10-Q 1 y64309e10vq.htm FORM 10-Q FORM 10-Q
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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, 2008
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 preceeding 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 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).   Yeso     No  þ
          At June 30, 2008, there were 325,335,776 shares of Common Stock outstanding.
 
 

 


 


Table of Contents

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,  
    2008     2007     2008     2007  
REVENUES AND NON-OPERATING INCOME
                               
Sales (excluding excise taxes) and other operating revenues
  $ 11,717     $ 7,421     $ 22,384     $ 14,740  
Equity in income (loss) of HOVENSA L.L.C.
    (19 )     81       (29 )     137  
Gain on asset sales
          21             21  
Other, net
    37       23       100       22  
 
                       
Total revenues and non-operating income
    11,735       7,546       22,455       14,920  
 
                       
COSTS AND EXPENSES
                               
Cost of products sold (excluding items shown separately below)
    8,354       5,190       16,072       10,600  
Production expenses
    494       377       918       724  
Marketing expenses
    267       241       500       463  
Exploration expenses, including dry holes and lease impairment
    158       90       310       183  
Other operating expenses
    47       37       92       70  
General and administrative expenses
    156       142       308       273  
Interest expense
    65       62       132       126  
Depreciation, depletion and amortization
    482       354       934       681  
 
                       
Total costs and expenses
    10,023       6,493       19,266       13,120  
 
                       
INCOME BEFORE INCOME TAXES
    1,712       1,053       3,189       1,800  
Provision for income taxes
    812       496       1,530       873  
 
                       
NET INCOME
  $ 900     $ 557     $ 1,659     $ 927  
 
                       
NET INCOME PER SHARE
                               
BASIC
  $ 2.81     $ 1.78     $ 5.20     $ 2.98  
DILUTED
    2.76       1.75       5.11       2.92  
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)
    326.2       318.6       325.0       317.9  
COMMON STOCK DIVIDENDS PER SHARE
  $ .10     $ .10     $ .20     $ .20  
See accompanying notes to consolidated financial statements.

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Table of Contents

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,  
    2008     2007  
ASSETS
               
 
               
CURRENT ASSETS
               
Cash and cash equivalents
  $ 1,479     $ 607  
Accounts receivable
    6,266       4,708  
Inventories
    1,473       1,250  
Other current assets
    474       361  
 
           
Total current assets
    9,692       6,926  
 
           
INVESTMENTS IN AFFILIATES
               
HOVENSA L.L.C.
    855       933  
Other
    183       184  
 
           
Total investments in affiliates
    1,038       1,117  
 
           
PROPERTY, PLANT AND EQUIPMENT
               
Total — at cost
    26,967       24,831  
Less reserves for depreciation, depletion, amortization and lease impairment
    11,213       10,197  
 
           
Property, plant and equipment — net
    15,754       14,634  
 
           
GOODWILL
    1,225       1,225  
DEFERRED INCOME TAXES
    2,704       1,873  
OTHER ASSETS
    326       356  
 
           
TOTAL ASSETS
  $ 30,739     $ 26,131  
 
           
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
CURRENT LIABILITIES
               
Accounts payable
  $ 7,804     $ 5,741  
Accrued liabilities
    2,030       1,638  
Taxes payable
    1,335       583  
Current maturities of long-term debt
    68       62  
 
           
Total current liabilities
    11,237       8,024  
 
           
LONG-TERM DEBT
    3,877       3,918  
DEFERRED INCOME TAXES
    2,463       2,362  
ASSET RETIREMENT OBLIGATIONS
    1,062       1,016  
OTHER LIABILITIES
    998       1,037  
 
           
Total liabilities
    19,637       16,357  
 
           
STOCKHOLDERS’ EQUITY
               
Preferred stock, par value $1.00, 20,000 shares authorized
3% cumulative convertible series
    Authorized — 330 shares
    Issued — 284 shares ($14 million liquidation preference)
           
Common stock, par value $1.00
    Authorized — 600,000 shares
    Issued — 325,336 shares at June 30, 2008; 320,600 shares at December 31, 2007
    325       321  
Capital in excess of par value
    2,038       1,882  
Retained earnings
    11,007       9,412  
Accumulated other comprehensive income (loss)
    (2,268 )     (1,841 )
 
           
Total stockholders’ equity
    11,102       9,774  
 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 30,739     $ 26,131  
 
           
See accompanying notes to consolidated financial statements.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In millions)
                 
    Six Months Ended  
    June 30,  
    2008     2007  
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net income
  $ 1,659     $ 927  
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation, depletion and amortization
    934       681  
Exploratory dry hole costs and lease impairment
    105       47  
Pre-tax gain on asset sales
          (21 )
(Benefit) provision for deferred income taxes
    (112 )     6  
(Undistributed) distributed earnings of HOVENSA L.L.C., net
    79       (12 )
Changes in other operating assets and liabilities
    202       210  
 
           
Net cash provided by operating activities
    2,867       1,838  
 
           
CASH FLOWS FROM INVESTING ACTIVITIES
               
Capital expenditures
    (2,005 )     (2,038 )
Proceeds from asset sales
          93  
Other
    39       (3 )
 
           
Net cash used in investing activities
    (1,966 )     (1,948 )
 
           
CASH FLOWS FROM FINANCING ACTIVITIES
               
Debt with maturities of greater than 90 days
               
Borrowings
    297       563  
Repayments
    (332 )     (344 )
Cash dividends paid
    (97 )     (95 )
Employee stock options exercised
    103       85  
 
           
Net cash provided by (used in) financing activities
    (29 )     209  
 
           
NET INCREASE IN CASH AND CASH EQUIVALENTS
    872       99  
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    607       383  
 
           
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 1,479     $ 482  
 
           
See accompanying notes to consolidated financial statements.

