DBRS Upgrades Hess Corporation to BBB, Stable Trend

DBRS has today upgraded the Senior Unsecured Notes and Debentures rating of Hess Corporation (Hess or the Company) to BBB from BBB (low). The trend is Stable. The upgrade reflects the steadily improving trend in the Company’s credit metrics and operating performance in recent years, as DBRS expects Hess to continue to benefit from the robust energy price environment coupled with its portfolio of growth projects. Offsetting challenges include the increasing political risk in the Company’s international operations, less flexibility in major development projects and the concentration and exploration risks of deepwater wells.

Credit metrics have improved steadily in recent years, with debt-to-cash flow dropping to 0.71 times and debt-to-capital to 26.9% at March 31, 2008 versus 2.17 times and 42.5%, respectively, at December 31, 2003. While total balance sheet debt has remained relatively flat in recent years, the Company’s credit profile has increasingly benefited from the run-up in crude and natural gas prices, growing production levels, improved operating performance and the ongoing roll-off of legacy hedges on its crude oil production that were contracted at prices well below actual spot levels. Given the robust commodity price environment and Hess’s strong cash position at March 31, 2008 ($902 million), DBRS expects Hess to cover its 2008 capital investment program of $4.4 billion from internal sources. Although the capital plans represent an increase of more than 20% over 2007 expenditures of $3.6 billion, the increase is in line with the Company’s peer group given the rapid escalation in costs across the industry in recent years.

The reserves replaced internally metric (through the drillbit) has also improved in recent years, as Hess replaced approximately 163% and 139% of production in 2007 and 2006, respectively. The Company’s reserve replacement costs have also moved more in line with the peer group in recent years, averaging $14.68 from 2005 to 2007, including acquisitions, and $19.86/boe from internal sources only. Hess’s portfolio of development projects puts the Company on track to grow production by its target of 3% to 5% per year over the medium term, recognizing that actual results will likely be uneven given the size and nature of its major projects. The Company is benefiting from the start-up in recent quarters of four of the 12 core development projects, with the remainder targeted to start production by the end of 2010. DBRS also believes Hess is well positioned to grow its proven reserve base in line with its target of 5% to 8% per year through this diverse portfolio of international and deepwater projects. Key projects include the Okume Complex offshore Equatorial Guinea (85% net interest to Hess), which reached design capacity of 60,000 barrels of oil equivalent per day (boe/d) gross in early 2008 (40,000 boe/d net to Hess) and Phase 2 of the Joint Development Area (JDA) offshore Thailand, which is expected to reach full production in the second half of 2008, doubling net production to Hess (50% interest) to 250 million cubic feet per day of natural gas. For 2008, the Company continues to forecast average upstream production of between 380,000 and 390,000 boe/d, an increase of between 1% and 3% over 2007 production of 377,000 boe/d.

Hess, however, has also expanded its geographic diversity to the point where non-OECD production and reserves (54% and 53%, respectively, of the Company’s 2007 results) have overtaken OECD operations, increasing its exposure to political risks. These risks include rising state ownership, resource nationalization and sharply increased tax burdens. A significant percentage of Hess’s production is also under production sharing contracts (PSCs). While providing a more defined return on investment, PSCs also typically have onerous terms, which is the key factor in the Company’s effective income tax rate of greater than 50% in 2007 (particularly due to Libya). DBRS, however, views the political risks as manageable in view of Hess’s diverse suite of projects spread out across many different countries. Hess is also exposed to higher risks from its offshore operations, though the Company often partners with major oil companies, which partially mitigates these risks.

Refining and marketing operations, anchored by the Company’s 50% interest in the HOVENSA L.L.C. (HOVENSA) joint venture, provide some diversification from exploration and production activities. DBRS expects Hess’s downstream operations to continue to generate good free cash flow for the Company, although results are expected to remain volatile, as seen in the weak results for the first quarter of 2008. The HOVENSA refinery also entails some political risk, as the other 50% partner is a subsidiary of Petróleos de Venezuela, S.A. (PDVSA), and the majority of the crude processed at the facility comes from Venezuela under long-term contracts. As evidenced by the Company’s management of the refinery during the general strike in Venezuela in late 2002/early 2003, this risk is partially mitigated by the refinery’s location in U.S. territory. Hess has also received $1.0 billion in distributions from the joint venture since 2005.

Through improved operations, strong commodity prices and financial conservatism, Hess has steadily improved its credit profile in recent years. Recognizing that over 30% of the Company’s common stock is held by the Chairman and CEO, John Hess, along with two board members and a former CFO, DBRS expects the Company’s prudent financial management to continue. Further rating actions will be dependent upon Hess’s continued commitment to maintaining a strong credit profile through its ongoing growth phase, as well as the continued positive performance from its upstream operations.

Notes:
All figures are in U.S. dollars unless otherwise noted.
This rating is based on public information.