which would probably be a year after Payara, and a fifth ship which would probably be a year after that one. And that really gives you the line of sight for the 5 ships. The exact sizing of the fourth and fifth ship is the reason we’re doing the exploration and appraisal program. So, we’re very comfortable about the financial requirements for that, and we’re very excited about the financial returns we’re getting from that. Obviously, further exploration drilling may have an impact on those ships in terms of sequencing and also identify further ships. But it’s very manageable from a financial perspective, and we and Exxon and CNOOC are totally aligned about maximizing value from this opportunity that we have.

[Paul Sankey, Mizuho]

If I can jump and if I could ask a follow-up, we’ve had a lot of volatility in times passed regarding oil markets can you just update us on your latest thoughts for how Guyana will impact Gulf oil markets, given how things have changed over the past couple of years?

[John Hess, Chief Executive Officer]

Well, I think Guyana being a very low-cost development with the first ship having a breakeven Brent price of $35 a barrel and the second ship having a breakeven price of $25 a barrel, they’re going to be very well situated to fit into the world oil market. World oil market, as you know, is very much determined by demand and supply. The headwinds that we’ve had and GDP growth worldwide are obviously having an impact on demand growth, demand is still growing, but at a slower rate as GDP grows at slower rate and then how shale, how these new developments and how OPEC all intersect to keep the market balanced to have a price high enough for investment and low enough for demand growth is obviously something that’s unfolding. So, volatility is something we have to live with. And obviously, that’s why we want to build a portfolio that has a low cost per barrel. So, we have resilient returns in almost any price environment.

[Paul Sankey, Mizuho]

Thank you, John.

[Operator]

Thank you. And our next question comes from the line of Paul Cheng of [indiscernible]. Your line is open.

[Unidentified Analyst]

Hi guys good morning.

[John Rielly, Chief Financial Officer]

Hi Paul.

[Unidentified Analyst]

A couple of questions. I know that it’s still early but I want to look at the preliminary outlook for the 2020 CapEx. I suppose that we should see the Bakken expense to be up on a full year after sixth rig. And then also the Guyana spending probably would be up given that the Phase 2 spending is going to ramp up probably pretty substantially. So maybe, John, you can help us to look at in those items that how the delta is going to change?

[John Rielly, Chief Financial Officer]

Sure, Paul. Obviously, we’ll give our guidance in for 2020 as per our normal practice in late 2019 or early 2020. But I think you can go back to our Investor Day in December 2018 and we laid out the plan that John just talked about as well. So, based on that, we do expect that capital and exploratory spend for 2020 to be approximately $3 billion as we had laid out. To your specific question, so Bakken, what’s going to happen with Bakken, we have 6 rigs this year in Bakken and we’ll have 6 rigs next year, and then we go down to the 4 rigs that we had talked about in 2021 and generate that $1 billion of free cash flow. So, the activity level is the same from that standpoint, so we’re not expecting any big increases there in the Bakken. And obviously, as we talked about, we’ve been getting some nice efficiencies there. Guyana, yes. That’s as we’re coming in at $2.8 billion this year, that’s what we had expected per the Investor Day that there would be some increase in Guyana. And that will be the add in and we’re perfectly comfortable with that exactly, as John Hess just laid out, and the timing of that with Phase 2 coming on in mid-2022. So, everything is going along according to plan. Bakken is executing well at 200,000 barrels a day. We’re a quarter closer to starting up in Guyana. And so, you can expect that type of guidance when we get to 2020.

[Unidentified Analyst]

Okay. Two a quick one. One, I think you overlift by 6,000 barrels per day, maybe I missed it in your detailed remark. What’s the earning and cash flow contribution for the quarter? And secondly, John, as you indicated rightfully that with the Phase I coming onstream next year, and so from that standpoint, and let’s say you have a pretty strong balance sheet at this point, is it really necessary for us to have the hedging? What is the future hedging strategy going to look like?

[John Rielly, Chief Financial Officer]

Sure. So just starting with the overlifts, so you can probably tell by our tax line that one of the big overlifts was in Libya, so overall, we had about, let me just call it, 200,000 barrels a day in Libya, we had 200,000 barrels a day in Denmark and we also had a 200,000 barrel a day overlift with JDA, offset by North Malay Basin being under 200,000 barrels. So, what happened is just from an overall earning standpoint it was immaterial, since Libya and Denmark driving that overlift. So, nothing material there. Then as far as we’re looking on, yes, with our program that we have going forward, we do intend to put hedges on for 2020. We just think it’s a prudent thing to do, as we just discussed or John Hess just discussed, the oil price volatility. So, it’s just something that we want to do from an insurance standpoint to make sure that we can execute this great program that we have. So, you can expect us to subject to market conditions to adding hedges for 2020.

[Unidentified Analyst]

The only comment I would make is that seems like everyone lost money over the long haul in hedging. So, I’m not sure that is really for the benefit for the shareholder. Anyways thank you.

[Operator]

Thank you. And our next question comes from the line of Arun Jayaram of JPMorgan.

[Arun Jayaram, JPMorgan]

Yes. My first question is for Greg. Greg, I was wondering, you did 39 wells in the Bakken in 2Q and I was wondering if you guys have tested some of the areas such as Goliath or Red Sky or some of the areas perhaps outside of your kind of core development area, key, etcetera?

