Hess Beats Consensus, Falls Y/Y

Integrated oil company Hess Corporation (HES - Analyst Report) reported adjusted second quarter 2012 earnings of $1.72 per share, which beat the Zacks Consensus Estimate of $1.38. However, the quarterly result was below the adjusted year-earlier earnings of $1.78, mainly on account of lower oil price realization.

Total revenue declined 5.1% year over year to $9,309 million in the quarter, but surpassed the Zacks Consensus Estimate of $8,726 million.

Operational Performance

Exploration and Production (E&P): The segment posted profits of $644 million in the second quarter, 13.8% below the year-earlier profit of $747 million.

Quarterly hydrocarbon production was 429 thousand barrels of oil equivalent per day (MBOE/d), up 15.3% year over year.

Crude oil production was 304 thousand barrels per day (up from 248 thousand barrels per day in the year-ago quarter), natural gas liquids production totaled 19 thousand barrels (up from 17 thousand barrels) while natural gas output was 639 thousand cubic feet (Mcf) (down from 643 Mcf).

Worldwide crude oil realization per barrel of $86.86 (including the impact of hedging) showed a drop of 10.6% year over year. Worldwide natural gas prices (including the impact of hedging) upped 0.2% year over year to $5.94 per Mcf.

Marketing and Refining: The segment posted earnings of $8 million in the second quarter, up significantly from a loss of $39 million in the year-earlier period.

Refinery operations generated an income of $8 million compared with a loss of $44 million in the year-ago quarter. However, Marketing earnings were $18 million, down from the year-ago earnings of $28 million. Trading activities incurred a loss of $18 million versus a loss of $23 million in the year-ago period.

Financials

Quarterly net cash flow from operations was $1,240 million. Hess’ capital expenditures totaled $2,078 million in the reported quarter, of which approximately $2,036 million were expended toward E&P.

As of June 30, 2012, the company had approximately $409 million in cash and $7,845 million in long-term debt (including current maturities). Hess’ debt-to-capitalization ratio at the end of the quarter was 28.2% versus 26.7% in the preceding quarter.

Outlook

We have maintained our Neutral recommendation on New York-based Hess Corporation, an integrated energy company engaged in oil and gas exploration, production and refining as well as marketing.

The quarterly production grew on an annualized basis and we believe that Hess has a competitive advantage over its peers from its improving fundamentals, commodity price leverage and exposure to areas with high resource potential like Brazil, Ghana, Libya and offshore Australia.

Recently, Hess struck an asset sale deal with Royal Dutch Shell Plc (RDS.A - Analyst Report) related to its stake in an oilfield off the Scottish coast. This is in sync with its strategy to balance high risk, high return offshore exploration with the expected lower risk and long reserve life, liquids-rich alternative resource plays onshore U.S.

We believe that the company’s strong exploration upside in Ghana and continued improvement in Bakken productivity hold a lot of promise.

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

We are maintaining our long-term Neutral recommendation on the stock. Hess retains a Zacks #3 Rank, which translates into a short-term Hold rating.