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Table of Contents

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, 2008 and December 31, 2007, and the consolidated results of operations and the consolidated cash flows for the three and six month periods ended June 30, 2008 and 2007. 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, 2007.
     Effective January 1, 2008, the Corporation adopted Financial Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements (FAS 157) for financial assets and liabilities that are required to be measured at fair value. FAS 157 established a framework for measuring fair value and requires disclosure of a fair value hierarchy (see Note 8, “Fair Value Measurements”). The impact of adopting FAS 157 was not material to the Corporation’s results of operations. Upon adoption, the Corporation recorded a reduction in the net deferred hedge losses reflected in accumulated other comprehensive income, which increased stockholders’ equity by approximately $190 million, after income taxes.
     In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (FAS 160). FAS 160 changes the accounting for and reporting of noncontrolling interests in a subsidiary. The Corporation is currently evaluating the impact of adoption on its financial statements and, as required, will adopt the provisions of FAS 160 effective January 1, 2009.
2.   Inventories
     Inventories consist of the following (in millions):
                 
          June 30,           December 31,  
    2008     2007  
Crude oil and other charge stocks
  $ 509     $ 338  
Refined products and natural gas
    2,030       1,577  
Less: LIFO adjustment
    (1,481 )     (1,029 )
 
           
 
    1,058       886  
Merchandise, materials and supplies
    415       364  
 
           
Total inventories
  $ 1,473     $ 1,250  
 
           

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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,  
    2008     2007  
Summarized balance sheet
               
Cash and short-term investments
  $ 537     $ 279  
Other current assets
    1,323       1,183  
Net fixed assets
    2,164       2,181  
Other assets
    74       62  
Current liabilities
    (1,994 )     (1,459 )
Long-term debt
    (356 )     (356 )
Deferred liabilities and credits
    (86 )     (75 )
 
           
 
Members’ equity
  $ 1,662     $ 1,815  
 
           
                                 
    Three months     Six months  
    ended June 30,     ended June 30,  
    2008     2007     2008     2007  
Summarized income statement
Total sales
  $ 5,438     $ 2,800     $ 9,739     $ 5,642  
Cost and expenses
    (5,474 )     (2,638 )     (9,793 )     (5,366 )
 
                       
Net income (loss)
  $ (36 )   $ 162     $ (54 )   $ 276  
 
                       
Hess Corporation’s share, before income taxes
  $ (19 )   $ 81     $ (29 )   $ 137  
 
                       
     During the first half of 2008 and 2007, the Corporation received cash distributions from HOVENSA of $50 million and $125 million, respectively.
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, 2008 (in millions):
         
Balance at beginning of period
  $ 608  
Additions to capitalized exploratory well costs pending the determination of proved reserves
    264  
Reclassifications to wells, facilities, and equipment based on the determination of proved reserves
    (6 )
Capitalized exploratory well costs charged to expense
    (7 )
 
     
Balance at end of period
  $ 859  
 
     
     The preceding table excludes costs related to exploratory dry holes of $51 million which were incurred and subsequently expensed in 2008. Capitalized exploratory well costs greater than one year old after completion of drilling were $406 million as of June 30, 2008 and $304 million as of December 31, 2007.

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PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5.   Long-Term Debt and Capitalized Interest
     At June 30, 2008, the Corporation classified an aggregate of $536 million of borrowings under short-term credit facilities as long-term debt, based on the available capacity under its $3 billion syndicated revolving credit facility, substantially all of which is committed through May 2012.
     Capitalized interest on development projects amounted to the following (in millions):
                                 
    Three months   Six months
    ended June 30,   ended June 30,
    2008   2007   2008   2007
Capitalized interest
  $ 1     $ 16     $ 2     $ 31  
6.   Foreign Currency
     Pre-tax foreign currency gains (losses) amounted to the following (in millions):
                                 
    Three months   Six months
    ended June 30,   ended June 30,
    2008   2007   2008   2007
Foreign currency gain (losses)
  $ 11     $     $ 44     $ (6 )
     The pre-tax amount of foreign currency gains (losses) 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,  
    2008     2007     2008     2007  
Service cost
  $ 10     $ 9     $ 20     $ 18  
Interest cost
    20       17       40       34  
Expected return on plan assets
    (20 )     (17 )     (40 )     (34 )
Amortization of net loss
    3       5       6       10  
 
                       
Pension expense
  $ 13     $ 14     $ 26     $ 28  
 
                       
     In 2008, the Corporation expects to contribute approximately $75 million to its funded pension plans and $25 million to the trust established for its unfunded pension plan. Through June 30, 2008, the Corporation contributed $61 million to its pension plans.

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PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8.   Fair Value Measurements
     The Corporation adopted the provisions of FAS 157 effective January 1, 2008 (see Note 1, “Basis of Presentation”). 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 hierarchy of the Corporation’s financial assets and (liabilities) as of June 30, 2008 (in millions):
                                         
                            Collateral and    
                            counterparty    
    Level 1   Level 2   Level 3   netting   Total
Supplemental pension plan investments
  $ 80     $     $ 17     $     $ 97  
Derivative contracts
                                       
Assets
    473       2,302       1,026       (2,012 )     1,789  
Liabilities
    (430 )     (5,918 )     (484 )     1,900       (4,932 )
     Details on the methods and assumptions used to determine the fair values of the financial assets and liabilities are as follows:
     Fair value measurements based on Level 1 inputs:
     Measurements that are most observable are based on quoted prices of identical instruments obtained from the principal markets in which they are traded. Closing prices are both readily available and representative of fair value. Market transactions occur with sufficient frequency and volume to assure liquidity. The fair value of certain of the Corporation’s exchange traded futures and options are considered Level 1. In addition, fair values for the majority of the pension investments are considered Level 1, since they are determined using quotations from national securities exchanges.
     Fair value measurements based on Level 2 inputs:
     Measurements derived indirectly from observable inputs or from quoted prices from markets that are less liquid are considered Level 2. Measurements based on Level 2 inputs include over-the-counter derivative instruments that are priced on an exchange traded curve, but have contractual terms that are not identical to exchange traded contracts. The Corporation utilizes fair value measurements based on Level 2 inputs for certain forwards, swaps and options. The liability related to the Corporation’s crude oil hedging program is classified as Level 2.
     Fair value measurements based on Level 3 inputs:
     Measurements that are least observable are estimated from related market data or determined from sources with little or no market activity for comparable contracts. For example, in its energy marketing business, the Corporation sells natural gas and electricity to customers and offsets the price exposure by purchasing forward contracts. The fair value of these sales and purchases may be based on specific prices at less liquid delivered locations, which are classified as Level 3. There may be offsets to these positions that are priced based on more liquid markets, which are, therefore, classified as Level 1 or Level 2.

