UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2009

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File Number 1-1204

HESS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)

13-4921002
(I.R.S. Employer Identification Number)

1185 AVENUE OF THE AMERICAS, NEW YORK, N.Y.
(Address of Principal Executive Offices)

10036
(Zip Code)

(Registrant’s Telephone Number, Including Area Code is (212) 997-8500)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

At June 30, 2009, there were 327,052,233 shares of Common Stock outstanding.

 

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)
(In millions, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
REVENUES AND NON-OPERATING INCOME
Sales (excluding excise taxes) and other operating revenues		$	6,751			$	11,711			$	13,666			$	22,358
Equity in income (loss) of HOVENSA L.L.C.			(75	)			(19	)			(116	)			(29	)
Other, net			79				37				77				100
Total revenues and non-operating income			6,755				11,729				13,627				22,429
COSTS AND EXPENSES
Cost of products sold (excluding items shown separately below)			4,705				8,337				9,887				16,042
Production expenses			444				494				853				918
Marketing expenses			245				267				502				500
Exploration expenses, including dry holes and lease impairment			312				158				505				310
Other operating expenses			43				47				91				92
General and administrative expenses			136				156				296				308
Interest expense			95				65				172				132
Depreciation, depletion and amortization			558				482				1,044				934
Total costs and expenses			6,538				10,006				13,350				19,236
INCOME BEFORE INCOME TAXES			217				1,723				277				3,193
Provision for income taxes			115				812				192				1,530
NET INCOME			102				911				85				1,663
Less: Net income attributable to noncontrolling interests			2				11				44				4
NET INCOME ATTRIBUTABLE TO HESS CORPORATION		$	100			$	900			$	41			$	1,659
NET INCOME PER SHARE ATTRIBUTABLE TO HESS CORPORATION
BASIC		$	.31			$	2.81			$	.13			$	5.20
DILUTED			.31				2.76				.13				5.11
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)			325.8				326.2				325.7				325.0
COMMON STOCK DIVIDENDS PER SHARE		$	.10			$	.10			$	.20			$	.20

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In millions of dollars, thousands of shares)

		June 30,				December 31,
		2009				2008
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	1,063			$	908
Accounts receivable			4,097				4,297
Inventories			1,358				1,308
Other current assets			990				819
Total current assets			7,508				7,332
INVESTMENTS IN AFFILIATES
HOVENSA L.L.C.			804				919
Other			209				208
Total investments in affiliates			1,013				1,127
PROPERTY, PLANT AND EQUIPMENT
Total — at cost			28,387				27,437
Less reserves for depreciation, depletion, amortization and lease impairment			11,966				11,166
Property, plant and equipment — net			16,421				16,271
GOODWILL			1,225				1,225
DEFERRED INCOME TAXES			2,413				2,292
OTHER ASSETS			336				342
TOTAL ASSETS		$	28,916			$	28,589
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable		$	5,331			$	5,045
Accrued liabilities			1,679				1,905
Taxes payable			468				637
Current maturities of long-term debt			135				143
Total current liabilities			7,613				7,730
LONG-TERM DEBT			4,178				3,812
DEFERRED INCOME TAXES			2,235				2,241
ASSET RETIREMENT OBLIGATIONS			1,249				1,164
OTHER LIABILITIES			1,263				1,251
Total liabilities			16,538				16,198
EQUITY
Hess Corporation Stockholders’ Equity
Common stock, par value $1.00
Authorized — 600,000 shares
Issued 327,052 shares at June 30, 2009; 326,133 shares at December 31, 2008			327				326
Capital in excess of par value			2,415				2,347
Retained earnings			11,617				11,642
Accumulated other comprehensive income (loss)			(2,100	)			(2,008	)
Total Hess Corporation stockholders’ equity			12,259				12,307
Noncontrolling interests			119				84
Total equity			12,378				12,391
TOTAL LIABILITIES AND EQUITY		$	28,916			$	28,589

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In millions of dollars)

		Six Months Ended
		June 30,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	85			$	1,663
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization			1,044				934
Exploratory dry hole costs and lease impairment			304				105
Benefit for deferred income taxes			(304	)			(112	)
Equity in (income) loss of HOVENSA L.L.C., net of distributions			116				79
Changes in operating assets and liabilities and other			(4	)			246
Net cash provided by operating activities			1,241				2,915
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(1,389	)			(2,005	)
Other, net			32				39
Net cash used in investing activities			(1,357	)			(1,966	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments of debt with maturities of 90 days or less			(850	)			(3	)
Debt with maturities of greater than 90 days
Borrowings			1,247				—
Repayments			(39	)			(32	)
Cash dividends paid			(98	)			(97	)
Distributions to noncontrolling interests			(1	)			(48	)
Employee stock options exercised, including income tax benefits			12				103
Net cash provided by (used in) financing activities			271				(77	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			155				872
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			908				607
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	1,063			$	1,479

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.

Basis of Presentation

     The financial statements included in this report reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of Hess Corporation’s (the Corporation) consolidated financial position at June 30, 2009 and December 31, 2008 and the consolidated results of operations for the three and six-month periods ended June 30, 2009 and 2008 and the consolidated cash flows for the six month periods ended June 30, 2009 and 2008. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.

