Continental Resources (NYSE:CLR) recently upgraded its estimate of total recoverable reserves in the Bakken. CLR proved out the third bench (TF3) of the Three Forks formation with the Charlotte 3-22H well. This flowed 953 boepd at 1700 psi on a 28/64 choke in its initial one-day test period. The well has since been producing for 15 days (as of December 3, 2012), and its performance compares favorably with other first bench (TF1) and second bench (TF2) producing Three Forks wells. The Three Forks has four benches. All are expected to produce. All are below the Bakken layers.
CLR, one of the biggest and earliest developers in the Bakken estimated in 2010 that the Bakken / Three Forks would eventually yield 24B recoverable boe. This estimate included 20B barrels of oil and 4B boe of natural gas. That estimate assumed 577 billion barrels of original oil in place. CLR just raised its estimate of barrels of oil in place to 903 billion barrels. CLR now estimates that there are between 27B and 45B recoverable barrels of oil in the Bakken. This is a 57% increase over the previous estimate; and it may still be a low estimate with continually improving recovery techniques.
This 57% estimate increase is roughly applicable to Hess's (NYSE:HES) Bakken holdings too (about 800,000 net acres). It could translate into 1B or more recoverable boe for Hess. This should help Hess's stock price rise. Further Hess's year-over-year production increase in the Bakken from 32,000 boepd at Q3 end in 2011 to 62,000 boepd at Q3 end in 2012 is impressive. With Bakken growth and Hess's Libyan assets coming back online (23,000 boepd so far), Hess had 1H 2012 production of 413,000 boe/d. This too should help Hess's stock price rise. A chart of Hess's Bakken production growth over the last three years is below.
Another Hess new discovery is the new Ghana prospect. Hess announced on December 12, 2012 that it had made a significant new discovery at the Deepwater Tano/Cape Three Points license. Hess encountered 245 ft. of net play in two separate Turonian intervals at its new Pecan-1 well, which was drilled to a total depth of 15,420 ft. in a water depth of 8,245 ft. This is Hess's fifth discovery in this new exploration block.
The previously announced discoveries in the block are: Almond (53 net feet of oil play), Beech (146 net feet of oil play), Hickory North (98 net feet of gas condensate play), and Paradise (120 net feet of oil play and 295 net feet of gas condensate play). Further exploration activities are planned for 2013. This is sure to provide a good amount of future production. It has only begun to be explored.
Hess has many great exploration and development opportunities beyond the above. Its Equatorial Guinea Block G (West Africa) already produces 45-50 Mboe/d (2012). 4D seismic indicates there are many more drilling opportunities there. Hess has about 200,000 net acres in the Ohio Utica shale that it is in the early stages of developing. Hess has the Valhall/Hod fields in the Norwegian North Sea with net production of 15-20 Mboe/d in 2012. Hess's goal is to reach about 75 Mboe/d net here. Hess has a new natural gas JDA in Malaysia-Thailand in the area in which natural gas prices are indexed to oil. Plus, keep in mind that natural gas powered cars are far more prevalent in China than they are in the US. This field currently has net production of more than 250 MMcf/d. It has much higher potential. Hess has an interest in another Malaysian field - North Malay Basin. It is expected to have net production of 125 MMcf/d in 2015.
Hess has the Tubular Bells wells in the Gulf of Mexico. It expects about 25 Mboe/d peak annual production from these. In Australia Hess has 13 natural gas discoveries so far in WA-390-P. It has a minor interest in a promising development in offshore Brunei. Hess has the promising Ness Deep development in the offshore Gulf of Mexico. It has one development area - Pony, and two production areas - Llano and Shenzi - nearby. This should make infrastructure builds more convenient and less expensive. It has the Dinarta and Shakrok developments in Kurdistan. These have had 70% exploration success in the last five years. More than 5 Bboe have been discovered. Hess has about 45,500 net acres in the Eagle Ford shale. Hess has more than 6.2 million gross acres in the Beetaloo Basin in Australia. Seismic is underway.
Hess has about 1.5 million net acres in the Canning Basin in Australia. It has an aeromagnetic survey scheduled in 2012. Many expect Australia to provide huge natural gas and oil finds. The above unexplored fields are likely to prove great developments in the future. They should ensure Hess's success in a relatively safe area of the world. I have left out many of Hess's producing areas and undoubtedly a few of Hess's new development areas. However, you should be able to see that Hess's future is all but assured. Hess is truly a VALUE.