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PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
     The following table provides changes in financial assets and liabilities that are measured at fair value based on Level 3 inputs for the three and six months ended June 30, 2008 (in millions):
                 
    Three months     Six months  
    ended June 30,     ended June 30,  
Balance at beginning of period
  $ 336     $ (4 )
Unrealized gains (losses)
               
Included in earnings (*)
    (98 )     (23 )
Included in other comprehensive income
    431       605  
Purchases, sales or other settlements during the period
    (29 )     35  
Net transfers in to (out of) Level 3
    (81 )     (54 )
 
           
Balance at end of period
  $ 559     $ 559  
 
           
 
(*)   Reflected in sales and other operating revenue.
9.   Weighted Average Common Shares
     The weighted average number of common shares used in the basic and diluted earnings per share computations are as follows (in thousands):
                                 
    Three months     Six months  
    ended June 30,     ended June 30,  
    2008     2007     2008     2007  
Common shares — basic
    320,936       311,971       319,167       311,225  
Effect of dilutive securities
                               
Stock options
    3,192       2,798       3,343       2,899  
Restricted common stock
    1,515       3,203       1,945       3,181  
Convertible preferred stock
    534       608       534       608  
 
                               
Common shares — diluted
    326,177       318,580       324,989       317,913  
 
                               
10.   Comprehensive Income
     Comprehensive income (loss) was as follows (in millions):
                                 
    Three months     Six months  
    ended June 30,     ended June 30,  
    2008     2007     2008     2007  
Net income
  $ 900     $ 557     $ 1,659     $ 927  
Deferred gains (losses) on cash flow hedges, after tax
                               
Effect of hedge losses recognized in income
    100       69       187       111  
Net change in fair value of cash flow hedges
    (722 )     (192 )     (653 )     (176 )
Change in minimum postretirement plan liabilities, after tax
    2       4       5       8  
Change in foreign currency translation adjustment and other
    3       9       33       6  
 
                       
Comprehensive income
  $ 283     $ 447     $ 1,231     $ 876  
 
                       
     The Corporation reclassifies hedging gains and losses included in other comprehensive income (loss) to earnings at the time the hedged transactions are recognized. Hedging decreased Exploration and Production results for the three and six months ended June 30, 2008 by $234 million ($144 million after income taxes) and $386 million ($239 million after income taxes), respectively. For the three and six months ended June 30, 2007, hedging decreased Exploration and Production results by $93 million ($56 million after income taxes) and $157 million ($95 million after income taxes), respectively.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
     At June 30, 2008, accumulated other comprehensive income (loss) included net after-tax unrealized deferred losses of $2,138 million, primarily related to crude oil contracts used as hedges of future Exploration and Production sales. The pre-tax amount of any deferred hedge losses and gains is reflected in accounts payable and accounts receivable, respectively, and the related income tax impact is recorded in deferred income taxes on the balance sheet.
11.   Segment Information
     The Corporation’s results by operating segment were as follows (in millions):
                                 
    Three months     Six months  
    ended June 30,     ended June 30,  
    2008     2007     2008     2007  
Operating revenues
                               
Exploration and Production
  $ 3,234     $ 1,916     $ 5,886     $ 3,480  
Marketing and Refining
    8,564       5,558       16,647       11,367  
Less: Transfers between affiliates
    (81 )     (53 )     (149 )     (107 )
 
                       
Total (*)
  $ 11,717     $ 7,421     $ 22,384     $ 14,740  
 
                       
 
                               
Net income (loss)
                               
Exploration and Production
  $ 1,025     $ 505     $ 1,849     $ 845  
Marketing and Refining
    (52 )     122       (36 )     223  
Corporate, including interest
    (73 )     (70 )     (154 )     (141 )
 
                       
Total
  $ 900     $ 557     $ 1,659     $ 927  
 
                       
 
(*)   Operating revenues exclude excise and similar taxes of approximately $550 million and $500 million in the second quarter of 2008 and 2007, respectively, and $1,050 million and $950 million during the first half of 2008 and 2007, respectively.
     Identifiable assets by operating segment were as follows (in millions):
                 
         June 30,          December 31,  
    2008     2007  
Exploration and Production
  $ 19,402     $ 17,008  
Marketing and Refining
    7,702       6,667  
Corporate
    3,635       2,456  
 
           
Total
  $ 30,739     $ 26,131  
 
           

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Table of Contents

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, purchases, transports, trades and markets refined petroleum products, natural gas and electricity. Net income was $900 million for the second quarter of 2008, compared with $557 million in the second quarter of 2007.
     Exploration and Production: E&P earnings were $1,025 million for the second quarter of 2008, compared with $505 million in the second quarter of 2007. The increase in earnings primarily reflects higher average selling prices and natural gas production volumes, partially offset by higher operating and exploration costs.
     Worldwide crude oil and natural gas production was 393,000 barrels of oil equivalent per day (boepd) in the second quarter of 2008 compared with 378,000 boepd in the same period of 2007. The Corporation anticipates that its production for the full year of 2008 will average between 380,000 and 390,000 boepd.
     In the second quarter of 2008, the Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $104.29 per barrel compared with $60.05 per barrel in the second quarter of 2007. The Corporation’s average worldwide natural gas selling price, including the effect of hedging, was $7.81 per Mcf in the second quarter of 2008 compared with $4.88 per Mcf in the second quarter of 2007.
     The following is an update of Exploration and Production activities during the second quarter of 2008:
    In the deepwater Gulf of Mexico, development of the Shenzi Field (Hess 28%) progressed with installation of the tension leg platform hull and topsides on location. Installation of subsea facilities is ongoing and commissioning and first production are expected in the first half of 2009.
 