     The financial statements were prepared in accordance with the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain notes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) have been condensed or omitted from these interim financial statements. These statements, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Corporation’s Form 10-K for the year ended December 31, 2008.

     Effective January 1, 2009, the Corporation adopted Financial Accounting Standards Board (FASB) Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (FAS 160), which changes the accounting for and reporting of noncontrolling interests in a consolidated subsidiary. As required, the Corporation retrospectively applied the presentation and disclosure requirements of FAS 160. At June 30, 2009 and December 31, 2008 noncontrolling interests of $119 million and $84 million, respectively, have been classified as a component of equity. Previously the noncontrolling interests had been classified in other liabilities. Net income attributable to the noncontrolling interests of $2 million for the three months ended and $44 million for the six months ended June 30, 2009 and $11 million for the three months ended and $4 million for the six months ended June 30, 2008 are included in net income. Certain amounts in the consolidated financial statements and footnotes have been reclassified to conform with the presentation requirements of
FAS 160.

     Effective January 1, 2009, the Corporation also adopted FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, which expands the disclosure requirements for an entity’s use of derivative instruments. See Note 8, Derivative Instruments, Hedging, and Trading Activities, for these disclosures.

     The Corporation adopted FASB Staff Position FAS No. 157-2, Effective Date of FASB Statement No. 157, effective January 1, 2009, which requires the application of the fair value measurement and disclosure provisions of FAS 157 to nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis. The impact of adoption was not material to the Corporation’s consolidated financial statements.

     Effective June 30, 2009, the Corporation adopted FASB Statement No. 165 (FAS 165), Subsequent Events. FAS 165 provides guidance on the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of FAS 165 did not impact the Corporation’s existing practice of evaluating subsequent events through the date the financial statements are filed with the SEC. These financial statements were evaluated for subsequent events through August 7, 2009.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     In June 2009, the FASB issued Statements No. 166, Accounting for Transfers of Financial Assets- an amendment of FASB Statement No. 140 (FAS 166) and No. 167, Amendments to FASB Interpretation No. FIN 46(R) (FAS 167). FAS 166 eliminates the concept of a qualifying special-purpose entity, which did not require consolidation under existing GAAP, and limits the circumstances in which transferred financial assets should be derecognized. FAS 167 requires additional analysis of variable interest entities to determine if consolidation is necessary. The Corporation is currently evaluating the impact of FAS 166 and FAS 167 on its financial statements and, as required, will adopt the provisions of these standards effective January 1, 2010.

2.

Inventories

     Inventories consist of the following (in millions):

		June 30,				December 31,
		2009				2008
Crude oil and other charge stocks		$	396			$	383
Refined products and natural gas			1,193				988
Less: LIFO adjustment			(664	)			(500	)
			925				871
Merchandise, materials and supplies			433				437
Total inventories		$	1,358			$	1,308

3.

Refining Joint Venture

     The Corporation accounts for its investment in HOVENSA L.L.C. (HOVENSA) using the equity method. Summarized financial information for HOVENSA follows (in millions):

		June 30,				December 31,
		2009				2008
Summarized balance sheet
Cash and short-term investments		$	201			$	75
Other current assets			683				664
Net fixed assets			2,089				2,136
Other assets			53				58
Current liabilities			(996	)			(679	)
Long-term debt			(356	)			(356	)
Deferred liabilities and credits			(107	)			(104	)
Members’ equity		$	1,567			$	1,794

		Three months								Six months
		ended June 30,								ended June 30,
		2009				2008				2009				2008
Summarized income statement
Total revenues		$	2,640			$	5,446			$	4,663			$	9,757
Cost and expenses			(2,787	)			(5,482	)			(4,891	)			(9,811	)
Net loss		$	(147	)		$	(36	)		$	(228	)		$	(54	)
Hess Corporation’s share, before income taxes		$	(75	)		$	(19	)		$	(116	)		$	(29	)

     During the first half of 2008, the Corporation received a cash distribution of $50 million from HOVENSA.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.

Capitalized Exploratory Well Costs

     The following table discloses the net changes in capitalized exploratory well costs pending determination of proved reserves for the six months ended June 30, 2009 (in millions):

Beginning balance at January 1		$	1,094
Additions to capitalized exploratory well costs pending the determination of proved reserves			162
Reclassifications to wells, facilities, and equipment based on the determination of proved reserves			(10	)
Capitalized exploratory wells charged to expense			(54	)
Ending balance at June 30		$	1,192

     The preceding table excludes costs related to exploratory dry holes of $131 million which were incurred and subsequently expensed in 2009. Capitalized exploratory well costs greater than one year old after completion of drilling were $665 million as of June 30, 2009 and $381 million as of December 31, 2008. This increase is primarily related to the Pony and Tubular Bells projects in the deepwater Gulf of Mexico, where development options are being evaluated.

5.

Long-Term Debt

     In February 2009, the Corporation issued $250 million of 5 year senior unsecured notes with a coupon of 7% and $1 billion of 10 year senior unsecured notes with a coupon of 8.125%. The majority of the proceeds were used to repay revolving credit debt and outstanding borrowings on other credit facilities.

6.

