Hess: Key Takeaways From The Third Quarter

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About: Hess Corporation (HES)
by: Fun Trading
Summary

Adjusted income was an after-tax net income of $123 million, or $0.38 per common share, in the third quarter of 2018 compared to a net loss of $324 million.

The Liza Phase 1 development, which was sanctioned in June of last year, is well-advanced with the first production of gross 120K Boep/d expected by early 2020.

HES may continue to weaken due to oil prices. I recommend a cautious accumulation at $52 and lower.

Courtesy: Hess Corporation.

Investment Strategy

Hess Corporation (HES) is a US-based independent energy company engaged in the exploration and production of crude oil and natural gas worldwide with strong revenue originated from the USA (onshore and offshore) which represented 63.6% of the total output in 3Q'18.

Market capitalization is $15.97 billion, which places the company as a large-cap stock. Hess Corporation appeals to long-term investors because of its broad revenue streams and its ability to enhance total returns through dividend ($1.00 per share or a yield of 1.86%).

Again, the general strategy remains the same. HES is a solid long-term choice, especially for an investor who wants to participate in the oil sector by using the recent oil prices significant weakness. The company is in the process of developing a massive offshore oil project called the Stabroek project in Guyana, in collaboration with Exxon Mobil (XOM), which will produce commercially (Phase I) in 2020.

John B. Hess, the CEO, said in the 3Q'18 conference call:

"We delivered another strong quarter of execution with higher production and guidance and lower unit costs and guidance while keeping capital and exploratory expenditures flat with guidance for the year and generating a profit for the quarter."

Hess Corporation Assets (Onshore and Offshore)

1 - Deepwater Gulf of Mexico: Stampede

The Stampede field is one of the most significant undeveloped areas in the Gulf of Mexico (300-350 MMBOE gross recoverable).

Hess is the operator and has 25% WI. The company achieved first oil in January 2018. The New Penn State well brought online March 2018.

2 - Onshore U.S. - Bakken

Hess has a substantial presence in the Bakken. The company plans to add a fifth rig in the third quarter and a sixth rig in the fourth quarter of this year.

Hess controls ~554K acres as an operator with 75% WI. Hess is the most active operator in the Middle Bakken.

On April 4, 2017, the company launched a successful IPO called Hess Midstream Partners LP (HESM) that generated ~$175 million net to Hess Corp.

The Midstream segment had net income of $30 million in the third quarter of 2018, compared to net income of $12 million in the third quarter of 2017.

3 - Offshore Asia Pacific. Gulf of Thailand: Malaysia Gas - North Malay Basin & JDA

HES has a strong relationship with Petronas. The company and its partners made nine discoveries.

This NG gas segment is also part of the core framework that will support the company for its turnaround.

4 - Offshore South America: Guyana/Suriname. A project of substantial financial implication for HES: a game changer

The new project in Guyana (Stabroek block) - Phase I to be completed in 2020 - will provide a robust future production expected to boost revenues and free cash flow significantly by 2023, even assuming $50 per barrel.

Source: HES Presentation September 2018

Also, HES owns 33% in the Block 59 and Block 42 adjacent to Stabroek, in Suriname.

Again, this critical project is what makes Hess Corp., a new long-term investment in my opinion. The Stabroek project and potentially the Block 59 and Block 42 adjacent can be called a real game changer for Hess which will impact revenue for the next decade. In the conference call, we learned that:

"In Suriname, Kosmos announced earlier this month that the Pontoenoe well on Block 42 in which Hess has a one-third interest failed to encounter commercial hydrocarbons and the well was expensed in the third quarter. The partners are studying the results of the well and will reprocess seismic to improve our understanding of the subsurface and regional geology."

The Liza Phase 1 development which was sanctioned in June of last year is well-advanced with the first production of gross 120K Boep/d expected by early 2020.

On the side note: The recent Hammerhead discovery "is a massive accumulation, a very thick sand package. In fact, it's the thickest single sand package that we drilled on the block. It's a very large structure so it's going to require some additional appraisal."

Hess Corp. 3Q'18 Balance sheet and Trend - The Raw Numbers

Hess Energy 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18
Total Revenues in $ Billion 1.54 1.94 1.69 1.39 0.99 1.22 1.20 1.39

1.25

1.20 1.64 1.29 1.39 1.57 1.83
Net Income available to common in $ Million −389 −567 −279 −1,821 −509 −392 −339 −4,892 −324 −449 -624 -2,689 -117 -142 52
EBITDA $ Million 314 405 533 −1214 119 204 262 −857 512 398 -1,729 -1,751 528 569 712
EPS diluted in $/share −1.37 −1.99 −0.98 −6.43 −1.72 −1.29 −1.12 −15.81 −1.07 −1.46 -2.02 -8.57 -0.38 -0.48 0.14
Cash from operations in $ Million 436 640 282 623 −60 197 332 326 349 165 88 343 210 425 423
Quarterly CapEx in $ Billion 1,311 1,112 963 925 620 615 529 487 390 480 513 554 400 493 540
Free Cash Flow in $ Million −875 −472 −681 −312 −680 −418 −197 −161 −41 −315 -425 -211 -190 -68 -117
Cash and cash equivalent $ Billion 1.51 0.93 3.01 2.72 3.56 3.10 3.53 2.73 2.69 2.49 2.53 4.85 3.73 2.91 3.00
Long-term Debt in $ Billion 5.98 5.96 6.55 6.59 6.59 6.55 7.34 6.81 6.79 6.73 6.71 6.98 6.57 6.44 6.69
Dividend per share in $ 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
Shares outstanding (diluted) in Million 283.5 284.3 283.5 283.0 299.8 313.2 313.2 313.5 313.9 314.4 314.5 313.5 309.5 297.5 294.3
Oil Production 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18
Oil Equivalent Production in K Boep/d 361 391 380 375 350 313 314 322 311 300 299 300 255 265 297
Global liquid price ($/b) 45.04 56.40 43.43 46.37 28.50 41.91 41.50 39.20 48.61 45.74 46.97 55.44 61.82 66.28 66.08
Global Natural gas price ($/M Btu) 4.74 4.49 4.02 4.16 3.42 3.58 3.20 3.37 3.20 3.19 3.35 3.69 3.86 4.12

