Hess Corp.’s 4Q:20 Earnings Call Transcript

(Seeking Alpha, 27.Jan.2021) — A full transcript of the Hess Corporation4Q 2020 earnings conference call from 27 January 2021 at 10:00 am ET follows here.

Executives

Jay Wilson – VP, IR

John Hess – CEO

Greg Hill – COO

John Rielly – CFO

Analysts

Jeanine Wai – Barclays Capital

Doug Leggate – Bank of America

Arun Jayaram – JPMorgan

Brian Singer – Goldman Sachs

Josh Silverstein – Wolfe Research

Ryan Todd – Simmons Energy

Roger Read – Wells Fargo

Paul Cheng – Scotiabank

Bob Brackett – Bernstein Research

Operator

Good day ladies and gentlemen, and welcome to the Fourth 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. 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

Thank you, Andrew. Good morning everyone, and thank you for participating in our fourth quarter earnings conference call. Our earnings release was issued this morning and appears on our Web site, 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 Web site.

As we have done in recent quarters, we will be posting transcripts of each speakers prepared remarks on our Web site following the presentations. As usual, online with me today are John Hess, Chief Executive Officer; Greg Hill, Chief Operating Officer; and John Rielly, Chief Financial Officer.

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

John Hess

Thank you, Jay. I would like to welcome everyone to our fourth quarter conference call. I hope you and your families are well and staying healthy during these challenging times. Today, I will review our continued progress and executing our strategy. Then Greg Hill will discuss our operations, and John Rielly 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 PUD 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 and April, when U.S. oil storage was near capacity, we chartered three very large crude carriers or VLCCs to store approximately 2 million barrels each of May, June and July Bakken crude oil production. The first VLCC cargo of 2.1 million barrels was sold in China at a premium to Brent in September. And the second and third VLCC cargos have been sold at a premium to Brent for delivery in the first quarter of 2021.

We reduced our capital and exploratory spend for 2020 by 40% from our original budget of $3 billion down to $1.8 billion. The majority of this reduction came from dropping from a six rig program in the Bakken to one rig. We also reduced our 2020 cash operating cost by $275 million. In 2020, we strengthened the company’s cash and liquidity position through a $1 billion three-year term loan initially underwritten by JPMorgan Chase. In addition, we have an undrawn $3.5 billion revolving credit facility and no material debt maturities until 2023.

During the fourth quarter, we closed on the sale of our 28% interest in the Shenzi field in the Gulf of Mexico for a total consideration of $505 million, bringing value forward in the low-price environment. In terms of preserving capability, a key for us in 2020 was continuing to operate one 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. Three oil discoveries during the year, at Uaru, Redtail-1 and Yellowtail-2 brought total discoveries on the Stabroek Block to 18. The estimate of gross discovered recoverable resources on the block was increased to approximately $9 billion 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 120,000 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 third oil development on the Stabroek Block in September at the Payara field. Payara will have a capacity of 220,000 gross barrels of oil per day and is expected to achieve first oil in 2024.

Turning to our plans for 2021, to protect our cash flows, we have hedged 120,000 barrels per day with $45 per barrel WTI PUD options and 20,000 barrels per day with $50 per barrel Brent PUD options. Our 2021 capital and exploratory budget is $1.9 billion, of which more than 80% will be allocated to Guyana and the Bakken. Our three sanctioned oil developments on the Stabroek Block have break-even Brent oil prices of between $25 and $35 per barrel; world class by any measure. Front-end engineering and design work for a fourth development at 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 five 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 internals. Although the well did not find oil in primary shallower target areas, the Hassa well results confirm a working petroleum system and provide valuable information about the future exploration prospectively for this part of the block. In the Bakken, we plan to add a second rig during the first quarter, 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 longstanding 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 a 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.

Greg Hill

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-19 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 agency’s guidance.

I am truly grateful to our Hess response team and our global workforce for their commitment to keeping their colleagues and our community safe during the pandemic. Second, in the Bakken despite dropping from six rigs to one 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 anchorage position.

Third, 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 billion barrels of oil equivalent.

Now turning to our operations, proved reserves the end of 2020 stood at 1.17 billion barrels of oil equivalent. Net proved reserve additions in 2020 totaled 170 million barrels of oil equivalent including negative net price revisions of 79 million barrels of oil equivalent, which resulted in overall 2020 production replacement ratio of 95% and a finding and development cost of $15.25 per barrel of oil equivalent. Excluding price related revisions, our production replacement ratio was 158% with an F&D cost of $9.10 per barrel of oil equivalent.