The 1H 2012 production charts give investors an idea of how safe Hess's production is. The charts below show that Hess's production is 75% oil, which has been much more price stable in recent years. Plus, much of Hess's natural gas production is in areas of the world in which natural gas prices are directly tied to oil prices.
Some investors have been upset about Hess spending on all of its new development fields. Hess has been trying to address this. It had made over $850 million in asset sales as of September 2012; and it had $1B-$2B in further sales underway. 2013 capital expenditures are planned to be significantly below 2012 levels. Capital expenditures and cash flow are expected to be near balance in 2014. Yet, Hess expects to grow production considerably. Plus, with its then greater production, Hess should be able to fund even greater development. The above is the mark of a conservative and successful company. There is very little doubt that Hess is going to succeed. Much of its future development will be in low-risk areas such as the Bakken, the Utica, the Eagle Ford, Australian fields, European fields, and other low-risk areas. Hess should prove to be a great long-term buy.
In Q3 2012, Hess showed good financial results. Net Income was $557 million versus $298 million in Q3 2011. Excluding items affecting comparability, net income was $495 million versus $379 million in Q3 2011. Oil and gas production increased to 402,000 boe/d from 344,000 boe/d in Q3 2011. Keep in mind that Hess sold assets during that time, so the result is actually slightly better than that. Net cash from operating activities increased to $1,862 million from $1,022 million in Q3 2011. For those who love cash flow, this is impressive. Marketing and Refining generated income of $53 million in Q3 2012 versus a loss of -$23 million in Q3 2011. Production from Libya in Q3 2012 averaged 23,000 boe/d versus none in Q3 2011 due to civil unrest.
On the downside, NGLs selling prices dropped from $63.64 per barrel in Q3 2011 to $41.71 per barrel in Q3 2012. The only good thing about this was that Hess produced only 19,000 barrels/d of NGLs worldwide in Q3 2012 (17,000 bpd in Q3 2011). In contrast, the prices of oil and gas after hedging were very stable year over year. The reason for the drastic fall in NGLs prices was likely due to the difficulty hedging currently. NGLs futures prices have been suffering from backwardation. Plus the market is relatively small. The backwardation may be about to correct itself. All told Hess's performance was excellent in a slightly troubled environment.
Longer term, the future performance of Hess looks promising. It is selling some non-core assets in order to raise money for exploration and development. This should keep it from increasing its debt too much. It has plenty of great development properties. Currently Hess has a total debt/total equity ratio of 27.52%. This is better than the industry average of 31.54%. With an Interest Coverage (mrq) of 11.6x, it should have little trouble paying its bills for quite some time. By 2014, its revenues should be considerably higher due to production growth. This will make paying for further development that much easier.
Hess has an average analysts' five-year EPS estimate per annum of 6.17% and a past five-year reserves CAGR of 6.6%. These are both good steady numbers. They are not as high as some fast growers. However, they do compare well to those of the more staid large cap oil and gas companies such as Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), ConocoPhillips (NYSE:COP), and Marathon Oil (NYSE:MRO). The table below provides some of the fundamental data of the companies for value comparison.
5 yr EPS growth estimate per annum
Avg. Analysts' Recommendation
Total Debt/Total Capital (mrq)
Net Margin (TTM)
Hess has a much lower dividend. However, it has one of the highest five year EPS growth forecasts per annum. It has the lowest FPE and the lowest Price/Book ratio. The Price/Book ratio of 0.90x for a large cap oil and gas company is very low. Hess's list of development properties above substantiates this. This makes Hess perhaps the best long term value buy. When an investor is facing troubled times as we are now, investing in great value stocks can be a good strategy. Such stocks always make comebacks quickly if they go down in tough times. The company expects its net margin to improve over time, especially with its new strategy of developing in low risk areas. The only negative is the dividend, which is small (0.74%). Otherwise, an investor has to love this stock.
The two-year chart of Hess provides some technical direction for a trade.
The slow stochastic sub chart shows that Hess is near overbought levels. The main chart shows that it has until recently been in a downtrend. It now looks like it may be about to break out of that downtrend. It has recently set a higher low; and it may be near to setting a higher high. This would confirm a breakout of the downtrend. Hess looks like a stock an investor would want to own longer term. It has floundered for several years, but it seems about to break out of that funk shortly. It is a buy. However, an astute investor will likely want to average in around the fiscal cliff. Even if the Congress avoids the fiscal cliff, there will likely be a slight US recession in 2013. At best, growth will slow to 0% to 1% in 1H 2013. An astute investor will want to catch at least some of the stock price near or at its low of this time.
Note: Much of the fundamental data above is from Yahoo Finance and TD Ameritrade.
Good Luck Trading.