Foreign Currency

     Pre-tax foreign currency gains amounted to the following (in millions):

		Three months								Six months
		ended June 30,								ended June 30,
		2009				2008				2009				2008
Foreign currency gains		$		35		$		11		$		31		$		44

     The pre-tax amount of foreign currency gains is included in other, net within revenues and non-operating income.

7.

Retirement Plans

     Components of net periodic pension cost consisted of the following (in millions):

		Three months								Six months
		ended June 30,								ended June 30,
		2009				2008				2009				2008
Service cost		$		10		$		10		$		20		$		20
Interest cost				20				20				40				40
Expected return on plan assets				(15	)			(20	)			(30	)			(40	)
Amortization of net loss				14				3				28				6
Pension expense		$		29		$		13		$		58		$		26

     In 2009, the Corporation expects to contribute approximately $100 million to its pension plans. Through June 30, 2009, the Corporation had contributed $43 million to its pension plans.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

8.

Derivative Instruments, Hedging, and Trading Activities

     The Corporation utilizes derivative instruments for both non-trading and trading activities. In non-trading activities, the Corporation uses futures, forwards, options and swaps individually or in combination, to mitigate its exposure to fluctuations in prices of crude oil, natural gas, refined products and electricity, and changes in foreign currency exchange rates. In trading activities, the Corporation, principally through a consolidated partnership (in which the Corporation has a 50% voting interest), trades energy commodities and energy derivatives, including futures, forwards, options and swaps, based on expectations of future market conditions. The following information includes 100% of the trading partnership’s accounts.

     The Corporation maintains a control environment under the direction of its chief risk officer and through its corporate risk policy, which the Corporation’s senior management has approved. Controls include volumetric, term and value-at-risk limits. Risk limits are monitored daily and exceptions are reported to business units and to senior management. The Corporation’s risk management department also performs independent verifications of sources of fair values and validations of valuation models. These controls apply to all of the Corporation’s non-trading and trading activities, including the consolidated trading partnership.

     The table below shows the total volume of the Corporation’s trading and non-trading derivative instruments outstanding at June 30, 2009:

		Volume*
Commodity Contracts
Crude oil, refined products, and natural gas liquids (millions of barrels)				2,149
Natural gas (millions of mcf)				9,282
Electricity (millions of megawatt hours)				191
Other Contracts
Foreign exchange (millions of U.S. dollars)				2,116

     The Corporation records all derivative instruments on the balance sheet at fair value (see Note 9, Fair Value Measurements). The table below reflects the gross and net fair values of the Corporation’s derivative instruments as of June 30, 2009 (in millions):

		Accounts				Accounts
		Receivable				Payable
Derivative contracts designated as hedging instruments
Commodity		$	1,118			$	(1,940	)
Derivative contracts not designated as hedging instruments*
Commodity			11,881				(13,106	)
Foreign exchange			78				(39	)
Other			12				(13	)
Total derivative contracts not designated as hedging instruments			11,971				(13,158	)
Gross fair value of derivative contracts			13,089				(15,098	)
Master netting arrangements			(11,270	)			11,270
Cash collateral (received) posted			(281	)			94
Net fair value of derivative contracts		$	1,538			$	(3,734	)

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     The Corporation generally enters into master netting arrangements to mitigate counterparty credit risk. Master netting arrangements are standardized contracts that govern all specified transactions with the same counterparty and allow the Corporation to terminate all contracts upon occurrence of certain events, such as a counterparty’s default or bankruptcy. Because these arrangements provide the right of offset, and the Corporation’s intent and practice is to offset amounts in the case of contract terminations, the Corporation records fair value on a net basis in accordance with FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts.

Non-trading activities

     Cash Flow Hedges: The Corporation uses commodity contracts to hedge variability of expected future cash flows and forecasted transactions (cash flow hedges). At June 30, 2009, the Corporation used cash flow hedges principally to fix the cost of supply in its energy marketing business. The length of time over which the Corporation hedges exposure to variability in future cash flows is predominantly two years or less. For contracts outstanding at June 30, 2009, the maximum length of time was five years.

     The Corporation records the effective portion of changes in the fair value of cash flow hedges as a component of other comprehensive income. Amounts recorded in accumulated other comprehensive income are reclassified into cost of products sold in the same period that the hedged item is recognized in earnings. The ineffective portion of changes in the fair value of cash flow hedges is recognized immediately in cost of products sold.

     The Corporation may use futures and swaps to hedge crude oil and natural gas production in its Exploration and Production business. In October 2008, the Corporation closed its Brent crude oil cash flow hedges by entering into offsetting contracts with the same counterparty, covering 24,000 barrels per day from 2009 through 2012. As a result, the Corporation no longer accounts for these contracts as cash flow hedges. Because the underlying cash flows from the originally hedged production are still probable, the deferred losses within accumulated other comprehensive income as of the date the contracts were closed will be recorded in sales and other operating revenues as the contracts mature. There were no open hedges of crude oil or natural gas production at June 30, 2009.

     At June 30, 2009, the after-tax deferred losses in accumulated other comprehensive income relating to cash flow hedges were $1,591 million. The Corporation estimates that approximately $715 million of this amount will be reclassified into earnings over the next twelve months.