    In Indonesia, development of the oil leg at the Ujung Pangkah Field (Hess 75%) is continuing. Construction of the offshore platforms and onshore processing facilities is on schedule and oil production is expected to commence in the first half of 2009.
 
    In June 2008, the Corporation successfully completed drilling an appraisal well at its Pony discovery (Hess 100%) located on Green Canyon Block 468 in the deepwater Gulf of Mexico. The Corporation is evaluating development options for production from the Pony prospect before making a final investment decision.
 
    In June 2008, the Corporation’s Glencoe-1 exploration well on Block WA-390-P (Hess 100%) located in Australia’s Northwest Shelf, encountered 92 feet of net natural gas pay. In addition, in July 2008, the Briseis-1 exploration well encountered 151 feet of net natural gas pay on the same block. The Corporation plans to drill two additional exploration wells on this block in 2008. The next well, Nimblefoot-1, will be drilled about 14 kilometers southwest of the Glencoe-1 discovery and is expected to spud in August.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
    Overview (continued)
    In the fourth quarter of 2008, the Corporation expects to spud deepwater wells on Block 54 (Hess 100%) in Libya, Cape Three Points (Hess 100%) in Ghana, and BM-S-22 (Hess 40%) in Brazil.
 
    In the Williston Basin of North Dakota, the Corporation increased its net acreage position in the Bakken Play to approximately 500,000 acres. The Corporation currently has seven rigs operating in the Bakken and will add one additional rig in the fourth quarter.
     Marketing and Refining: M&R results generated a loss of $52 million in the second quarter of 2008, compared with income of $122 million in the second quarter of 2007, primarily due to lower margins and trading results. The Corporation received a cash distribution of $25 million from HOVENSA in the second quarter of 2008.
    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,  
    2008     2007     2008     2007  
Exploration and Production
  $ 1,025     $ 505     $ 1,849     $ 845  
Marketing and Refining
    (52 )     122       (36 )     223  
Corporate
    (33 )     (32 )     (72 )     (63 )
Interest expense
    (40 )     (38 )     (82 )     (78 )
 
                       
Net income
  $ 900     $ 557     $ 1,659     $ 927  
 
                       
Net income per share (diluted)
  $ 2.76     $ 1.75     $ 5.11     $ 2.92  
 
                       
    Items Affecting Comparability Between Periods
     The following items of income, on an after-tax basis, affect the comparability of earnings between periods (in millions):
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
Exploration and Production
                               
Gain from asset sales
      15         15  
     During the second quarter of 2007, the Corporation recorded a net gain of $15 million ($21 million before income taxes) related to the sale of its interests in the Scott and Telford fields located in the United Kingdom.
     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.

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Table of Contents

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 Exploration and Production operations (in millions):
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
Sales and other operating revenues(*)
  $ 3,075     $ 1,802     $ 5,682     $ 3,313  
Non-operating income
    22       28       69       22  
 
                       
Total revenues
    3,097       1,830       5,751       3,335  
 
                       
Cost and expenses
                               
Production expenses, including related taxes
    494       377       918       724  
Exploration expenses, including dry holes and lease impairment
    158       90       310       183  
General, administrative and other expenses
    73       62       136       119  
Depreciation, depletion and amortization
    462       337       896       646  
 
                       
Total costs and expenses
    1,187       866       2,260       1,672  
 
                       
Results of operations before income taxes
    1,910       964       3,491       1,663  
Provision for income taxes
    885       459       1,642       818  
 
                       
Results of operations
  $ 1,025     $ 505     $ 1,849     $ 845  
 
                       
 
(*)   Amounts differ from E&P operating revenues in Note 11 “Segment Information” primarily due to the exclusion of sales of hydrocarbons purchased from unrelated third parties.
    Selling prices: Higher average realized selling prices of crude oil and natural gas increased Exploration and Production revenues by approximately $1,250 million and $2,175 million in the second quarter and first half of 2008, respectively, compared with the corresponding periods of 2007. The Corporation’s average selling prices were as follows:
                                 
    Three months ended   Six months ended
    June 30,   June 30,
    2008   2007   2008   2007
Average selling prices
                               
Crude oil — per barrel (including hedging)
                               
United States
  $ 120.23     $ 61.41     $ 106.42     $ 57.46  
Europe
    104.98       58.94       93.32       54.98  
Africa
    97.32       58.02       88.44       53.68  
Asia and other
    120.59       70.73       106.28       65.08  
Worldwide
    104.29       60.05       93.75       55.66  

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
    Results of Operations (continued)
                                 
    Three months ended   Six months ended
    June 30,   June 30,
    2008   2007   2008   2007
Crude oil — per barrel (excluding hedging)
                               
United States
  $ 120.23     $ 61.41     $ 106.42     $ 57.46  
Europe
    104.98       58.94       93.32       54.98  
Africa
    117.49       67.04       105.98       62.22  
Asia and other
    120.59       70.73       106.28       65.08  
Worldwide
    113.79       63.94       101.66       59.13  
 
                               
Natural gas liquids — per barrel
                               
United States
  $ 76.60     $ 47.97     $ 70.71     $ 45.36  
Europe
    92.67       58.26       85.78       52.44  
Worldwide
    81.52       51.68       74.90       48.06  
 
                               
Natural gas — per Mcf (including hedging)
                               
United States
  $ 11.00     $ 7.24     $ 9.69     $ 7.22  
Europe
    10.33       4.54       9.61       4.66  
Asia and other
    5.23       4.42       5.12       4.49  
Worldwide
    7.81       4.88       7.43       4.95  
 
                               
Natural gas — per Mcf (excluding hedging)
                               
