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Integrated oil company Hess Corporation (HES - Analyst Report) reported adjusted fourth quarter 2012 earnings of $1.20 per share, up 2.6% from $1.17 reported in the fourth quarter of 2011. The increase was mainly attributable to higher volumes in the Bakken and resumption of operations in Libya that resulted in higher oil production. However, earnings missed the Zacks Consensus Estimate of $1.26.

Full-year 2012 earnings came at $5.87 per share, up 0.5% from year-earlier earnings of $5.84 per share. The earnings missed the Zacks Consensus Estimate of $5.95.

Total revenue increased 9.9% year over year to $9,698 million in the quarter from $8,824 million but failed to meet the Zacks Consensus Estimate of $10,276 million.

For 2012, total revenue increased 1.3% to reach $38,373 million from $37,871 million in 2011 and beat the Zacks Consensus Estimate of $38,254 million.

Operational Performance

Exploration and Production (E&P): The segment posted profits of $517 million in the fourth quarter, down 1.9% from the year-earlier profit of $527 million.

Quarterly hydrocarbon production was 396 thousand barrels of oil equivalent per day (MBOE/d), up 7.9% year over year.

Crude oil production was 275 thousand barrels per day (up from 251 thousand barrels per day in the year-ago quarter), natural gas liquids production totaled 21 thousand barrels (up from 18 thousand barrels) while natural gas output was 601 thousand cubic feet (Mcf) (up from 590 Mcf).

Worldwide crude oil realization per barrel of $84.46 (including the impact of hedging) decreased 5.8% year over year. Worldwide natural gas prices (including the impact of hedging) upped 4.4% year over year to $6.60 per Mcf.

At the end of 2012, oil and gas proved reserves were 1,553 million barrels of oil equivalent compared with 1,573 million barrels at the end of 2011. During 2012, the Corporation added 214 million barrels of oil equivalent to proved reserves. Subject to final review, these additions, replaced approximately 141% of the Corporation’s 2012 production, resulting in a reserve life of 10.3 years.

Marketing and Refining: The segment posted earnings of $159 million in the fourth quarter, improving significantly from a loss of $561 million in the year-earlier period.

Refinery operations generated an income of $8 million compared with a loss of $598 million in the year-ago quarter. However, Marketing earnings were $152 million, up from the year-ago earnings of $48 million. Trading activities generated a loss of $1 million versus a loss of $11 million in the year-ago period.

Financials

Quarterly net cash flow from operations was $1,570 million. Hess’ capital expenditures totaled $1,914 million, of which approximately $1,887 million were expended toward E&P.

As of December 31, 2012, the company had approximately $642 million in cash and $8,111 million in long-term debt (including current maturities). Hess’ debt-to-capitalization ratio at the end of the quarter was 27.0% versus 26.9% in the preceding quarter.

Outlook

New York-based Hess Corporation is 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. 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 agreed to the sale terms of its stake in the Beryl area fields and the Scottish Area Gas Evacuation System with Royal Dutch Shell Plc (RDS.A - Analyst Report).  Hess also inked an agreement with the London-listed oil and gas exploration company Egdon Resources to acquire a considerable stake in the Mairy permit onshore France. These deals are 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.

Hess remains on track with its strategy of becoming purely an E&P company while boosting its shareholders value, much like ConocoPhillips (COP - Analyst Report) and Marathon Oil Corporation (MRO - Analyst Report). In this regard, it may be mentioned that Hess plans to pursue the sale of 20 oil storage terminals in the U.S. and the Caribbean and exit its refining business.

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.

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

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