     Other Risk Management Derivatives: The Corporation mitigates certain risks in its energy marketing business using commodity contracts that it does not designate as hedges. Changes in fair value of the commodity contracts, which include forward purchases and sales of energy marketing products, are recognized currently in earnings. Revenues from the sales contracts are recognized in sales and other operating revenues and supply contract purchases are recognized in cost of products sold. The Corporation also uses foreign exchange contracts that it does not designate as hedges with the intent to reduce its exposure to fluctuations in foreign exchange rates. Changes in the fair value of the foreign exchange contracts are recognized currently in other non-operating income. Net pretax gains on these derivative contracts amounted to the following (in millions):

		Three months				Six months
		ended June 30,				ended June 30,
		2009				2009
Commodity		$	7			$	89
Foreign exchange			110				107
Total		$	117			$	196

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Trading Activities

     In trading activities, the Corporation is primarily exposed to changes in crude oil, natural gas, and refined product prices. Pre-tax gains (losses) recorded in sales and other operating revenues from trading activities amounted to the following (in millions):

		Three months				Six months
		ended June 30,				ended June 30,
		2009				2009
Commodity		$	10			$	100
Foreign exchange			23				30
Other			7				15
Total		$	40			$	145

Credit Risk

     The Corporation is exposed to credit risks that may at times be concentrated with certain counterparties or groups of counterparties. Accounts receivable are generated from a diverse domestic and international customer base. The Corporation reduces its risk related to certain counterparties by using master netting arrangements and requiring collateral, generally cash or letters of credit. The Corporation records the cash collateral received or posted as an offset of the fair value of derivatives executed with the same counterparty.

     At June 30, 2009, the Corporation had a total of $4,290 million of outstanding letters of credit, primarily issued to satisfy margin and collateral requirements. Certain of the Corporation’s agreements also contain contingent collateral provisions that could require the Corporation to post additional collateral if the Corporation’s credit rating declines. As of June 30, 2009, the net liability related to derivatives with contingent collateral provisions was approximately $2,960 million before cash collateral posted of approximately $65 million. At June 30, 2009, all three major credit rating agencies that rate the Corporation’s debt had assigned an investment grade rating. If two of the three agencies were to downgrade the Corporation’s rating to below investment grade, the Corporation would be required as of June 30, 2009 to post additional collateral of approximately $334 million.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9.

Fair Value Measurements

     The Corporation measures fair value in accordance with the provisions of FASB Statement No. 157, Fair Value Measurements, (FAS 157). FAS 157 establishes a hierarchy for the inputs used to measure fair value based on the source of the input, which generally range from quoted prices for identical instruments in a principal trading market (Level 1) to estimates determined using related market data (Level 3). Multiple inputs may be used to measure fair value, however, the level of fair value for each financial asset or liability presented below is based on the lowest significant input level within this fair value hierarchy. The following table provides the fair value of the Corporation’s financial assets and (liabilities) based on this hierarchy (in millions):

														Collateral and				Balance at
														counterparty				June 30,
		Level 1				Level 2				Level 3				netting				2009
Supplemental pension plan investments		$		54		$		—		$		14		$		—		$		68
Derivative contracts
Assets				160				1,338				468				(428	)			1,538
Liabilities				(166	)			(3,112	)			(697	)			241				(3,734	)

     The following table provides changes in financial assets and liabilities that are measured at fair value based on Level 3 inputs (in millions):

		Three months				Six months
		ended June 30,				ended June 30,
		2009				2009
Balance at beginning of period		$	(165	)		$	149
Unrealized gains (losses)
Included in earnings			(12	)			50
Included in other comprehensive income (loss)			(19	)			(224	)
Purchases, sales or other settlements during the period			16				16
Net transfers in to (out of) Level 3			(35	)			(206	)
Balance at end of period		$	(215	)		$	(215	)

     The carrying amounts of the Corporation’s financial instruments generally approximate their fair values at June 30, 2009 except fixed rate long term debt, which had a carrying value of $4,313 million and a fair value of $4,611 million.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

10.

Weighted Average Common Shares

     The weighted average numbers of common shares used in the basic and diluted earnings per share computations are as follows (thousands of shares):

		Three months								Six months
		ended June 30,								ended June 30,
		2009				2008				2009				2008
Common shares – basic				323,975				320,936				323,676				319,167
Effect of dilutive securities
Restricted common stock				986				1,515				1,128				1,945
Stock options				818				3,192				885				3,343
Convertible preferred stock				—				534				—				534
Common shares – diluted				325,779				326,177				325,689				324,989

     The Corporation issued 3,050,250 stock options and 1,022,050 shares of restricted stock in the first six months of 2009. The table above excludes the effect of out-of-the-money options on 3,546,000 shares and 4,073,000 shares for the quarter and six months ended June 30, 2009, respectively.

11.

