## FINANCIAL REVIEW 

Amerada Hess Corporation and Consolidated Subsidiaries 

## ManagementGLYPH<213>s Discussion and Analysis of Results of Operations and Financial Condition 

## Executive Overview 

The Corporation is a global integrated energy company that operates in two segments, exploration and production (E&P) and refining and marketing (R&M). The E&P segment explores for, produces and sells crude oil and natural gas. The R&M segment manufactures, trades and markets refined petroleum and other energy products. 

The Corporation’s long-term goal for the E&P segment is to generate profitable and sustainable growth by transitioning the asset portfolio to longer life, lower cost fields, bringing new field developments onstream and pursuing a focused, high impact exploration program. During the past three years the Corporation has reshaped its E&P asset portfolio by: 

• Acquiring exploration, development and production assets in West Africa and Southeast Asia. 

• Selling higher cost properties predominantly in the shallow water Gulf of Mexico and the North Sea. 

• Exchanging interests in mature producing assets for increased interests in development stage assets in the joint development area of Malaysia and Thailand and deepwater Gulf of Mexico. 

The asset sales and exchanges have reduced near-term production which increased unit operating costs. Produc- tion declined from 451,000 barrels of oil equivalent per day in 2002 to 373,000 barrels of oil equivalent per day in 2003. Over 60% of the reduction resulted from the absence of production from assets sold or exchanged. The remainder of the decrease was due to natural declines and poorer than expected performance of certain fields in the United States and Equatorial Guinea. Production is expected to decline in 2004 by approximately 13% due to the 2003 asset sales and swaps and natural declines in our remaining fields. 

The Corporation is currently funding twelve development projects that are expected to provide over 100,000 barrels of oil equivalent per day of new production in 2006, offsetting natural declines in existing fields and providing net overall production growth. In addition, since 2002, the Corporation has participated in two deepwater Gulf of Mexico discoveries that may provide additional production beyond 2006. As a result of the development projects, the Corporation presently estimates that production will be slightly higher in 2005 than in 2004 and production will increase further in 2006. While 

the Corporation expects these developments to be com- pleted as currently scheduled, development projects may be subject to unforeseen events, such as technical complexi- ties, delays in governmental sanction and political instability. 

The lower production in 2004 is not expected to result in higher 2004 unit operating costs due to cost reduction initiatives begun in 2003 and the portfolio rationalization. The Corporation believes these factors, plus increasing production from new developments, will reduce unit costs in the future. 

The portfolio reshaping has reduced near-term cash flows from operations. In response, the Corporation has hedged approximately 70% and 45% of its 2004 and 2005 world- wide crude oil production to provide secure cash flow to fund the development projects. Upon completion of the pro- jects, the Corporation expects the percentage of hedged volumes to decrease. 

The R&M segment’s financial results improved significantly in 2003, principally reflecting higher margins and increased sales volumes. The Corporation’s strategic goals for R&M are to maximize financial returns from existing assets and to generate free cash flow. The Corporation may opportunistically add retail marketing sites in its East Coast marketing area. 

The Corporation’s liquidity and financial position were sig- nificantly improved in 2003. At December 31, 2002, the Cor- poration’s debt was $5 billion and its debt to capitalization ratio was 54%. During 2003, the Corporation generated cash flow of $545 million from asset sales and $653 million from the issuance of mandatory convertible preferred stock. These actions, combined with additional free cash flow from profitable operations after funding capital expenditures, resulted in debt reduction of $1.1 billion. Year-end debt was $3.9 billion and the debt to capitalization ratio improved to 42.5%. The Corporation has $221 million of debt maturities over the next three years, and had $518 million of cash on hand at December 31, 2003. 

