Hess to Offload ACG Stakes

Hess Corporation ( HES - Analyst Report ) plans to shed its stake in oil fields in Azerbaijan and an associated pipeline to India’s ONGC Videsh Ltd. The transaction − expected to close by early 2013 and subject to the Indian and other government and regulatory approvals − is worth $1 billion.

The deal comprises Hess’ 2.72% interest in the Azeri, Chirag and Guneshli fields (ACG) in Azerbaijan and 2.36% interest in the associated BTC pipeline. The ACG field − located in the Caspian Sea approximately 100 kilometers east of Baku − commenced production in 1997. It is operated by the British energy giant BP Plc ( BP - Analyst Report ) .

New York-based Hess stated that this divestiture is in line with its strategy to offload mature as well as minor interest holding properties in order to restructure its portfolio. With this deal, the company has completed nearly $2 billion of asset sale agreements till date.

A recent report from Azerbaijan International Operating Company (AIOC), operated by BP, states that the ACG oil field produced 16.8 million tons, or 682,154 barrels of oil per day (BPD) during the period January-June 2012 compared with 19.0 million tons produced in the year-ago period. This marks a sharp 11.6% decline in output, not witnessed since 2007, mainly attributable to maintenance work on some drilling programs and refineries.

ACG is the largest oil and gas field complex in Azerbaijan with a potential ultimate recovery of more than 5 billion barrels. BP holds a 34.1% stake, while the other associate partners including Chevron Corp. ( CVX - Analyst Report ) , SOCAR, INPEX, Statoil ASA ( STO - Analyst Report ) , ExxonMobil Corporation ( XOM - Analyst Report ) , TPAO, Devon Energy Corporation ( DVN - Analyst Report ) and ITOCHU hold 10.2%, 10%, 10%, 8.6%, 8%, 6.8%, 5.6, and 3.9% stakes, respectively.

Hess’s second quarter profit dropped on an annualized basis as its exploration and production segment reported a 13.8% decrease in profit in response to lower worldwide crude oil price realization. Again, the company intends to divest assets of around $1–$2 billion in the forthcoming quarters that is likely to reduce the output level further, thereby affecting its top line.

However, Hess’ new strategy of concentrating on high-impact exploration areas compared to low risk areas, its exposure to areas with high resource potential (such as Brazil, Ghana, Libya and offshore Australia), strong growth throughout the Bakken oil shale play, along with robust holdings in the Eagle Ford Shale and the Utica Shale, are expected to lift earnings, cash flow and valuation.

Considering the situation, we expect the stock to perform in line with other industry players and the broader market and maintain our long-term Neutral recommendation for Hess. The company retains a Zacks #3 Rank (equivalent to a short-term Hold rating).