Equity and Comprehensive Income

     The table below summarizes changes in equity (amounts in millions):

		Hess				Non-
		Stockholders’				Controlling
		Equity				Interest				Total Equity
Balance January 1, 2009		$	12,307			$	84			$	12,391
Net Income			41				44				85
Deferred gains (losses) on cash flow hedges, after tax
Effect of hedge losses recognized in income			419				—				419
Net change in fair value of cash flow hedges			(532	)			—				(532	)
Change in foreign currency translation adjustments and other			2				(8	)			(6	)
Change in post retirement plan liabilities, after tax			19				—				19
Comprehensive income (loss)			(51	)			36				(15	)
Activity related to restricted common stock awards, net			27				—				27
Employee stock options, including income tax benefits			42				—				42
Cash dividends declared			(66	)			—				(66	)
Distributions to non-controlling interests			—				(1	)			(1	)
Balance June 30, 2009		$	12,259			$	119			$	12,378
Balance January 1, 2008		$	9,774			$	226			$	10,000
Net Income			1,659				4				1,663
Deferred gains (losses) on cash flow hedges, after tax
Effect of hedge losses recognized in income			187				—				187
Net change in fair value of cash flow hedges			(653	)			—				(653	)
Change in foreign currency translation adjustments and other			29				4				33
Change in post retirement plan liabilities, after tax			5				—				5
Comprehensive income (loss)			1,227				8				1,235
Activity related to restricted common stock awards, net			32				—				32
Employee stock options, including income tax benefits			130				—				130
Cash dividends declared			(65	)			—				(65	)
Distributions to non-controlling interests			—				(48	)			(48	)
Balance June 30, 2008		$	11,098			$	186			$	11,284

     Comprehensive income was $248 million ($239 million attributable to Hess Corporation) for the three months ended June 30, 2009 and $290 million ($279 million attributable to Hess Corporation) for the three months ended June 30, 2008.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

12.

Segment Information

     The Corporation’s results by operating segment were as follows (in millions):

		Three months								Six months
		ended June 30,								ended June 30,
		2009				2008				2009				2008
Operating revenues
Exploration and Production		$	1,825			$	3,234			$	3,027			$	5,886
Marketing and Refining			4,952				8,558				10,693				16,621
Less: Transfers between affiliates			(26	)			(81	)			(54	)			(149	)
Total*		$	6,751			$	11,711			$	13,666			$	22,358
Net income (loss) attributable to Hess Corporation
Exploration and Production		$	215			$	1,025			$	151			$	1,849
Marketing and Refining			(30	)			(52	)			72				(36	)
Corporate, including interest			(85	)			(73	)			(182	)			(154	)
Total		$	100			$	900			$	41			$	1,659

     Identifiable assets by operating segment were as follows (in millions):

		June 30,				December 31,
		2009				2008
Identifiable assets
Exploration and Production		$	20,637			$	19,506
Marketing and Refining			6,371				6,680
Corporate			1,908				2,403
Total		$	28,916			$	28,589

PART I — FINANCIAL INFORMATION (CONT’D.)

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.

Overview

     Hess Corporation (the Corporation) is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. The M&R segment manufactures refined petroleum products and purchases, trades and markets refined petroleum products, natural gas and electricity. The Corporation reported net income of $100 million in the second quarter of 2009, compared with $900 million in the second quarter of 2008.

     Exploration and Production: E&P reported income of $215 million for the second quarter of 2009, compared with income of $1,025 million in the second quarter of 2008. The decrease in earnings mainly reflects significantly lower average oil and gas selling prices.

     In the second quarter of 2009, the Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $49.27 per barrel compared with $104.29 per barrel in the second quarter of 2008. The Corporation’s average worldwide natural gas selling price was $4.56 per thousand cubic feet (mcf) in the second quarter of 2009 compared with $7.81 per mcf in the second quarter of 2008.

     Worldwide crude oil and natural gas production was 407,000 barrels of oil equivalent per day (boepd) in the second quarter of 2009 compared with 393,000 boepd in the same period of 2008. The Corporation now anticipates that its production for the full year of 2009 will average between 390,000 and 400,000 boepd.

The following is an update of Exploration and Production activities during the second quarter of 2009.

	•		Production increased during the second quarter at the Shenzi Field (Hess 28%) in the deepwater Gulf of Mexico, which commenced production at the end of the first quarter of 2009. Net production averaged 21,000 boepd for the quarter.
	•		In July, the Corporation announced that the Guarani well on the BM-S-22 (Hess 40%) license in the Santos Basin offshore Brazil has been completed and no notice of discovery was filed with the Brazilian government by the field operator. The Corporation’s portion of the well costs was expensed in the second quarter. The next steps are to analyze the significant amount of log and core data gathered from the first two wells, and to plan the location of a third well to further evaluate the BM-S-22 license.
	•		The Corporation commenced a planned 12 well program on permit WA-390-P (Hess 100%) offshore Western Australia designed to further appraise the block.

     Marketing and Refining: M&R reported a loss of $30 million for the second quarter of 2009, compared with a loss of $52 million in the second quarter of 2008, primarily reflecting improved energy marketing and trading results, partially offset by lower refining and retail margins.

PART I — FINANCIAL INFORMATION (CONT’D.)

Results of Operations

     The after-tax results by major operating activity were as follows (in millions, except per share data):

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Exploration and Production		$	215			$	1,025			$	151			$	1,849
Marketing and Refining			(30	)			(52	)			72				(36	)
Corporate			(26	)			(33	)			(75	)			(72	)
Interest expense			(59	)			(40	)			(107	)			(82	)
Net income (loss) attributable to Hess Corporation		$	100			$	900			$	41			$	1,659
Net income (loss) per share (diluted)		$	.31			$	2.76			$	.13			$	5.11

Items Affecting Comparability Between Periods

     The following table summarizes, on an after-tax basis, items of income (expense) that are included in net income and affect comparability between periods (amounts in millions). The items in the table below are explained and the pre-tax amounts are shown on pages 17 and 19.

