Hess: Positive Production Outlook

New York-based Hess Corporation (HES - Analyst Report) is an integrated oil company engaged in oil and gas exploration and production (E&P) and refining as well as marketing. The company's E&P activities are concentrated in the U.S., Europe, Africa and Asia. Hess' exposure to areas with high resource potential, such as Brazil, Ghana and offshore Australia, make its near-term production growth outlook positive.

We are optimistic about the company's forward drilling program, which we expect will include several appraisal wells on the WA-390-P block in offshore Australia (with 100% interest) following last year's successful exploration program. The company also has an appraisal well in offshore Libya towards year-end.

We continue to see upstream momentum on the back of the company's large inventory of exploration and development projects. In the recently-completed quarter, total production increased nearly 4% from the year-earlier level to 407,000 barrels of oil equivalent per day. We believe that the stronger earnings and production outlook could potentially be the catalyst to reverse the impact of negative macro backdrop.

However, there is significant resource potential from new discoveries, and the E&P business is inherently risky, often with equal successes and failures. While future projects have the potential to add value to share price, we feel the risk/reward potential is not in the company's favor, especially in light of the weak commodity prices. While we see the stock performing in line with the broader market, we rate it as Neutral.

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