Hess Beats, Volumes Up

Hess Corp. (HES - Analyst Report) reported third-quarter earnings of 74 cents per diluted share, easily beating the Zacks Consensus Estimate of 54 cents. However, the result was much lower than the year-ago earnings of $2.37. Before adjusting for one-time items, the company posted earnings per share of $1.05. 

The Exploration and Production (E&P) segment posted a $397 million profit in the quarter, compared to $699 million in the year-earlier quarter. Results were negatively impacted by significant declines in commodity prices and other incremental costs. 

Quarterly crude oil and natural gas production, on an oil equivalent barrel basis, was 420,000 barrels of oil equivalent per day (MBOE/d) - 74% liquids and 26% natural gas - up more than 16% year-over-year and more than 3% sequentially. 

Worldwide crude oil realization per barrel during the quarter was $56.07 (including the impact of hedging), up 14% sequentially, but down approximately 40% year over year. Worldwide natural gas prices (including the impact of hedging) increased approximately 1% sequentially, but were down 39% year over year to $4.60 per thousand cubic feet (Mcf). 

The Marketing and Refining segment posted earnings of $38 million, compared to $161 million in the year-earlier quarter, primarily due to lower margins. Hess’ share from the HOVENSA refinery (located on the island of St. Croix in the U.S. Virgin Islands) was a $49 million loss, compared to a $52 million profit in the year-earlier quarter. 

Quarterly net cash flow from operations was $534 million. Hess’ capital expenditures totaled $668 million, of which approximately 97% went to the E&P business. At the end of the quarter, the company had approximately $957 million in cash and $4.4 billion in long-term debt, reflecting a debt-to-capitalization ratio of about 25.2%. 

Despite the significantly lower commodity price realizations on a year over year basis, Hess has beaten our estimate. We particularly like the company’s upstream momentum on the back of large inventory of exploration and development projects. 

Hess’ improving fundamentals and exposure to areas with high resource potential such as Brazil, Ghana and offshore Australia position the stock to outperform its peers. While future projects have the potential to add value to share price, we feel the risk/reward trade-off does not favor the company, especially in light of weak commodity prices. 

We are keeping our Neutral rating unchanged for the stock.