United States
  $ 11.00     $ 7.24     $ 9.69     $ 7.22  
Europe
    10.84       4.54       9.90       4.66  
Asia and other
    5.23       4.42       5.12       4.49  
Worldwide
    8.01       4.88       7.55       4.95  
     Crude oil and natural gas hedges reduced Exploration and Production earnings by $144 million and $239 million in the second quarter and first half of 2008 ($234 million and $386 million before income taxes). Crude oil hedges reduced Exploration and Production earnings by $56 million and $95 million in the second quarter and first half of 2007 ($93 million and $157 million before income taxes).
Sales and production volumes: The Corporation’s crude oil and natural gas production, on a barrel of oil equivalent basis, was 393,000 boepd in the second quarter of 2008 compared with 378,000 boepd in the same period of 2007. Production in the first half of 2008 was 392,000 boepd compared with 380,000 boepd in the first half of 2007. The Corporation anticipates that its production for the full year of 2008 will average between 380,000 boepd and 390,000 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,
    2008   2007   2008   2007
Crude oil (barrels per day)
                               
United States
    36       31       36       30  
Europe
    83       96       83       103  
Africa
    128       115       123       107  
Asia and other
    12       26       15       20  
 
                               
Total
    259       268       257       260  
 
                               
 
                               
Natural gas liquids (barrels per day)
                               
United States
    11       10       11       10  
Europe
    4       4       4       5  
 
                               
Total
    15       14       15       15  
 
                               

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
    Results of Operations (continued)
                                 
    Three months ended   Six months ended
    June 30,   June 30,
    2008   2007   2008   2007
Natural gas (Mcf per day)
                               
United States
    83       86       88       88  
Europe
    267       212       282       280  
Asia and other
    364       277       353       260  
 
                               
Total
    714       575       723       628  
 
                               
 
                               
Barrels of oil equivalent per day (*)
    393       378       392       380  
 
                               
 
(*)   Natural gas production is converted assuming six Mcf equals one barrel.
                 United States: Crude oil production in the United States was higher in the second quarter and first half of 2008, principally due to production from new wells in North Dakota and the deepwater Gulf of Mexico.
                 Europe: Crude oil production in Europe in the second quarter and first half of 2008 was lower than the comparable periods of 2007, reflecting the sale of the Corporation’s interests in the Scott and Telford fields in the United Kingdom, cessation of production at the Fife Field and natural decline. Natural gas production in the second quarter of 2008 was higher than in the second quarter of 2007, principally reflecting increased production from the Cromarty Field in the United Kingdom, which was shut-in in the second quarter of 2007 in response to market conditions.
                 Africa: Higher crude oil production in the second quarter and first half of 2008 was due to the ramp-up of the Okume Complex in Equatorial Guinea, partially offset by a lower entitlement to Algerian production.
                 Asia and other: Crude oil production in Asia was lower in the second quarter and first half of 2008 reflecting a reduced entitlement to production in Azerbaijan. Natural gas production increased in the second quarter and first half of 2008, principally due to production from the Pangkah Field in Indonesia, which commenced in April 2007, and increased production from Block A-18 of the Joint Development Area of Malaysia and Thailand (JDA).
      Sales volumes: Higher crude oil sales volumes increased revenue by approximately $25 million in the second quarter and $200 million in the first half of 2008 compared with the corresponding periods of 2007.
Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, increased by $128 million and $211 million in the second quarter and first half of 2008 compared with the corresponding periods of 2007. The increases principally reflect higher production volumes, increased production taxes, higher costs of services and materials and increased employee related costs. Depreciation, depletion and amortization charges were higher in 2008 reflecting higher production volumes and per barrel rates.
Exploration expenses: Exploration expenses were higher in the second quarter and first half of 2008 compared with the corresponding periods of 2007, reflecting higher dry hole costs and increased costs of seismic studies. The Corporation’s planned exploratory drilling activities are expected to increase in the second half of the year.
Income Taxes: The effective income tax rate for Exploration and Production operations in the first half of 2008 was 47% compared with 49% in the first half of 2007. The effective income tax rate for Exploration and Production operations for the full year of 2008 is expected to be in the range of 47% to 51%.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
Results of Operations (continued)
Other: The after-tax foreign currency gain related to Exploration and Production activities was $1 million in the second quarter of 2008 compared with a loss of $6 million in the second quarter of 2007. The after-tax foreign currency gain was $12 million for the six months ended June 30, 2008 and a loss of $9 million for the six months ended June 30, 2007.
     The Corporation’s future Exploration and Production earnings may be impacted by external factors, such as volatility in the selling prices of crude oil and natural gas, reserve and production changes, industry cost inflation, exploration expenses, changes in foreign exchange and income tax rates, political risk and the effects of weather.
Marketing and Refining
     Results from Marketing and Refining activities amounted to a loss of $52 million and $36 million in the second quarter and first half of 2008, respectively, compared with income of $122 million and $223 million in the second quarter and first half of 2007, respectively. 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 Marketing and Refining 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 income of $3 million in the second quarter of 2008 and were breakeven in the first half of 2008 compared with income of $87 million in the second quarter of 2007 and $141 million in the first half of 2007. The Corporation’s share of HOVENSA’s results, after income taxes, was a loss of $12 million in the second quarter of 2008 compared with income of $49 million in the second quarter of 2007. The Corporation’s share of HOVENSA’s results, after income taxes, was a loss of $18 million in the first half of 2008 compared with income of $84 million in 2007, principally reflecting lower refining margins.
     At June 30, 2008, the remaining balance of the PDVSA note was $46 million, which is scheduled to be fully repaid by February 2009. Interest income on the PDVSA note after income taxes was $1 million in the second quarter and $2 million in the first half of 2008 compared with $1 million in the second quarter and $3 million in the first half of 2007.
     Port Reading’s after tax earnings were $14 million and $16 million in the second quarter and first half of 2008 compared with $35 million and $52 million in the corresponding periods of 2007, reflecting lower margins.
     The following table summarizes refinery capacity and utilization rates:
                                         
    Refinery   Refinery utilization
    capacity   Three months ended   Six months ended
    (thousands of   June 30,   June 30,
    barrels per day)   2008   2007   2008   2007
HOVENSA
                                       
Crude
    500       94.2 %     79.4 %     91.6 %     86.7 %
Fluid catalytic cracker
    150       73.1 %     87.9 %     73.7 %     90.5 %
Coker
    58       99.5 %     53.3 %*     95.5 %     70.8 %
Port Reading
    70 **     91.3 %     97.9 %     89.2 %     91.4 %
 
*   Coker utilization reflects a planned 30 day turnaround.
 
