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Updated Report on Hess Exploration

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On Mar 13, 2014, we issued an updated research report on Hess Exploration (HES). Hess is executing a transition from an integrated oil and gas company to a predominantly E&P entity, thereby shifting its growth approach from high-impact exploration to lower-risk unconventionals and a smaller, more focused exploration portfolio.

Strong growth throughout the Bakken oil shale play, along with robust holdings in the Utica Shale, is expected to lift Hess’ earnings, cash flow and valuation in the foreseeable future. Going forward, we find the company’s strong exploration upside in Ghana and continued improvement in Bakken productivity as holding a lot of promise.

This would help the company to consistently deliver 5–8% year-over-year production growth in the near future. The company’s asset divestiture program, along with its significant progress in multi-year transformation, is also likely to reduce its financing needs.

Hess reported mixed financial results for the fourth quarter of 2013 with the top line beating the Zacks Consensus Estimate but the bottom line missing it. Hess failed to deliver positive earnings surprise in two of the last four quarters, with an average beat of 0.19%.

The company’s new strategy of concentrating on high-impact exploration areas compared to low risk areas in more stable regions has consequently led to increased spending on Bakken as well as North Malay Basin, Valhall and Tubular Bells. Bakken recorded a notable production growth of 20% in 2013, while experiencing a reduction in drilling and completion costs by more than 26%.

For 2014, this region is expected to average 80–90 thousand barrels of oil equivalent per day (Mboe/d), up 19–34% from 2013 levels. The exploration budget for 2014 is focused primarily on three regions: the Gulf of Mexico; Southeast Asia, particularly Malaysia; and the West Africa play, including Ghana.

Hess’ total proceeds from the asset sale venture amounted to $7.8 billion in 2013. The company is in the process of shedding its upstream assets in Thailand, as well as retail and the trading businesses. The amount raised through asset sale is expected to help fund E&P investments.

These major shifts in reshaping its portfolio will likely be completed by the end of 2014. However, the company said it will continue to look at all opportunities to enhance long-term shareholder value.

Hess remains on track with its multi-year transformation program. However, to support its capital expenditures through 2014, the company remains highly dependent on major asset sales. Again, this year, Hess will likely register a downfall in both its parameters, i.e., production and reserves. As of year-end 2013, Hess’ proved reserves tally stood at 1.44 billion oil-equivalent barrels, down 7.1% from the 2012 level. Hence, the company’s growth and returns picture will likely be hindered by the asset sale programs in the near term.

Stocks That Warrant a Look

Hess carries a Zacks Rank #3 (Neutral). Other stocks in the oil and gas industry include Helmerich & Payne, Inc. (HP - Free Report) , Warren Resources Inc. and Patterson-UTI Energy Inc. (PTEN - Free Report) . All three have a Zacks Rank #1 (Strong Buy).

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