Turning to production, in the fourth quarter 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 first quarter of 2021, we forecast net production to average approximately 315,000 barrels of oil equivalent per day, excluding Libya.

In the Bakken, fourth 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 six rigs to one in May.

We have a robust inventory of more than 1,800 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 first quarter. A two 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 $6.2 million which was $600,000 or 9% lower than 2019. In 2021, we expect D&C costs average below $6 million 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 first quarter of 2021, we expect to drill approximately 10 wells and bring four new wells online. Bakken net production is forecast to average approximately 170,000 barrels of oil equivalent per day for both the first quarter and for the full-year 2021.

Our four-year forecasts reflects the impact of a planned 45-day shut down for the type of gas plant in the third quarter, 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 time the planned expansion project completed in 2020, which will then increase capacity to 400 million cubic feet per day from the plants current 250 million 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 fourth quarter, and 56,000 barrels of oil equivalent per day for the full-year 2020, fourth 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 two third-party operated production platforms.

In 2021, no new wells are planned in the Deepwater Gulf of Mexico and we forecast net production from our assets 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 and the Gulf of Thailand, where Hess has a 50% interest, net production average 56,000 barrels of oil equivalent per day in the fourth quarter and 52,000 barrels of oil equivalent per day for the full-year 2020. Fourth quarter production was above our guidance at 50,000 barrels of oil equivalent per day because of higher natural gas nominations. For the full-year 2021, net production for 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 three new discoveries bringing the total number of discoveries to 18 and increasing our estimate of gross discovered recoverable resources to approximately 9 billion barrels of oil equivalent and we continue to see multi-billion 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 fifth drillship, the Stena Drillmax into theater and in April six drillship, The Noble Sam Croft. 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 to have significant potential needs further drilling to determine its commerciality and ultimate value.

Over the next several months, we will participate in two exploration wells and two appraisal wells on the Stabroek Block. The next exploration well to be drilled is [Koebi-1] [Ph], which 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 Carron drillship. In March, we expect to spud the Longtail-3 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 DrillMAX were drilled as well.

Moving to April, we expect to spud the Yellowtail-2 appraisal well utilizing the Noble Don Taylor drillship, success here and at Mako-2, 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 Redtail-1 one exploration well located approximately 12 miles east of Liza. This well will test Campanian and Santonian aged reservoirs and will be drilled by the Stena DrillMAX.

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 are 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.

The Liza 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 sale from the Keppel shipyard in Singapore to Guyana by mid-year. Payara, our third sanction 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 hole for the prosperity FPSO is complete, top site construction activities are underway, and we expect integration of the hole and top sites to begin at the Keppel yard in Singapore by year-end.

Front-end engineering and design work is ongoing for our fourth 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 fourth quarter.

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 Riley.

John Rielly

Thanks, Greg. In my remarks today I will compare results from the fourth quarter of 2020 to the third quarter of 2020, and provide guidance for 2021. We incurred a net loss of $97 million in the fourth quarter of 2020, compared with a net loss of $243 million in the third quarter of 2020. On an adjusted basis, which excludes items affecting comparability of earnings between periods, we incurred a net loss of $176 million in the fourth quarter of 2020, compared to a net loss of $216 million in the previous quarter. Fourth quarter results including after-tax gain of $79 million from the sale of our interests in the Shenzi Field.

Turning to E&P, on an adjusted basis, E&P incurred a net loss of $118 million in the fourth quarter of 2020, compared to a net loss of $156 million in the previous quarter. The after-tax changes and adjusted E&P results between the fourth quarter and third quarter were as follows: higher realized selling prices improve results by $18 million, higher sales volumes improve results by $11 million, lower DD&A expense improve results by $40 million, lower exploration expenses improve results by $12 million, higher cash costs driven by workovers and hurricane-related maintenance costs in the Gulf of Mexico reduced results by $41 million, all other items reduced results by $2 million for an overall increase in fourth quarter results of $38 billion. Our E&P operations were overlifted compared with production in the fourth quarter by approximately 1.6 million barrels resulting in an increased after-tax income of approximately $15 million.

