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Hess' Unconventional Portfolio Strong; Weak Oil Price a Drag

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On Dec 22, 2015, we issued an updated research report on Hess CorporationHES , a global exploration and production (E&P) company.

Hess' priority remains investment in future growth with a balanced approach between unconventional, exploitation and exploration. Such investments are expected to realize an average annual production growth of 5-8% through 2017 and beyond. With growing free cash flow over the years, Hess will be able to increase its share buybacks as well as dividend payouts. For 2015, the company expects capital expenditure at $4.7 billion, roughly 16% less than $5.6 billion spent in 2014. Recently, Hess divested its retail business and is in the process of shedding its upstream assets in Thailand and the trading business. The amount raised through asset sale is expected to help fund E&P investments. However, the company will continue to look at all opportunities to enhance long-term shareholder value.

We expect unconventional oil (including sources like oil shales, coal-based liquid supplies) and gas extraction (using non-traditional techniques) to play important roles in the world energy mix in the long run. Following the build-up of position in the North American Bakken oil field for unconventional oil, Hess is pursuing unconventional gas in the Marcellus Shale play. Hess' exposures to Eagle Ford and Utica shales as well as several global development projects (such as Ghana, Brunei, North Sea, Gulf of Mexico, Southeast Asia and Kurdistan) are likely to be growth drivers for 2015 and beyond.

Hess increased its 2015 production guidance to 370-375 mboed from the prior guidance of 360-370 mboed. This is a result of the company's better-than-expected operating results from increased efficiency and higher-than-expected cuts in capital expenditure as well as cost reduction.

Hess remains on track with its multi-year transformation program. However, to support its capital expenditures through 2015, the company continues to be highly dependent on major asset sales. Hence, the company's growth and returns picture will likely be hindered by the asset sale programs in the near term. Moreover, in 2014, Hess registered a fall in its reserves. As of year-end 2014, Hess' proved reserves tally was 1.43 billion oil-equivalent barrels, down 0.4% from the 2013 level. The current scenario continues to be gloomy and depicts lower reserve and production in 2015.

Further, Hess has reduced its 2016 capital expenditure by about 27% to the range of $2.9 billion to $3.1 billion. Therefore, production levels are also expected to decrease and are estimated to range between 330 thousand barrels of oil equivalent per day (mboed) and 350 mboed. The Bakken is estimated to have four rigs operational in 2016 compared with an average of 8.5 rigs in 2015. The drastic fall in oil prices has affected all oil majors and the impact can be witnessed in the reduced level of operations and cost cuts.

Zacks Rank and Stocks to Consider

Hess carries a Zacks Rank #3 (Hold). Some better-ranked players from the energy sector are Energy Transfer Equity, L.P. ETE , ReneSola Ltd. SOL and Boardwalk Pipeline Partners, LP BWP . Each of these stocks sports a Zacks Rank #1 (Strong Buy).

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

HESS CORP (HES): Free Stock Analysis Report

RENESOLA LT-ADR (SOL): Free Stock Analysis Report

ENERGY TRAN EQT (ETE): Free Stock Analysis Report

BOARDWALK PIPLN (BWP): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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