Hess Corporation ( HES Quick Quote HES - Free Report) is well poised to grow on the back of robust offshore Guyana oil reserves and solid midstream business.
Hess Corp — with a market cap of $20 billion — is a global integrated energy company. The New York-based company engages in exploration, production, development, transportation, and purchase and sale of crude oil, natural gas liquids, and natural gas. Moreover, it is involved in gathering, compressing, and processing natural gas as well as fractionating natural gas liquids (NGLs). Additionally, Hess offers gathering, terminaling, loading and transporting operations for both crude oil and NGLs.
Courtesy of solid prospects, this Zacks Rank #3 (Hold) stock is worth holding on to at the moment.
What’s Driving the Stock?
The company made world-class oil discoveries at the Stabroek Block, located off the coast of Guyana. It estimates gross resources of more than 6 billion barrels of oil equivalent from its 15 promising discoveries in the Stabroek Block. The discoveries made so far on the block have the potential to add five FPSO vessels that will be capable of yielding around 750,000 barrels of oil per day by 2025. Hess is expected to record significant production from the Guyana prospect in the coming years. Notably, production from the Liza Phase 1 development started in December 2019, ahead of schedule.
Hess is among the leading producers of crude in the Bakken oil shale play in North Dakota. With interests in the best areas of the play, the energy firm expects its daily production from Bakken to increase to 200 thousand barrels of oil equivalent by 2021. Notably, through 2019, Hess expects net production volumes — excluding Libya — to be around 285,000 barrels of oil equivalent per day (Boe/D), higher than the previous guided range of 275,000-280,000 Boe/D and indicating a significant increase from 117,000 BoE/D in 2018.
Even though the majority of the company’s total production is oil (53.2% in third-quarter 2019), Hess is not affected by an unfavorable oil price environment, as breakeven prices in its operating plays are considerably lower than the current commodity price level. Hess has implemented a cost-reduction program, through which the company will likely boost profitability and cash margins. From 2017 through 2023, it estimates cash unit production costs to decline 30%. This will provide a northbound thrust to the company’s bottom line.
Its midstream assets are also a huge positive. While North America is currently suffering from a dearth of takeaway capacity and waiting for several midstream projects to come online, Hess’ midstream assets enable it to earn stable fee-based revenues. The company generated adjusted net earnings of $39 million from this business in third-quarter 2019, up from $30 million a year ago.
However, there are a few factors that are impeding the growth of the stock lately.
As of Sep 30, 2019, its long-term debt was $6.5 billion and cashtotaled $1.9 billion. The company’s debt-to-capitalization ratio of 40% is higher than that of the industry’s 35%. Hence, its balance sheet is more levered than the industry it belongs to.
Hess expects 2019 capital expenditure to be $2.7 billion, suggesting an increase from $2.1 billion in 2018. The company’s projection for increased oil and natural gas production volumes is supported by higher capital spending. However, this reflects its inefficiency, as major energy players are spending low capital for higher volumes. Moreover, the company incurred a loss of 32 cents per share in third-quarter 2019 due to increased operating expenses and lower commodity price realization.
Over the past two years, the firm has been consistently paying a lower dividend yield than the industry it belongs to. Currently, its dividend yield of 1.5% is below the industry’s 4.4%.
To Sum Up
Despite significant prospects as mentioned above, lack of capital efficiency and reliance on debt are concerns for the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Hess Corporation Price and Consensus Key Picks
Some better-ranked stocks in the energy sector include CNX Resources Corporation
CNX, Antero Midstream Corporation AM and Frank's International N.V. FI, each carrying a Zacks Rank #2 (Buy). You can see . the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
CNX Resources’ earnings for the current year have witnessed four upward revisions in the past 60 days versus no movement in the opposite direction.
Antero Midstream’s bottom line for the current quarter is expected to skyrocket 130% year over year.
Frank's International’s bottom line for 2019 is expected to rise 23.8% year over year.
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