Turning to Midstream, the Midstream segment had net income of $62 million in the fourth quarter of 2020, compared to net income of $56 million in the previous quarter. Midstream EBITDA before non-controlling interests amounted to $198 million in the fourth quarter of 2020, compared to $180 million in the previous quarter.

Turning to corporate, after-tax corporate and interest expenses were $120 million in the fourth quarter of 2020, compared to an adjusted after-tax expense of $116 million in the previous quarter.

Turning to our financial position, at quarter-end, excluding Midstream, cash and cash equivalents were approximately $1.74 billion, and our total liquidity was $5.4 billion, including available committed credit facilities, while debt and finance lease obligations totaled $6.6 billion. Our fully undrawn $3.5 billion 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 million.

Net cash provided by operating activities before changes in working capital was $532 million in the fourth quarter of 2020, compared with $468 million in the previous quarter, primarily due to higher crude oil sales volumes. In the fourth quarter, net cash provided from operating activities after changes in working capital was $486 million compared with $136 million in the prior quarter. Proceeds from the September sale of the first VLCC cargo of 2.1 million barrels of oil were received in October. We’ve entered into agreements to sell the second and third VLCC cargos totaling 4.2 million barrels of oil in the first quarter of 2021. We expect to recognize net income of approximately $60 million in the first quarter from these sales, including associated hedging gains and costs.

First quarter of 2021 net cash provided by operating activities after changes in working capital is expected to include approximately $115 million of cash flow from these sales. For calendar year of 2021, we have purchased WTI PUD options for 100,000 barrels of oil per day that have an average monthly floor price of $45 per barrel and Brent PUD options for 20,000 barrels of oil per day that have an average monthly floor price of $50 per barrel.

Now, turning to guidance, first, for EMP, we project EMP cash cost excluding Libya to be in the range of $10.50 to $11.50 per barrel of oil equivalent for the first quarter and for the full-year 2021. DD&A expense, excluding Libya is forecast to be in the range of $12 to $13 per barrel of oil equivalent for the first quarter and for the full-year 2021. This results in projected total E&P unit operating costs, excluding Libya, to be in the range of $22.50 to $24.50 per barrel of oil equivalent for the first quarter and for the full-year 2021.

Exploration expenses, excluding dry hole costs, are expected to be in the range of $30 million to $35 million in the first quarter and $170 million to $180 million for the full-year 2021. The midstream tariff is projected to be in the range of $265 million to $275 million in the first quarter, and $1.09 billion to $1.12 billion for the full-year 2021. E&P income tax expense, excluding Libya, is expected to be in the range of $30 million to $35 million for the first quarter and $80 million to $90 million 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 million per quarter. Our E&P capital and exploratory expenditures are expected to be approximately $425 million in the first quarter and approximately $1.9 billion 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 million to $80 million in the first quarter and $280 million to $290 million for the full-year 2021.

Corporate expenses are estimated to be in the range of $35 million to $40 million for the first quarter, and $130 million to $140 million for the full-year 2021. Interest expense is estimated to be in the range of $95 million to $100 million for the first quarter, and $380 million to $390 million 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.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. [Operator Instructions] First question comes from the line of Jeanine Wai with Barclays.

Jeanine Wai

Hi, good morning, everyone. Thanks for taking my question.

John Hess

Good morning.

Jeanine Wai

Good morning.

Greg Hill

Good morning.

Jeanine Wai

My questions are on Guyana. My first one is the Stena Carron 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.

John Hess

Yes, Greg?

Greg Hill

Yes. Thank you, Jeanine. First of all, the results of the Redtail well in the past 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 — Yellowtail area. And that’s a big reason why Yellowtail now is going to be the focus of the fourth development, which we said in our remarks we hope to submit a plan of development to the Guyanese government by the fourth quarter of this year. So, very exciting results and very exciting development coming forward.

Jeanine Wai

Okay, great. Thank you. And my follow-up is also on Guyana. I loved all the details about where you’re going for exploration and appraisal this year. You mentioned the results — depending on 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.

John Hess

Yes, Greg?

Greg Hill

Yes, sure Jeanine. So, what we said was that assuming good results at Mako and Uaru-2, that remember is very close to Liza-2 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.

Jeanine Wai

Okay. Thank you for taking my question.

John Hess

Thank you. And that could potentially be the first ship basically.

Operator

Thank you. Our next question comes from the line of Doug Leggate with Bank of America.