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Exploration and Production		$	(31	)		$	—			$	(44	)		$	—
Corporate			—				—				(16	)			—
Total		$	(31	)		$	—			$	(60	)		$	—

     In the discussion that follows, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings. Management believes that after-tax amounts are preferable to pre-tax amounts for explaining variances in earnings, since they show the entire effect of a transaction. After-tax amounts are determined by applying the appropriate income tax rate in each tax jurisdiction to pre-tax amounts.

PART I — FINANCIAL INFORMATION (CONT’D.)

Results of Operations (continued)

Comparison of Results

Exploration and Production

     Following is a summarized income statement of the Corporation’s E&P operations (in millions):

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Sales and other operating revenues*		$	1,699			$	3,075			$	2,830			$	5,682
Non-operating income			57				22				65				69
Total revenues and non-operating income			1,756				3,097				2,895				5,751
Cost and expenses
Production expenses, including related taxes			444				494				853				918
Exploration expenses, including dry holes and lease impairment			312				158				505				310
General, administrative and other expenses			61				73				117				136
Depreciation, depletion and amortization			538				462				1,003				896
Total costs and expenses			1,355				1,187				2,478				2,260
Results of operations before income taxes			401				1,910				417				3,491
Provision for income taxes			186				885				266				1,642
Results of operations attributable to Hess Corporation		$	215			$	1,025			$	151			$	1,849

After considering the items affecting comparability between periods, the remaining changes in E&P earnings are primarily attributable to changes in selling prices, sales volumes and exploration expenses as discussed below.

Selling prices: Lower average realized selling prices of crude oil and natural gas decreased E&P revenues by approximately $1,860 million and $3,060 million in the second quarter and first half of 2009 compared with the corresponding periods of 2008. The Corporation’s average selling prices were as follows:

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Average selling prices
Crude oil — per barrel (including hedging)
United States		$	55.53			$	120.23			$	49.56			$	106.42
Europe			47.41				104.98				41.09				93.32
Africa			47.16				97.32				40.29				88.44
Asia and other			55.84				120.59				51.50				106.28
Worldwide			49.27				104.29				42.62				93.75
Crude oil — per barrel (excluding hedging)
United States		$	55.53			$	120.23			$	49.56			$	106.42
Europe			47.41				104.98				41.09				93.32
Africa			57.13				117.49				51.58				105.98
Asia and other			55.84				120.59				51.50				106.28
Worldwide			54.03				113.79				47.84				101.66
Natural gas liquids — per barrel
United States		$	31.03			$	76.60			$	30.12			$	70.71
Europe			36.51				92.67				36.61				85.78
Asia and other			35.92				—				35.92				—
Worldwide			32.97				81.52				32.25				74.90

PART I — FINANCIAL INFORMATION (CONT’D.)

Results of Operations (continued)

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Natural gas — per mcf (including hedging)
United States		$	3.26			$	11.00			$	3.61			$	9.69
Europe			4.53				10.33				5.56				9.61
Asia and other			4.82				5.23				4.76				5.12
Worldwide			4.56				7.81				4.82				7.43
Natural gas — per mcf (excluding hedging)
United States		$	3.26			$	11.00			$	3.61			$	9.69
Europe			4.53				10.84				5.56				9.90
Asia and other			4.82				5.23				4.76				5.12
Worldwide			4.56				8.01				4.82				7.55

     In October 2008, the Corporation closed its Brent crude oil cash flow hedges by entering into offsetting contracts with the same counterparty, covering 24,000 barrels per day from 2009 through 2012. The deferred after tax loss as of the date the hedge positions were closed will be recorded in earnings as the contracts mature. The estimated annual after-tax loss from the closed positions will be approximately $335 million from 2009 through 2012. Crude oil hedges reduced E&P earnings by $83 million and $165 million in the second quarter and first half of 2009 ($133 million and $264 million before income taxes). Crude oil and natural gas hedges reduced E&P earnings by $144 million and $239 million in the second quarter and first half of 2008 ($234 million and $386 million before income taxes).

Sales and production volumes: The Corporation’s crude oil and natural gas production was 407,000 boepd in the second quarter of 2009 compared with 393,000 boepd in the same period of 2008. Production in the first half of 2009 was 398,000 boepd compared with 392,000 boepd for the same period in 2008. The Corporation anticipates that its full year production will average between 390,000 and 400,000 boepd.

The Corporation’s net daily worldwide production by region was as follows (in thousands):

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Crude oil (barrels per day)
United States			58				36				45				36
Europe			76				83				82				83
Africa			124				128				125				123
Asia and other			16				12				16				15
Total			274				259				268				257
Natural gas liquids (barrels per day)
United States			10				11				10				11
Europe			3				4				3				4
Asia and other			1				—				—				—
Total			14				15				13				15
Natural gas (mcf per day)
United States			92				83				85				88
Europe			160				267				170				282
Asia and other			459				364				449				353
Total			711				714				704				723
Barrels of oil equivalent per day*			407				393				398				392

     United States: Crude oil production in the United States was higher in the second quarter and first half of 2009 compared to the corresponding periods in 2008, primarily due to the Shenzi field which commenced production at the end of the first quarter of 2009.