**   Refinery utilization in 2007 is based on a capacity of 65,000 barrels per day.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
Results of Operations (continued)
Marketing: Marketing operations, which consist principally of energy marketing and retail gasoline operations, generated a loss of $40 million in the second quarter of 2008 compared with breakeven results in the second quarter of 2007. Marketing operations had a loss of $8 million in the first half of 2008 compared with earnings of $43 million in the first half of 2007. The decreases principally reflect lower margins on refined product sales. Total refined product sales volumes were 475,000 barrels per day in the first half of 2008 and 452,000 barrels per day in the first half of 2007.
     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 earnings of the trading partnership, amounted to a loss of $15 million in the second quarter and $28 million in the first half of 2008 compared with income of $35 million in the second quarter of 2007 and $39 million in the first half of 2007.
     Marketing expenses increased in the second quarter and first half of 2008 compared with the corresponding periods of 2007, principally reflecting growth in energy marketing activities, higher credit card fees in retail gasoline operations and increased transportation costs.
     The Corporation’s future Marketing and Refining earnings may be impacted by volatility in marketing and refining margins, competitive industry conditions, government regulatory changes, credit risk and supply and demand factors, including the effects of weather.
Corporate
     After-tax corporate expenses were $33 million in the second quarter of 2008 and $72 million in the first half of 2008 compared with $32 million in the second quarter and $63 million in the first half of 2007. The increase principally reflects higher employee related expenses and professional fees.
Interest
     Interest expense was as follows (in millions):
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
Total interest incurred
  $ 66     $ 78     $ 134     $ 157  
Less: capitalized interest
    1       16       2       31  
 
                       
Interest expense before income taxes
    65       62       132       126  
Less: income taxes
    25       24       50       48  
 
                       
After-tax interest expense
  $ 40     $ 38     $ 82     $ 78  
 
                       
     The decrease in interest incurred in 2008 principally reflects lower average debt. The decrease in capitalized interest in 2008 reflects the completion of several development projects in 2007.
Sales and Other Operating Revenues
     Sales and other operating revenues increased by 58% in the second quarter and 52% in the first half of 2008 compared with the corresponding periods of 2007, primarily due to higher crude oil and refined product selling prices and increased sales of electricity. The increase in cost of goods sold principally reflects higher refined product costs and increased purchases of electricity.

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
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,
    2008   2007
Cash and cash equivalents
  $ 1,479     $ 607  
Current portion of long-term debt
    68       62  
Total debt
    3,945       3,980  
Stockholders’ equity
    11,102       9,774  
Debt to capitalization ratio(*)
    26.2 %     28.9 %
 
(*)   Total debt as a percentage of the sum of total debt plus stockholders’ equity.
Cash Flows
     The following table sets forth a summary of the Corporation’s cash flows (in millions):
                 
    Six months ended  
    June 30,  
    2008     2007  
Net cash provided by (used in):
               
Operating activities
  $ 2,867     $ 1,838  
Investing activities
    (1,966 )     (1,948 )
Financing activities
    (29 )     209  
 
           
Net increase in cash and cash equivalents
  $ 872     $ 99  
 
           
Operating Activities: Net cash provided by operating activities, including changes in operating assets and liabilities, amounted to $2,867 million in the first half of 2008 compared with $1,838 million in 2007, reflecting increased earnings. In the first half of 2008, the Corporation received a cash distribution of $50 million from HOVENSA compared with $125 million in 2007.
Investing Activities: The following table summarizes the Corporation’s capital expenditures (in millions):
                 
    Six months ended  
    June 30,  
    2008     2007  
Exploration and Production
  $ 1,938     $ 1,982  
Marketing, Refining and Corporate
    67       56  
 
           
Total
  $ 2,005     $ 2,038  
 
           
     In the first half of 2007, proceeds from the sale of the Corporation’s interests in the Scott and Telford fields in the United Kingdom were $93 million.
Financing Activities: In the first half of 2008, there was a net decrease in borrowings of $35 million from year-end 2007. Dividends paid were $97 million in the first half of 2008 ($95 million in the first half of 2007). During the first half of 2008, the Corporation received proceeds from the exercise of stock options totaling $103 million ($85 million in the same period of 2007).

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Table of Contents

PART I — FINANCIAL INFORMATION (CONT’D.)
Liquidity and Capital Resources (continued)
Future Capital Requirements and Resources
     The Corporation anticipates investing a total of approximately $5 billion in capital and exploratory expenditures during 2008, of which $4.9 billion relates to Exploration and Production operations. The Corporation expects that it will fund its 2008 operations, including capital expenditures, dividends, pension contributions and required debt repayments, with existing cash on-hand, cash flow from operations and its available credit facilities.
     At June 30, 2008, the Corporation has $2,718 million of available borrowing capacity under its $3 billion syndicated revolving credit facility (the Revolver), substantially all of which is committed through May 2012. Outstanding borrowings under the Revolver were $281 million at June 30, 2008 compared with $220 million at December 31, 2007. In addition, at June 30, 2008, the Corporation had $336 million in outstanding borrowings and $534 million of outstanding letters of credit under its 364-day asset-backed credit facility (the Asset-backed Facility) compared with $250 million and $534 million, respectively, at December 31, 2007. The borrowings and outstanding letters of credit under the Asset-backed Facility were collateralized by approximately $1,360 million of Marketing and Refining accounts receivable. These receivables are not available to pay the general obligations of the Corporation before satisfaction of the Corporation’s obligations under the Asset-backed Facility. At June 30, 2008, the Corporation classified an aggregate of $536 million of borrowings under short-term credit facilities and the Asset-backed Facility as long-term debt, based on the available capacity under the Revolver.
     The Corporation also has a shelf registration under which it may issue additional debt securities, warrants, common stock or preferred stock.
     Outstanding letters of credit were as follows (in millions):
                 