Doug Leggate

Thanks. Good morning. Happy New Year, guys. I appreciate you taking my questions. Greg, let me start with Hassa and the somewhat quick description John gave of the deeper horizons. You talked about the possibility of the Santonian and a number of other tests extending the life of some of the early stages. So, I’m just wondering is this a continuation of that Santonian trend that we saw in Hassa, and if so, why would you describe it as — I guess how would you describe it, as a successful well, as an unsuccessful well? How have you reported it to the government?

Greg Hill

Well, I think — look, well, 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 feet of pay in the deeper Santonian section. So, further evaluation of those deep results are going to be incorporated in our future ex-pricing development plans for the area and will 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 Santonian. So, now we need to process on what that means, but I think it’s a very positive sign for the Santonian.

Doug Leggate

So, would that be reported as a discovery then?

Greg Hill

No, because the well is still under evaluation.

Doug Leggate

Okay, alright. My follow-up John Rielly, you’ve obviously involved in some protection, can you talk about the — I don’t know if you [indiscernible] your prepared remarks about the amortization schedule. What’s really behind my question is at which [indiscernible] you’re going to be pretty close to cash breakeven including dividend this year, how would you characterize that statement? Does that sound reasonable to you with what we 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 sheet question for 2021.

John Hess

Go ahead, John.

John Rielly

Sure. So, I think first you were saying for the hedges themselves for our 100,000 of barrels a day of WTI PUD 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 million per quarter. So, we like it. We’ve got nice protection on the down side 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, it gets approximately 60,000 barrels a day of Brent based production. The cash cost 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 is 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 what we were looking to do? So, the first thing we were looking to do was to get the hedges placed. So, we have insurance on the downside. Coming into the year effectively, as I mentioned, we have $1.74 billion of cash at year-end, and as I said in my remarks, we are going to complete the sales of the two VLCCs, and it’s going to give us cash flow of approximately $150 million in the first quarter. So, on a pro forma basis, we basically have $1.9 billion of cash going into the year. So I want to say, I mean I don’t want to guess on oil prices, but we have got the downside protected, we are 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 on what prices are, with our insurance now, we know we are going to have a nice cash cushion at that point. And then, we are 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 would still be generating free cash flow. So, we put ourselves in a good position with a very strong cash position, hedges protection, should be nice year with prices at this level, and then a big inflection when Phase 2 starts.

John Hess

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.

Doug Leggate

So, John, not to deliver the question, so you are happy with about a $5 billion debt balance is that the implication?

John Rielly

When we pay down that term loan debt?

Doug Leggate

Yes.

John Rielly

Yes. So as we pay down that term loan, our debt to EBITDA when the Guyana FPSOs keep coming on, we are going to drive under our two times target fairly quickly. So, yes, that’s where we would like to be, right there. Get that term loan paid off. And then as John said, then start increasing dividend and opportunistic share repurchases.

Doug Leggate

That’s sustaining. Thanks again guys.

Operator

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

Arun Jayaram

Yes. Good morning, gents.

John Hess

Good morning, Arun.

Arun Jayaram

Yes, John, I want 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 order later today on canceling lease sales. And if the government takes a more restrictive stance on permits post the 60-day moratorium? And perhaps as well to John Rielly, thoughts on IDCs and how — I know you have material NOL balances, but just thoughts on risk to IDCs as well.

John Hess

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 acreage is on Federal land. So, this pronouncement will not have an impact on our Bakken activities.

And in the deepwater Gulf of Mexico, as I heard Greg say earlier that we have no drilling plan for this year in the deepwater Gulf, and it remains to be seen what he is 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 & gas are strategic engine for the U.S. economy, especially at a time that we are trying to recover the economy from COVID. And that importance in jobs, we have over 12 million direct and indirect jobs. In terms of low energy cost for our working class families, our power cost in large part because of shale gas are half what they are in Europe.

And in terms of national security, where we are 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 well, 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?

John Rielly

Sure, so yes, you are right, Arun for us obviously, 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 EOP 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.

Arun Jayaram

Great. And my follow-up is, John Rielly, the cash costs 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. So would love to hear what those costs are and any expectations around Liza 2 with the bigger boat?

