Hess Stands at Neutral

We are maintaining a Neutral recommendation on Hess Corporation (HES - Analyst Report), reflecting its strong asset base and impressive financial profile, partially offset by weak year-end 2011 results.

New York-based Hess Corporation is an integrated energy company engaged in oil and gas exploration, production and refining as well as marketing. We believe that the company holds strong exploration upside potential in Brazil, Ghana, Libya and offshore Australia. Hess’ holding in the Bakken acreage also holds a lot of promise.

Hess, in recent times, has turned its attention to the development of unconventional oil (including sources like oil shales, coal-based liquid supplies etc.) and gas resources. Following the build-up of position in the North American Bakken oil field for unconventional oil, we foresee Hess as pursuing unconventional gas extraction in the Marcellus Shale play.

We also remain optimistic about Hess’ long-term oil and gas production growth target of 3−5%. We expect this growth to be in the range of 4–7% through 2017, based on an expected ramp-up in activities at Bakken, Eagle Ford and Marcellus in the U.S. as well as in other overseas regions. In an attempt to mitigate future risks, the company has also hedged approximately 45% of its 2012 forecast oil production (or 120,000 barrels of oil per day) at an average Brent price of $107.70 per barrel.

However, these positive aspects are somewhat mitigated by the company’s lower-than-expected fourth quarter and final year 2011 results. Hess’ earnings and revenue figures missed our projection and crude oil production declined year over year.

Moreover, during the fourth quarter, Hess entered into a deal with Statoil ASA (STO - Analyst Report) for the sale of its 3% interest in the Snohvit LNG project in Norway for $170 million. We remain apprehensive about the fact that this disposition will likely impact the company’s 2012 production level.

Hess’ sensitivity to gas/oil price volatility, as well as drilling results, costs, geo-political risks and project delays, also limit the upside potential of its shares.

Hess currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Read the full analyst report on HES

Read the full analyst report on STO