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Will Industry Challenges Overshadow Hess' Growth Prospects? - Analyst Blog

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On May 11, 2015, we issued an updated research report on Hess CorporationHES , an integrated energy company engaged in oil and gas Exploration & Production (E&P) and refining as well as marketing.

Hess is undergoing 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 low-risk unconventionals, and a smaller, more focused exploration portfolio. The company has divested its downstream businesses, including energy marketing, terminals, retail marketing and refining operations.

Hess' energy trading partnership (HETCO) is also scheduled for sale in early 2015. Given the global economic slowdown and new refining capacity in the world market, the aforesaid decisions will help enhance Hess' shareholder value.

Hess' priority remains investments in future growth with a balanced approach toward unconventionals, exploitation and exploration. Such investment is 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 buyback as well as dividend.

For 2015, the company expects capital expenditure of $4.7 billion, roughly 16% less than $5.6 billion spent in 2014. Recently, it divested the 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.

Hess' oil exposure further increases bearishness on the stock as the commodity has plunged over 50% since last June. With crude prices anticipated to remain weak throughout 2015, financials would stay depressed.

Other key risks for Hess are project execution, decline in yield due to unscheduled downtime, higher royalties and taxes, unsuccessful drilling results and limited access to energy resources. Additionally, considerable political unrest, instability and major security issues in Libya make production unpredictable despite oil supply glut. The tentative price environment reduces Hess' ability to generate cash flow and consequently, production and reserve growth. The company's earnings depend on the strength of refining margins in the U.S.

Stocks to Consider

Hess currently has a Zacks Rank #3 (Hold). Better-ranked stocks from the same space are Energy Transfer Equity, L.P. ETE , CNOOC Ltd. CEO and Pembina Pipeline Corporation PBA . All these stocks sport 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

CNOOC LTD ADR (CEO): Free Stock Analysis Report

ENERGY TRAN EQT (ETE): Free Stock Analysis Report

PEMBINA PIPELN (PBA): 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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