John Rielly

Yes, so for Liza Phase 1 it’s $12 per barrel, basically. And 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 per barrel post the purchase of the FPSO. So, again for us, every time you know an FPSO comes online, it’s going to help our cash costs. And it’s also by the way, going to help our DD&A rates, so right now, Liza Phase 1 is the current DD&A rate is below our portfolio average, again due to the low F&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&D is very low. And that’s going to continue to drive our DD&A down. So again, we look forward for every FPSO to come on in Guyana.

Arun Jayaram

Thanks.

John Rielly

Thank you.

Operator

And our next question comes from the line of Brian Singer with Goldman Sachs.

Brian Singer

Thank you, good morning.

John Rielly

Good morning, Brian.

Brian Singer

I want to start on the Bakken. You’ve highlighted at the beat on production on a BOE per day basis has come from in part from GAAP 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 the oil production outlook to be in the first quarter and the full-year? Where you stand in terms of gas flaring? And what the upside could be from further gas capturing?

John Hess

Greg?

Greg Hill

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 fourth quarter, 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’ll see us continue to add infrastructure with our partner in the midstream to gather as much gas as we possibly can.

Now if we talk about the oil, so the decline in oil is purely related to the wells online. So in Q3, we had 22 wells online. In Q4, we hit 12 wells online. And in Q1, we only added in Q1 of this year, we will only put four wells online. So naturally, you’re going to get some oil decline associated with that, however, as that second rig kicks in, which we 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 the 175,000 barrels a day flat for a number of years.

Brian Singer

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 actually 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 a full capacity, knowing some of the lessons of 2020 in terms of gas capture et cetera?

John Hess

Great. 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.

Brian Singer

Great, thank you.

Operator

Thank you. And our next question comes from the line of Josh Silverstein with Wolfe Research.

Josh Silverstein

Hi, good morning, guys. Just to ask a follow-up question…

John Hess

Good morning.

Josh Silverstein

Good morning. Just to ask a follow-up question to talk, I’m sorry if I just missed this, but when you guys start to stabilize around the 175,000 range 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 wall timing?

John Hess

Greg?

Greg Hill

Yes. So, of course, you will always get — there’s two factors going on. One, 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 are 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 third party and NGL prices, which affect your pop contracts, but oil will be flat with a two rig program. And then for the whole company, the 175,000 barrels a day equivalent would be flat with the two rigs.

Josh Silverstein

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 in Guyana development. I know some of this will be opportunistic, but these are cash flowing engines of the company. And I’m just wondering how much of the remaining portfolio you guys may wanted to divest or maybe market right now I know in the past Denmark had be looked at as an asset for sale. So I am just curious there will be some ongoing divestiture program as Guyana wants some.

John Hess

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 commenting more than that would be inappropriate.

Josh Silverstein

Got it, understood. Thanks, guys.

John Hess

Thank you.

Operator

And our next question comes from the line of Ryan Todd with Simmons Energy.

Ryan Todd

Good. Thanks. Maybe one follow-up on the Bakken discovery, 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? And 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?

John Hess

Yes, Greg.

Greg Hill

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 will be a function of NGL prices, right? We fully expect NGL prices to normalize in the second quarter, so we get some pickup in the second, third, and fourth quarter as NGL prices normalize.

Ryan Todd

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 FPSO 4, whether resource density and our infrastructure requirements would kind of lean more one way or the other in terms of implications for the CapEx budget going forward?

John Hess

Yes, Greg, you might talk about the reservoir and oil quality there.

Greg Hill

Sure.

John Hess

And the attractiveness of the economics.

Greg Hill

Yes. So, and then I’ll give the capital to John Riley, but Yellowtail, again very high quality reservoir. And we would expect it to be between Liza 2 and Payara in terms of — it’s breakeven oil price, right, so, somewhere between at $25 and $32 breakeven is where we anticipate Yellowtail will come across, because again, this is an extremely high quality reservoir and very high quality fluid. So, 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 it’s very high value development.

Ryan, I wanted to add one thing to my Bakken comment last time. Also remember in the third quarter we had the Tioga gas plant turnaround. So, you will see a dip in production in the third quarter, but that’s all gas, primarily oil is going to be rocking along just fine.

Ryan Todd

Okay, perfect. Thanks, guys.

Operator

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

Roger Read

Yes. Thank you. Good morning.

John Hess

Good morning.

Roger Read

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?

John Hess

Greg?

Greg Hill

Yes. Yes, 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 that have occurred in 2020 had purely been as a results of the top sites.