[Greg Hill, Chief Operating Officer]

Yes. So first of all, let me say that we have, and we don’t have a lot of wells out there yet. But what I will say is that the wells drilled to-date in those areas are meeting expectations, that’s with returns in the order of 40% to 50% at $60 a barrel. Our plan for those areas in 2019 is to drill about 25 wells, and we’re going to be testing kind of different completion designs and well spacing in order to try and further optimize their development in these areas. As you recall, we’ve got at least a 15-year inventory of wells that exceeds 50% IRRs at $60 a barrel. And I expect with the optimization that we’re going to do this year in those areas like Goliath and Red Sky, that – I expect that inventory is probably going to grow as a result of that optimization.

[Arun Jayaram, JPMorgan]

Great. And this one’s for John Rielly. John, you gave us some great color on overall production guidance and as well as your thoughts on the Bakken oil mix. Could you help us with your thoughts on a range of oil production versus the BOE total for Q3 and Q4?

[John Hess, Chief Executive Officer]

So if you were looking at where we were kind of the first two quarters and you’re saying overall production, we – our oil was 52% of our production in the first quarter and was 52% in the second quarter. So I would say – are you doing – and this is overall I’m talking about.

[Arun Jayaram, JPMorgan]

Overall? Right.

[John Hess, Chief Executive Officer]

Overall, yes, company guidance. So for the third quarter, I would expect it to go up slightly driven by good Bakken oil production growth.

[Arun Jayaram, JPMorgan]

Fair enough. And just to sneak one more in, the Llano, is it the number 5 well. Can you remind us what kind of production impact that will be on a net basis?

[Greg Hill, Chief Operating Officer]

Yes. So on a growth base, it’ll be between 8,000 and 10,000 barrels a day in the fourth quarter and we have half of that. So the net would be half of that.

[Arun Jayaram, JPMorgan]

Great, thanks a lot.

[Operator]

Thank you. And our next question comes from the line of Jeffrey Campbell of Tuohy Brothers.

[Jeffrey Campbell, Tuohy Brothers]

Good morning. The press release mentioned improved well performance in the Bakken. I was just wondering, was this anticipated from the shift to plug and perf or was this something in addition to that?

[Greg Hill, Chief Operating Officer]

No. I think this is really referencing the shift to plug and perf. And those are delivering, again, about a 15% increase in IP180 and a 5% to 10% increase in EUR versus our previous sliding sleeve design. And our whole program for 2019 – on average, EURs are going to be about 1 million barrels, IP 180s between 120% and 125% and the IRRs at 60% between 60% and 100% for the program this year. So a very strong program and we’re extremely pleased with the results and the Bakken is doing very well.

[Jeffrey Campbell, Tuohy Brothers]

Okay. And referring to the Slide 21 of the May presentation. Discussed tighter well spacing for higher Bakken net present value in the – for the drilling acreage, I was just wondering, if you’ve settled on optimal spacing in your core areas or are you still testing closer spacing in certain areas?

[Greg Hill, Chief Operating Officer]

No. I think the 9 and 8 configuration in the core that we’re pretty settled on. I think the optimization that could occur is as you get out into Tier 2 acreage, I’ll call it, although it’s all really good acreage, you might actually widen the spacing as you get out there. And why do I say that because our objective is to maximize DSU NPV. So it’s going to be that equation of profit loading, well spacing, et cetera, to basically maximize DSU NPV. So you might change the well spacing, you may not be as tight as you go out into the other acreage.

[Jeffrey Campbell, Tuohy Brothers]

Okay. And if I sneak one last one in there, just going back to Hammerhead real quick, I was just wondering are there any further Hammerhead tests in the current plans or are the 3 wells that you’ve discussed sufficient to determine next steps?

[Greg Hill, Chief Operating Officer]

Yes. I think we have got enough well data and evaluation data to determine next steps.

[Jeffrey Campbell, Tuohy Brothers]

Okay, great. Thanks. Appreciate it.

[Operator]

And our next question is from the line of Pavel Molchanov of Raymond James. Your line is open.

[Pavel Molchanov, Raymond James]

Thanks for taking the question. It’s not a huge part of your U.S. production mix but you did have 17 Bcf of gas last quarter and in that context with Henry Hub hovering around $2 obviously Bakken pricing is below that. What’s the point where you might resort to shutting in wells?

[John Hess, Chief Executive Officer]

No. We don’t see us shutting in wells there. So again, a lot of what we have is associated gas with our Bakken well. So, we wouldn’t be shutting in anything. Also you have to remember the Bakken gas stream has probably 3 times the amount of liquids in it than most other shale wells. So as a consequence in the rest of the country, we are in a pretty good position to optimize our net backs even though the natural gas price and NGL prices are down, they are still accretive to our overall net backs.

[Pavel Molchanov, Raymond James]

Okay. And in that same context what’s your stance on flaring and the latest status update on that?

[Greg Hill, Chief Operating Officer]

Yes. We are well within regulatory requirements. And I think in particularly, as LM4 south of the river gas plant comes on, our joint venture with Targa, which is actually imminently on that will substantially drop our flaring south of the river and we will be substantially below regulatory requirements at that point in time. So, flaring is not an issue for us, it’s not a problem for us, particularly with LM4.

[Pavel Molchanov, Raymond James]

Okay. Appreciate it.

[Operator]

Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.