4.11

Note: Company filings and Morningstar

Trends, Charts, and commentary: Revenues, Free Cash Flow and Upstream/downstream Production

1 - Quarterly revenues and other income

Note: Total revenues indicated above are "Sales and other revenues" not including gain on asset sale net and other. For the 3Q'18, total revenues including all items were $1,828 million and revenues from sales and other operating revenues were $1,793 million.

In the third quarter of 2018, Hess Corp. posted a net gain to common shareholders of $52 million, or $0.14 per diluted share, up from a net loss of $624 million, or $2.02 per diluted share, in the year-ago quarter. (per Morningstar)

Adjusted income was an after-tax net income of $123 million, or $0.38 per common share, in the third quarter of 2018 compared to a net loss of $324 million, or $1.07 per share, in the third quarter 2017.

The company said in the conference call:

"Compared to 2017, our improved third quarter financial results primarily reflect higher realized crude oil selling prices combined with lower operating costs and DD&A expense."

2 - Free cash flow (not including divestiture) and net debt

HES is not generating positive free cash flow and it is a definitive weakness due to ongoing massive capital expenditure (primarily due to the large CapEx needed for the Guyana-Stabroek project in which the company owns 30%).

Despite this weakness, HES is paying around $295 million annually for the dividend and is also implementing an aggressive share repurchase program. The company said in the press release 3Q'18, "In the third quarter of 2018, the Corporation purchased a total of $250 million of common shares, bringing total share repurchases under the Corporation’s previously announced $1.5 billion repurchase program to $1.25 billion." Hess Corp. plans to purchase another $250 million of ordinary shares in the fourth quarter.

However, net debt (including the Midstream) was up this quarter to $3.69 billion. Net Debt to Capitalization Ratio is now 20%.

Excluding Midstream, cash and cash equivalents were $2.6 billion, total liquidity was $7 billion including available committed credit facilities, and debt was $5.7 billion at September 30, 2018. Cash flow from operations before working capital changes and items affecting comparability was $738 million in the third quarter.

In the conference call, John P. Rielly noted:

"We also entered into a sale and leaseback agreement for a floating, storage and offloading vessel to handle produced condensate at our North Malay Basin project and received net proceeds of approximately $130 million. The gross lease obligation is reported as debt on our balance sheet and we will recover our partner share through future joint interest billings over the lease term."

3 - Quarterly Production

The production was nearly 10% above the midpoint of HES guidance range of 250K to 260K net Boep/d for the quarter and reflects strong performance across our portfolio. Production in details below:

However, net production was lower in the third quarter of 2018, compared to the third quarter of 2017 as shown in the graph above.

In the Gulf of Mexico, net production came in above guidance at 71K Boep/d, reflecting the return of production from the Conger Field in July, minimal weather-related downtime, and strong operating performance across all assets.

On August 31, Hess Corp. completed the sale of its JV interests in the Utica shale play to Ascent Resources for approximately $400 million.

The fourth-quarter net production is expected to be lower by approximately 10K net Boep/d relative to the third quarter.

Note: Oil price includes the impact of Hedging

Full-year guidance

Full-year 2018 production, excluding Libya, is now expected to be approximately 255K Boep/d, which is the upper end of the company previous guidance range.

The midstream tariff is projected to be approximately $170 million for the fourth quarter and roughly $655 million for the full year of 2018 which is up from previous guidance of about $635 million to $650 million.

Conclusion and Technical Analysis

Hess Corporation has significantly improved its financial situation, and it is a paramount element to consider if we want to look at HES as a long-term investment. This progress was possible because oil prices have increased to a very comfortable level. However, oil prices entered a bearish cycle starting in October which is not a good omen for the company's future revenues.

Chart Brent Crude Oil Spot Price data by

YCharts

One important takeaway is that Hess' future financial prosperity is based on two primary elements.

First, the company will need oil prices at about $55 per barrel. For calendar 2019, the company has purchased WTI put options with a notional amount of 95K Bop/d that have a monthly floor price of $60 per barrel. It is reassuring.

Second, the Stabroek project in Guyana and potentially the Block 59 and the Block 42 adjacent in Suriname are vital for Hess and are about to deliver a significant production boost starting 2020, reaching 750K Boep/d gross by 2025.

However, the next component that will decide how the stock's near-future price will perform in December and the first quarter of 2019 is, of course, the oil prices. I am quite bearish short term and expect more pain for oil. We have entered a bearish cycle, and it will have to run its course. However, the next few months will be extremely volatile, but the trend will be down unless OPEC and NOPEC can find a way to agree on a massive production reduction which is not likely.

Hess Corporation - Technical Analysis

HES is forming a descending triangle pattern with long-term resistance at $63.50 (I recommend selling at least 30% of your position at this level unless oil prices turn bullish). Line support is a little different than what Finviz is indicating in the chart above. It is created by the low, established in early September, and the recent low of last week at around $52 (I recommend buying a little at this level depending on the price of oil). I recommend HES as a hold now.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.