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 the studies to put project in place to further increase on that capacity, plans or to do that in the third quarter. 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, our 30,000 barrels of oil met 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.

Roger Read

Okay, great. Thank you.

John Hess

Meaning this year and next year, right Greg?

Greg Hill

Yes, sorry, ’21. Sorry, John. You got me again.

John Hess

Okay, fine.

Greg Hill

Yes.

Operator

Our next question comes from the line of Paul Cheng with Scotiabank.

Paul Cheng

Hi, thank you. Good morning, guys.

John Hess

Hey, good morning, Paul.

Paul Cheng

Thank you. Talking about the Yellowtail, you guys had a good quarter. I know that’s wonderful. Can you make some preliminary expectation, what is the unit development cost, is that comparable to Liza 2 or more like Payara?

John Hess

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 we’d be closer to Phase 2. And so, you could assume development costs be very similar somewhere between Phase 2 in 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 to much Payara, may little need a little bit more than Phase 2.

Paul Cheng

Okay. You mentioned about a two-week Bakken program, two question 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 way, but you’re saying that oil will be priced? That is so what that number that you expect? And whether that based on what you see today? 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?

John Hess

Well, let me start with your second question first, Paul. As we’ve said, our plan is to hold two rigs through 2021. Now, assuming oil prices improve in the future, what we’d like to do is eventually get the rig count to four in the Bakken. By getting the rig count to four will 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 1,800 well locations left that at current prices generate very high returns?

Now 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-180 will be the same as last year, 120,000 barrels of oil IP-180 very good wells and add 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 1750 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 on the Bakken is very large with some very good return opportunities.

John Rielly

And to be clear to everyone following, the oil cut at the wellhead really not has not changed, the oil 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. Now, what changes in the corporate accounting is due to what happens downstream as I mentioned.

Paul Cheng

Hey, so what is that oil production that you expect that two rig program can do?

John Hess

Well, I think broadly, what once this level is out, I think broadly you can expect oil around 90,000 barrels a day in the third and fourth quarter.

Paul Cheng

Okay. And the next one is for John Rielly, John your DD&A expectation for the year is really low comparing to your fourth quarter and your fourth quarter [indiscernible] probably do close to $16, and you’re expecting you’re going to be at $12 to $13 for the first quarter as well as for the full-year. So, where are we seeing that picture in your unit DD&A?

John Hess

John?

John Rielly

Sure, Paul. Yes, thanks John. The driver of this is the increase in our year-end 2020 proved develop reserves. So, you saw our reserve replacement, but I guess another aspect of this is that our proved develop 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 up proved developed reserves here as more and more wells and the performance from Phase 2. And then you’ve got some good amount of transfers from PUDs that moved into proved developed reserves, approximately 100 million 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 a 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&A rates. And again, Bakken’s DD&A rate while still higher is coming down from 2020 just due to the proved develop adds. So, again a good year for reserve ads.

Paul Cheng

My final question on the Gulf of Mexico, how many permits that you have currently in hand, if you have any?

John Hess

Paul, we don’t need any permits this year at all. We’re not…

Paul Cheng

I understand…

John Hess

We’re not planning any…

Paul Cheng

I understand that you are not going to drill anything, but I just want to see that if you have any permit that in hand, given that the permit can last for two years, and then possible that for extension.

John Hess

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.

Paul Cheng

Okay, thank you.

Operator

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

Bob Brackett

Good morning, all.

John Hess

Good morning, Bob.

Bob Brackett

I’ll risk a bit of a long-winded question, so the lean of the FPSO destiny had a mid-year 2019 departure from Singapore and a single installation campaign, which resulted in first oil on December 20th of 2019, the same year. You’ve mentioned that Liza unity FPSO has a mid-year 2021 departure from Singapore, and it has two 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?

John Hess

Go ahead, Greg.

Greg Hill

Yes. So, Bob, you’re right, I mean there’s two installation programs. That’s why officially first oil is early 2022. Now because of those two programs, there are still some contingency in the projects. So, if everything goes right, you could maybe get that best launch 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’ll 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 in 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 it was very similar equipment as in Phase 1. So very much expect the ramp, broadly would occur over, say, a three-month period because you’re going to — you bring things on and you measure dynamics, you’ve got vibration sensors everywhere. That’s a pretty normal cadence to bring something like that on as over three-month period.

Bob Brackett

Great, thanks for that.

Greg Hill

Thank you.

Operator

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

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