Dear Shareholders, Oil and gas will be needed for decades to come and are fundamental to an affordable, just and secure energy transition. The world has a massive dual challenge – we will require approximately 20% more energy globally by 2050 and over the same period we need to reach net zero emissions. At the end of last year, the International Energy Agency (IEA) published its latest World Energy Outlook that offers three scenarios for addressing this dual challenge. In all three IEA scenarios, the world is facing a structural supply deficit in energy, and significantly more investment is required both in oil and gas and in renewable energy.
According to the IEA, a reasonable estimate for the global oil and gas investment required to meet demand growth is approximately $500 billion each year for the next 10 years, as compared with approximately $300 billion to $400 billion invested annually in the last 5 years. In terms of renewable energy, an annual investment of between $3 trillion and $4 trillion is needed each year for the next 10 years – significantly more than last year’s investment of approximately $1.2 trillion. Business leaders and government officials must have a sober understanding of this investment challenge, especially since capital is becoming more scarce and more expensive in the current financial environment. The energy transition is going to take a long time, cost a lot of money and require many technologies that do not exist today. To have an orderly energy transition, policymakers must have climate literacy, energy literacy and economic literacy.
In a world that will need affordable and secure oil and gas resources for decades to come, Hess is in a strong position. Our strategy has been and continues to be to grow our resource base, deliver a low cost of supply and generate industry leading cash flow growth – and at the same time maintain our industry leadership in environmental, social and governance performance and disclosure. Our successful execution of this strategy has uniquely positioned our company to deliver significant value to shareholders for years to come, both by growing intrinsic value and by growing cash returns.
In terms of cash flow growth, we have an industry leading rate of change and duration story that provides a unique value proposition. Our company is positioned to grow our cash flow by approximately 25% annually between 2022 and 2027 based on a Brent oil price of $75 per barrel – more than twice as fast as our top line growth. By investing only in high return, low cost opportunities, we have built a differentiated and balanced portfolio focused on Guyana, the Bakken, the deepwater Gulf of Mexico and Southeast Asia.
As our portfolio becomes increasingly free cash flow positive, we are committed to returning up to 75% of our annual free cash flow to shareholders, with the remainder going to strengthen the balance sheet by increasing our cash position or further reducing our debt to ensure that we can fund our high return investment opportunities through the cycle. Executing this strategy in 2022, we decreased our debt by $500 million, increased our regular quarterly dividend by 50% and completed a $650 million stock repurchase program.
Looking ahead, we plan to continue increasing our regular dividend to a level that is attractive to income-oriented investors, but sustainable in a low oil price environment. As our free cash flow generation steadily increases in future years, share repurchases are expected to represent a growing proportion of our return of capital.
Key to our strategy is Guyana, one of the largest oil provinces discovered in the world over the last 20 years. On the Stabroek Block, where Hess has a 30% interest and ExxonMobil is the operator, we have had more than 30 discoveries, including nine in 2022, underpinning a gross discovered recoverable resource estimate of more than 11 billion barrels of oil equivalent. Our four sanctioned oil developments on the block have world class economics with a Brent breakeven oil price of between $25 and $35 per barrel. Combined gross production from our first two offshore developments at the Liza Field averaged more than 360,000 barrels of oil per day in the fourth quarter of 2022, and our third development remains on schedule for startup by the end of this year. We currently have line of sight to six floating production, storage and offloading vessels (FPSOs) in 2027 with a gross production capacity of more than 1.2 million barrels of oil per day and the potential for up to 10 FPSOs to develop the discovered resources on the block.
The Bakken, our largest operated asset, remains an important part of our portfolio with a robust inventory of high return future drilling locations. We plan to continue operating a four rig program, which will enable us to generate significant free cash flow, lower our unit cash costs and further optimize our infrastructure.
COMMITMENT TO SHAREHOLDERS
We are excited about the future and will continue to execute our strategy that has positioned our company to deliver significant value for our shareholders for years to come. We are grateful for the ongoing dedication of our employees, the wise counsel of our Directors and the continued support of our shareholders.
Turning to our 2022 financial results, our adjusted net income was $2.176 billion, compared with adjusted net income of $677 million in 2021, primarily due to higher realized prices and higher production from Guyana. Cash flow from operations, before changes in working capital, was $5.1 billion, compared with $3.0 billion in the prior year. Proved reserves at the end of 2022 stood at approximately 1.26 billion barrels of oil equivalent, compared with 1.31 billion barrels of oil equivalent at December 31, 2021. Proved reserve additions and net revisions in 2022 totaled 184 million barrels of oil equivalent, primarily from Guyana, which included sanctioning of the Yellowtail development, and the Bakken. Excluding asset sales, we replaced 144% of 2022 production at a finding and development cost of approximately $14.80 per barrel of oil equivalent.
SUSTAINABILITY
As we continue to execute our strategy, our commitment to sustainability will remain a top priority. Our Board of Directors is climate change literate and actively engaged in overseeing Hess’ sustainability practices. We are committed to transparency, and our strategy and reporting are closely aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures.
We support the aim of the Paris Agreement, and our Board and senior leadership have set aggressive targets for greenhouse gas (GHG) emissions reduction with a commitment to achieve net zero Scope 1 and 2 GHG emissions on a net equity basis by 2050. After our company significantly outperformed our five year emissions reduction targets for 2020, we announced new five year GHG emissions reduction targets for 2025, which are to reduce operated Scope 1 and 2 GHG emissions intensity by approximately 50% and methane emissions intensity by approximately 50% from 2017 and to eliminate routine flaring from our operations by the end of 2025.
Saving the world’s forests and the important role they play as natural carbon sinks is foundational to the Paris Agreement’s aim of limiting the global average temperature rise to well below 2°C. At the end of 2022, we announced an agreement to purchase high quality, independently verified REDD+ carbon credits for a minimum of $750 million between 2022 and 2032 directly from the government of Guyana. This agreement will serve to support Guyana’s efforts to protect the country’s vast forests and provide capital to improve the lives of Guyana’s citizens through investments made by the government as part of Guyana’s Low Carbon Development Strategy 2030, with 15% of proceeds directed to indigenous communities. In addition, we are contributing to groundbreaking work by the Salk Institute to develop plants with larger root systems that are capable of absorbing and storing potentially billions of tons of carbon per year from the atmosphere.
We test the long term resilience of Hess’ portfolio in a lower carbon economy using energy supply and demand scenarios developed by the IEA. Hess’ strategic priorities are consistent with the IEA’s less than 2°C scenarios, which continue to envision a meaningful role for oil and natural gas as part of the global energy mix through 2050. More information about our annual scenario planning is provided in our sustainability report.
We are honored to have been recognized throughout 2022 as an industry leader in our environmental, social and governance performance and disclosure and proud of the actions we are taking to make a positive social impact in the communities where we do business. In keeping with our Hess Values, we are committed to diversity, equity and inclusion, which we believe creates value for all of our stakeholders, and to the safety and wellbeing of our workforce and our communities.
James H. Quigley
Chairman of the Board
April 2023
John B. Hess
Chief Executive Officer
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