PART I — FINANCIAL INFORMATION (CONT’D.)

Results of Operations (continued)

     Europe: Crude oil production in Europe in the second quarter and first half of 2009 was lower than the same periods in 2008, primarily due to an unplanned 75 day shutdown at the Valhall field in Norway and natural decline in the U.K. North Sea, partly offset by increased production in Russia. Natural gas production in the second quarter and first half of 2009 was lower than the same periods in 2008, primarily due to decline at the Atlantic and Cromarty fields in the U.K. North Sea and the shutdown at the Valhall field in Norway.

     Asia and Other: The increase in natural gas production in the second quarter and first half of 2009 compared to the corresponding periods in 2008 was principally due to Phase 2 gas sales from Block A-18 of the Joint Development Area of Malaysia and Thailand (JDA), which commenced in November 2008.

     Sales Volumes: Higher crude oil and natural gas sales volumes increased revenue by approximately $480 million in the second quarter of 2009 and $200 million in the first half of 2009, compared with the corresponding periods of 2008. During the second quarter of 2009, the Corporation’s sales volumes exceeded production volumes which resulted in an increase in second quarter after tax income of approximately $50 million.

Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, decreased by $87 million and $109 million in the second quarter and first half of 2009 compared with the corresponding periods of 2008, excluding the impact of items affecting comparability discussed below. The decrease in expenses reflects lower commodity price-driven production taxes, the cessation of production at two fields in the U.K. North Sea, the favorable impact of foreign exchange rates and cost saving initiatives.

     Depreciation, depletion and amortization expenses increased by $50 million and $55 million in the second quarter and first half of 2009 compared with the corresponding periods of 2008, excluding the impact of items affecting comparability discussed below. The increase was primarily due to production increases in the U.S. and the JDA, partly offset by lower production in Norway and the U.K. North Sea.

     In the second quarter of 2009, after-tax charges of $31 million ($51 million before income taxes) were recorded to reduce the carrying values of production equipment in the U.K. North Sea and materials inventory in Equatorial Guinea and the United States. In the first quarter of 2009, the Corporation recorded an after-tax charge of $13 million ($26 million before income taxes) to reduce the carrying values of two short-lived fields in the U.K. North Sea. The pre-tax amount of the reductions in carrying value of production equipment and the short-lived fields is reflected in depreciation, depletion and amortization and the reduction in carrying values of inventory of $25 million is reflected in production expenses in the statement of consolidated income.

     Excluding the impact of items affecting comparability discussed above, E&P cash operating costs for full year 2009 are expected to be in a range of $14 to $15 per boe and total production unit costs (cash operating costs plus depreciation, depletion, and amortization) are anticipated to be in the range of $27 to $29 per boe.

Exploration expenses: Exploration expenses were higher by $154 million and $195 million in the second quarter and first half of 2009 compared with the same periods in 2008. The increases principally reflect higher dry hole expense and lease impairment.

Income taxes: The effective income tax rate for the six months ended June 30, 2009 for E&P operations was 60% compared to 47% for the six months ended June 30, 2008, excluding the impact of items affecting comparability discussed above. The higher rate in 2009 primarily reflects the impact of Libyan taxes in a lower commodity price environment. The effective tax rate for the full year 2009 is estimated to be in the range of 53% to 57%.

PART I — FINANCIAL INFORMATION (CONT’D.)

Results of Operations (continued)

Foreign Exchange: The after-tax foreign currency gain relating to E&P activities was $1 million in the second quarter of 2009 and 2008. The after-tax foreign currency loss was $5 million for the six months ended June 30, 2009, compared to a gain of $12 million for the same period in 2008.

     The Corporation’s future E&P earnings may be impacted by external factors, such as political risk, volatility in the selling prices of crude oil and natural gas, reserve and production changes, industry cost inflation, exploration expenses, the effects of weather and changes in foreign exchange and income tax rates.

Marketing and Refining

     Results from M&R activities amounted to a loss of $30 million in the second quarter of 2009 compared with a loss of $52 million in the second quarter of 2008. M&R generated income of $72 million for the six months ended June 30, 2009 compared to a loss of $36 million for the six months ended June 30, 2008. The Corporation’s downstream operations include HOVENSA L.L.C. (HOVENSA), a 50% owned refining joint venture with a subsidiary of Petroleos de Venezuela S.A. (PDVSA), which is accounted for using the equity method. Additional M&R activities include a fluid catalytic cracking facility in Port Reading, New Jersey, as well as retail gasoline stations, energy marketing and trading operations.

Refining: Refining operations generated losses of $26 million and $44 million in the second quarter and the first half of 2009, compared with income of $3 million in the second quarter and a breakeven result in the first half of 2008. The Corporation’s share of HOVENSA’s results, after income taxes, amounted to losses of $46 million and $71 million in the second quarter and first half of 2009 compared with losses of $12 million and $18 million in the second quarter and first half of 2008. These decreases primarily reflect lower refining margins. Port Reading’s after-tax earnings were $19 million in the second quarter and $27 million in the first half of 2009 compared with $14 million and $16 million for the same periods in 2008, reflecting improved margins.