         June 30,          December 31,  
    2008     2007  
Lines of Credit
               
Revolving credit facility
  $ 1     $  
Asset backed credit facility
    534       534  
Committed short-term letter of credit facilities
    2,218       995  
Uncommitted lines
    1,219       1,510  
 
           
 
  $ 3,972     $ 3,039  
 
           
     A loan agreement covenant based on the Corporation’s debt to equity ratio allows the Corporation to borrow up to an additional $14.6 billion for the construction or acquisition of assets at June 30, 2008. The Corporation has the ability to borrow up to an additional $2.8 billion of secured debt at June 30, 2008 under the loan agreement covenants.
Off-Balance Sheet Arrangements
     The Corporation has leveraged leases not included in its balance sheet, primarily related to retail gasoline stations that the Corporation operates. The net present value of these leases is $491 million at June 30, 2008. The Corporation’s June 30, 2008 debt to capitalization ratio would increase from 26.2% to 28.5% if the leases were included as debt.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Liquidity and Capital Resources (continued)
     The Corporation guarantees the payment of up to 50% of HOVENSA’s crude oil purchases from suppliers other than PDVSA. At June 30, 2008, the guarantee amounted to $192 million. This amount fluctuates based on the volume of crude oil purchased and related prices. In addition, the Corporation has agreed to provide funding up to a maximum of $15 million to the extent HOVENSA does not have funds to meet its senior debt obligations.
Change in Accounting Policies
     Effective January 1, 2008, the Corporation adopted Financial Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements (FAS 157) for financial assets and liabilities that are required to be measured at fair value. FAS 157 established a framework for measuring fair value and requires disclosure of a fair value hierarchy (see Note 8, “Fair Value Measurements”). The impact of adopting FAS 157 was not material to the Corporation’s results of operations. Upon adoption, the Corporation recorded a reduction in the net deferred hedge losses reflected in accumulated other comprehensive income, which increased stockholders’ equity by approximately $190 million, after income taxes.
Recently Issued Accounting Standard
     In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (FAS 160). FAS 160 changes the accounting for and reporting of noncontrolling interests in a subsidiary. The Corporation is currently evaluating the impact of adoption on its financial statements and, as required, will adopt the provisions of FAS 160 effective January 1, 2009.
Market Risk Disclosure
     In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the prices of crude oil, natural gas, refined products and electricity, as well as to changes in interest rates and foreign currency values. In the disclosures that follow, these operations are referred to as non-trading activities. The Corporation also has trading operations, principally through a 50% voting interest in a trading partnership. These activities are also exposed to commodity risks primarily related to the prices of crude oil, natural gas and refined products.
Instruments: The Corporation primarily uses forward commodity contracts, foreign exchange forward contracts, futures, swaps, options and energy commodity based securities in its non-trading and trading activities. Generally, these contracts are widely traded instruments with standardized terms.
Value-at-Risk: The Corporation uses value-at-risk to monitor and control commodity risk within its trading and non-trading activities. The value-at-risk model uses historical simulation and the results represent the potential loss in fair value over one day at a 95% confidence level. The model captures both first and second order sensitivities for options. The potential change in fair value based on commodity price risk is presented in the non-trading and trading sections below.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Market Risk Disclosure (continued)
Non-Trading: The Corporation’s Exploration and Production segment uses futures and swaps to fix the selling prices of a portion of its future production and the related gains or losses are an integral part of its selling prices. Following is a summary of the Corporation’s outstanding Brent crude oil hedges at June 30, 2008:
                 
    Average   Thousands
    Selling   of Barrels
    Price   per Day
Maturities
               
2008
  $ 25.56       24  
2009
    25.54       24  
2010
    25.78       24  
2011
    26.37       24  
2012
    26.90       24  
     There were no hedges of WTI crude oil at June 30, 2008. At June 30, 2008, the Corporation also had outstanding United Kingdom natural gas hedges of 50 thousand Mcf per day through October 2008 at an average selling price of approximately $11.05 per Mcf. As market conditions change, the Corporation may adjust its hedge positions. The Corporation also markets energy commodities including refined petroleum products, natural gas and electricity. The Corporation uses derivatives to manage the risk in its marketing activities.
     Accumulated other comprehensive income (loss) at June 30, 2008 includes after-tax unrealized deferred losses of $2,138 million primarily related to crude oil contracts used as hedges of Exploration and Production sales. The pre-tax amount of deferred hedge losses is reflected in accounts payable and the related income tax benefits are recorded as deferred tax assets on the balance sheet.
     The Corporation estimates that at June 30, 2008, the value-at-risk for commodity related derivatives used in non-trading activities was $135 million compared with $72 million at December 31, 2007. The results may vary from time to time as hedge levels change.
Trading: In trading activities, the Corporation is exposed to changes in crude oil, natural gas and refined product prices. The trading partnership, in which the Corporation has a 50% voting interest, trades energy commodities and derivatives. The accounts of the partnership are consolidated with those of the Corporation. The Corporation also takes trading positions for its own account. The information that follows represents 100% of the trading partnership and the Corporation’s proprietary trading accounts.
     Total net realized losses for the first half of 2008 amounted to $259 million ($60 million of realized gains for the first half of 2007). The following table provides an assessment of the factors affecting the changes in fair value of trading activities (in millions):
                 
    2008     2007  
Fair value of contracts outstanding at January 1
  $ 154     $ 365  
Change in fair value of contracts outstanding at the beginning of the year and still outstanding at June 30
    511       (28 )
Reversal of fair value for contracts closed during the period
    22       (30 )
Fair value of contracts entered into during the period and still outstanding
    (339 )     119  
 
           
Fair value of contracts outstanding at June 30
  $ 348     $ 426  
 
           

