Hess Corporation HES is well poised to grow on the back of robust offshore Guyana oil reserves and solid midstream business. However, its levered balance sheet is concerning.
Hess Corp. — with a market cap of $13.6 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.
In the last four quarters, it beat earnings estimates twice, met once and missed on another occasion, with an average surprise of 2.9%.
Hess Corporation Price and EPS Surprise
Hess Corporation price-eps-surprise | Hess Corporation Quote
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 much more than 8 billion barrels of oil equivalent from its 18 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 750,000 barrels of oil per day (bpd) by 2025. Hess is expected to record significant production from the Guyana prospect in the coming years. Despite a delay in operations owing to the coronavirus pandemic, the company expects the Liza Phase 2 development to remain on schedule and commence production in 2022.
It expects 2020 exploration and production capital and exploration expenditure to be $1.9 billion, down 37% from the original guidance of $3 billion. Despite lower capital spending, the company expects production volumes to increase on operational efficiency. It has raised its 2020 net production guidance, excluding Libya, to 330,000 barrels of oil equivalent per day (Boe/d) from the earlier projection of 320,000 Boe/d. From the prolific Bakken shale play, the company expects 2020 net production of 185,000 Boe/d versus the earlier projection of 175,000 Boe/d.
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. Moreover, it has hedged 150 thousand barrels of oil per day for 2020 to safeguard itself from oil price declines.
Its midstream assets, which enable it to earn stable fee-based revenues, are a huge positive. From the midstream business, the company generated adjusted net earnings of $51 million for the second quarter, significantly up from $35 million a year ago. The rise can be attributed to higher throughput volumes.
However, there are a few factors that are impeding the growth of the stock lately.
As of Jun 30, 2020, the company had $1,646 million in cash & cash equivalents, which declined from $2,080 million at the end of first-quarter 2020. Its long-term debt rose to $8,205 million at second quarter-end from $8,191 million in the first quarter. Debt to capitalization at quarter-end was 55.5%, reflecting significant debt exposure.
The noticeable revenue decline in the June quarter and unfavorable upstream business scenario due to the coronavirus pandemic raise questions regarding the explorer’s ability to pay the portion of its long-term debt that is due for payment after 12 months. Oil prices are now in the bearish territory owing to coronavirus-hit global energy demand and oversupplied commodity market. Weak crude prices, which are unlikely to recover soon, are thereby affecting the company’s upstream business.
To Sum Up
Despite significant prospects as mentioned above, high debt burden and weak commodity prices are concerns. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Some better-ranked players in the energy space include EOG Resources, Inc. EOG, Equinor ASA EQNR and Bloom Energy Corporation BE. While Equinor sports a Zacks Rank #1 (Strong Buy), EOG Resources and Bloom Energy hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
EOG Resources’ sales for 2021 are expected to jump 18.8% year over year.
Equinor’s bottom line for 2021 is expected to skyrocket 125% year over year.
Bloom Energy’ bottom line for 2021 is expected to rise 71.2% year over year.
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