The following table summarizes refinery capacity and utilization rates:

						Refinery utilization
		Refinery				Three months ended								Six months ended
		capacity				June 30,								June 30,
		(thousands of
		barrels per day)				2009				2008				2009				2008
HOVENSA
Crude			500				88.4	%			94.2	%			85.2	%			91.6	%
Fluid catalytic cracker			150				71.2	%			73.1	%			71.3	%			73.7	%
Coker			58				91.2	%			99.5	%			85.9	%			95.5	%
Port Reading			70				93.0	%			91.3	%			90.6	%			89.2	%

Marketing: Marketing results, which consist principally of energy marketing and retail gasoline operations, were losses of $13 million in the second quarter of 2009 compared with losses of $40 million in the same period of 2008, reflecting improved energy marketing results. Earnings were $88 million in the first half of 2009 compared to a loss of $8 million for the six months ended June 30, 2008, reflecting improved energy marketing results. Total refined product sales volumes were 455,000 barrels per day and 478,000 barrels per day in the second quarter and first half of 2009, compared with 454,000 barrels per day and 475,000 barrels per day in the second quarter and first half of 2008. Total energy marketing natural gas sales volumes were approximately 1.7 million mcf per day and 2.1 million mcf per day in the second quarter and first half of 2009, which were comparable to the volumes in the corresponding 2008 periods. In addition, energy marketing sold electricity volumes at the rate of 4,500 megawatts (round the clock) and 4,100 megawatts (round the clock) in the second quarter and first half of 2009 compared with 3,100 megawatts (round the clock) in the second quarter and first half of 2008.

PART I — FINANCIAL INFORMATION (CONT’D.)

Results of Operations (continued)

     The Corporation has a 50% voting interest in a consolidated partnership that trades energy commodities and energy derivatives. The Corporation also takes trading positions for its own account. The Corporation’s after-tax results from trading activities, including its share of the results of the trading partnership, amounted to income of $9 million and $28 million in the second quarter and first half of 2009 compared with losses of $15 million and $28 million in the second quarter and first half of 2008.

     Marketing expenses decreased by 8% in the second quarter of 2009 compared with the same period in 2008 due to lower retail expenses. Marketing expenses were comparable for the first six months of 2009 and 2008.

     The Corporation’s future M&R earnings may be impacted by volatility in margins, competitive industry conditions, government regulatory changes, credit risk and supply and demand factors, including the effects of weather.

Corporate

The following table summarizes corporate expenses (in millions):

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Corporate expenses (including the item described below)		$	34			$	48			$	117			$	106
Income tax benefits			(8	)			(15	)			(42	)			(34	)
			26				33				75				72
Items affecting comparability between periods, after-tax			—				—				(16	)			—
Net corporate expenses		$	26			$	33			$	59			$	72

     After-tax corporate expenses were lower in the second quarter and first half of 2009 compared with the same periods in 2008, mainly due to higher income from pension related investments and lower costs as a result of cost saving initiatives. In the first half of 2009, a charge of $25 million before income taxes ($16 million after tax) relating to retirement benefits and employee severance costs was recorded in general and administrative expenses. After-tax corporate expenses in 2009 are estimated to be in the range of $155 to $165 million, excluding items affecting comparability.

Interest

     Interest expense was as follows (in millions):

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Total interest incurred		$	97			$	66			$	175			$	134
Less: capitalized interest			2				1				3				2
Interest expense before income taxes			95				65				172				132
Income tax benefits			(36	)			(25	)			(65	)			(50	)
After-tax interest expense		$	59			$	40			$	107			$	82

PART I — FINANCIAL INFORMATION (CONT’D.)

Results of Operations (continued)

     Increased interest expense for the second quarter and first half of 2009 principally reflects higher average debt resulting from the Corporation’s $1.25 billion debt offering in February 2009 (see Note 5, Long-Term Debt) and higher fees relating to letters of credit.

Sales and Other Operating Revenues

     Sales and other operating revenues decreased by 42% and 39% in the second quarter and first half of 2009 compared with the corresponding periods of 2008, primarily due to lower crude oil, natural gas and refined product selling prices. The decrease in cost of products sold principally reflects lower prices of refined products and purchased natural gas.

Liquidity and Capital Resources

     The following table sets forth certain relevant measures of the Corporation’s liquidity and capital resources (in millions, except ratios):

		June 30,				December 31,
		2009				2008
Cash and cash equivalents		$	1,063			$	908
Current portion of long-term debt			135				143
Total debt			4,313				3,955
Total equity			12,378				12,391
Debt to capitalization ratio*			25.8	%			24.2	%

Cash Flows

     The following table sets forth a summary of the Corporation’s cash flows (in millions):

		Six months ended
		June 30,
		2009				2008
Net cash provided by (used in):
Operating activities		$	1,241			$	2,915
Investing activities			(1,357	)			(1,966	)
Financing activities			271				(77	)
Net increase in cash and cash equivalents		$	155			$	872