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PART I — FINANCIAL INFORMATION (CONT’D.)
Market Risk Disclosure (continued)
     The Corporation uses observable market values for determining the fair value of its trading instruments. In cases where actively quoted prices are not available, other external sources are used which incorporate information about commodity prices in actively quoted markets, quoted prices in less active markets and other market fundamental analysis. Internal estimates are based on internal models incorporating underlying market information such as commodity volatilities and correlations. The Corporation’s risk management department regularly compares valuations to independent sources and models. The following table summarizes the sources of fair values of derivatives used in the Corporation’s trading activities at June 30, 2008 (in millions):
                                         
            Instruments Maturing  
                                    2011  
                                    and  
Source of Fair Value   Total     2008     2009     2010     beyond  
Prices actively quoted
  $ 264     $ (413 )   $ 523     $ 159     $ (5 )
Other external sources
    83       91       (15 )           7  
Internal estimates
    1       1                    
 
                             
Total
  $ 348     $ (321 )   $ 508     $ 159     $ 2  
 
                             
     The Corporation estimates that at June 30, 2008, the value-at-risk for trading activities, including commodities, was $11 million compared with $10 million at December 31, 2007. The results may change from time to time as strategies change to capture potential market rate movements.
     The following table summarizes the fair values of net receivables relating to the Corporation’s trading activities and the credit ratings of counterparties at June 30, 2008 (in millions):
         
Investment grade determined by outside sources
  $ 533  
Investment grade determined internally (*)
    178  
Less than investment grade
    152  
 
     
Fair value of net receivables outstanding at end of period
  $ 863  
 
     
 
    (*) Based on information provided by counterparties and other available sources.
Forward-Looking Information
     Certain sections of Management’s Discussion and Analysis of Results of Operations and Financial Condition, including references to the Corporation’s future results of operations and financial position, liquidity and capital resources, capital expenditures, oil and gas production, tax rates, debt repayment, hedging, derivative and market risk disclosures and off-balance sheet arrangements include forward-looking information. Forward-looking disclosures are based on the Corporation’s current understanding and assessment of these activities and reasonable assumptions about the future. Actual results may differ from these disclosures because of changes in market conditions, government actions and other factors.

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PART I — FINANCIAL INFORMATION (CONT’D.)
Item 3.   Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is presented under Item 2, “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Market Risk Disclosure.”
Item 4.   Controls and Procedures
Based upon their evaluation of the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rules 13a — 15(e) and 15d — 15(e)) as of June 30, 2008, John B. Hess, Chief Executive Officer, and John P. Rielly, Chief Financial Officer, concluded that these disclosure controls and procedures were effective as of June 30, 2008.
There was no change in internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 in the quarter ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 4.   Submission of Matters to a Vote of Security Holders
     The Annual Meeting of Stockholders of the Registrant was held on May 7, 2008. The Inspectors of Election reported that 284,667,801 shares of common stock of the Registrant were represented in person or by proxy at the meeting, constituting 88% of the votes entitled to be cast. At the meeting, stockholders voted on:
    The election of five nominees for the Board of Directors for the three-year term expiring in 2011.
 
    The ratification of the selection by the Audit Committee of the Board of Directors of Ernst & Young LLP as the independent registered public accounting firm of the Registrant for the fiscal year ending December 31, 2008.
 
    A proposal to amend the Registrant’s Certificate of Incorporation and By-Laws to declassify the Board of Directors.
 
    A proposal to approve the Registrant’s 2008 Long-Term Incentive Plan.
     With respect to the election of directors, the inspector of election reported as follows:
                   
      For   Withholding Authority
Name     Nominee Listed   to Vote For Nominee Listed
Edith E. Holiday
      277,728,970       6,938,831  
John H. Mullin
      282,525,666       2,142,135  
John J. O’Connor
      281,368,147       3,299,654  
F. Borden Walker
      281,368,758       3,299,043  
Robert N. Wilson
      280,435,182       4,232,619  
     The inspectors reported that 281,043,829 votes were cast for the ratification of the selection of Ernst & Young LLP as the independent auditors of the Registrant for the fiscal year ending December 31, 2008, 1,923,224 votes were cast against said ratification and holders of 1,700,748 votes abstained.
     The inspectors reported that 245,741,757 votes were cast for the proposal to amend the certificate of incorporation and by-laws to declassify the board, constituting 76.25% of the outstanding shares and less than the 80% required for amendment, 37,112,017 votes were cast against said proposal and holders of 1,814,027 votes abstained. There were no broker non-votes with respect to this matter.
     The inspectors reported that 255,032,299 votes were cast for the approval of the 2008 Long-Term Incentive Plan, 14,432,410 votes were cast against said proposal and holders of 1,798,830 votes abstained. There were 13,404,262 broker non-votes with respect to this matter.

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PART II — OTHER INFORMATION (CONT’D.)
Item 6.   Exhibits and Reports on Form 8-K
     a. Exhibits
  10(1)   2008 Long-Term Incentive Plan, incorporated by reference to Annex B to Registrant’s definitive proxy statement filed on March 27, 2008.
 
  10(2)   Forms of awards under Registrant’s 2008 Long-Term Incentive Plan.
 
  31(1)   Certification required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a))
 
  31(2)   Certification required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a))
 
  32(1)   Certification required by Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)
 
  32(2)   Certification required by Rule 13a-14(b) (17 CFR 240.13a-14(b)) or Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)
     b. Reports on Form 8-K
     During the quarter ended June 30, 2008, Registrant filed one report on Form 8-K:
  (i)   Filing dated April 30, 2008 reporting under Items 2.02 and 9.01 a news release dated April 30, 2008 reporting results for the first quarter of 2008.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
             
    HESS CORPORATION    
    (REGISTRANT)    
 
           
 
  By   /s/ John B. Hess
 
   
 
      JOHN B. HESS    
 
      CHAIRMAN OF THE BOARD AND    
 
      CHIEF EXECUTIVE OFFICER    
 
           
 
  By   /s/ John P. Rielly    
 
           
 
      JOHN P. RIELLY    
 
      SENIOR VICE PRESIDENT AND    
 
      CHIEF FINANCIAL OFFICER    
Date: August 6, 2008

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