Hess Corporation: Key Takeaways From The Fourth Quarter 2018

Summary

• This quarter was a good one, despite a concerning drop in the oil prices the past few months. Adjusted income was an after-tax net loss of $77 million.
• The company delivered production of 250K net Boep/d in 2018 (excluding Libya) which was within the original production guidance 2018 of 245K to 255K net Boep/d.
• Hess Corporation is a compelling case from a long-term investor's perspective. However, it is perhaps reasonable to be a little patient before turning bullish on the stock.

Courtesy: Hess Corporation

Investment Strategy

Hess Corporation (NYSE:HES) is a US-based independent oil and gas producer with strong revenue primarily originated from the USA (onshore and offshore), which represented 67.1% of the total output in 4Q'18.

Hess Corporation can be considered long-term investment because of its diversified revenue streams and its ability to enhance total returns through dividend ($1.00 per share or a yield of 1.8%).

Two primary topics can describe the present and future of Hess's business model.

First, a strong presence in the Bakken shale with production expected to increase to 200K Boe/d by 2021. Greg Hill said in the conference call:

For the full-year 2019, we forecast our Bakken production to average between 135,000 and 145,000 net barrels of oil equivalent per day approximately 20% above 2018 levels. In the first quarter of 2019, we expect Bakken production to average approximately 130,000 to 135,000 net barrels of oil equivalent per day. In 2019, we plan to drill approximately 170 wells and bring approximately 160 new wells online, compared to 121 wells drilled and 104 wells brought online in 2018.

Second, an ongoing effort focusing on the company's Guyana massive offshore project conducted in collaboration with Exxon Mobil (XOM), which will begin producing commercially (Phase I) in 2020.

Hess Guyana Exploration, which is a subsidiary of Hess Corp., owns 30% working interest, while Exxon Mobil is the operator of the field and owns 45% working interests.

After Hess and Exxon announced their 10th discovery in the Stabroek block called the Pluma-1 well early December of 2018, the field is estimated holding now 5 billion barrels of oil and gas (resources). The company expects that it can install up to five production platforms in the block over the coming years with a total production of 750k Boe/d by 2025.

John B. Hess, the CEO, said in the 4Q'18 conference call:

Through 2025, we plan to allocate about 75% of our capital expenditures to our Guyana and Bakken assets, two of the highest return investment opportunities in the industry.

Second, we have built a focused portfolio with a combination of short-cycle and long-cycle investment opportunities with Guyana and Bakken as our growth engines and the deepwater Gulf of Mexico and the Gulf of Thailand is our cash engines.

Hess Corp. 4Q'18 Balance sheet and Trend - The Raw Numbers

Hess Energy	3Q'16	4Q'16	1Q'17	2Q'17	3Q'17	4Q'17	1Q'18	2Q'18	3Q'18	4Q'18
Total Revenues in $ Billion	1.20	1.39	1.25	1.20	1.64	1.29	1.39	1.57	1.83	1.68
Net Income available to common in $ Million	−339	−4,892	−324	−449	-624	-2,689	-117	-142	-53	-4
EBITDA $ Million	262	−857	512	398	-1,729	-1,751	528	569	712	632
EPS diluted in $/share	−1.12	−15.81	−1.07	−1.46	-2.02	-8.57	-0.38	-0.48	-0.18	-0.05
Cash from operations in $ Million	332	326	349	165	88	343	210	425	423	881
Quarterly CapEx in $ Billion	529	487	390	480	513	554	400	493	540	664
Free Cash Flow in $ Million	−197	−161	−41	−315	-425	-211	-190	-68	-117	217
Cash and cash equivalent $ Billion	3.53	2.73	2.69	2.49	2.53	4.85	3.73	2.91	3.00	2.69
Long-term Debt in $ Billion	7.34	6.81	6.79	6.73	6.71	6.98	6.57	6.44	6.69	6.67
Dividend per share in $	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	313.2	313.5	313.9	314.4	314.5	313.5	309.5	297.5	294.3	291,5
Oil Production	3Q'16	4Q'16	1Q'17	2Q'17	3Q'17	4Q'17	1Q'18	2Q'18	3Q'18	4Q'18
Oil Equivalent Production in K Boe/d	314	322	311	300	299	300	255	265	297	289
Global liquid price ($/b)	41.50	39.20	48.61	45.74	46.97	55.44	61.82	66.28	66.08	55,24
Global Natural gas price ($/M Btu)	3.20	3.37	3.20	3.19	3.35	3.69	3.86	4.12	4.11	4,82

Click to enlarge

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 4Q'18, total revenues, including all items were $1,682 million, and revenues from sales and other operating revenues were $1,653 million.

In the fourth quarter of 2018, Hess Corp. posted a net loss to common shareholders of $4 million, or $0.05 per diluted share, up from a net loss of $2,677 million, or $8.57 per diluted share, compared to the same quarter last year.

Adjusted income was an after-tax net loss of $77 million, or $0.31 per common share, in the fourth quarter of 2018. However, the midstream segment had net income of $32 million in the fourth quarter of 2018.

John Rielly said in the conference call:

We incurred a net loss of $4 million in the fourth quarter, compared to a net loss of $42 million in the third quarter. Excluding items affecting comparability of earnings between periods, results in the fourth quarter were a net loss of $77 million, compared to net income of $29 million in the previous quarter, resulting primarily from lower realized crude oil prices.

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

HES managed to generate positive free cash flow this quarter, and it is definitive progress. The company's ongoing massive capital expenditure (primarily due to the large CapEx needed for the Guyana-Stabroek project in which the company owns 30%) has been draining the company for many years now, and it is important to celebrate this achievement. Free cash flow for the fourth quarter of 2018 was $217 million compared to -211 million the same quarter a year ago. Free cash flow for the year 2018 is minus $158 million.

Meanwhile, HES is paying around $292 million annually for the dividend and is also implementing an aggressive share repurchase program. The company said in the press release 4Q'18, "The Corporation purchased $250 million in common stock to complete our previously announced $1.5 billion share repurchase program".

However, net debt (including the Midstream) was up this quarter to $3.98 billion. Net Debt to Capitalization Ratio is now 38% compared to 36.1% a year ago.

Cash and cash equivalents were $2.69 billion, total liquidity was $7 billion, including available committed credit facilities, and total debt was $6.672 billion at December 31, 2018. Cash flow from operations before working capital changes was $584 million in the fourth quarter.

3 - Quarterly Production

The company produced 250K net Boe/d in 2018 (excluding Libya), which was within the original production guidance 2018 of 245K to 255K net barrels of oil equivalent per day.

CapEx 2018 was $2,097 million consistent with the guidance of $2.1 billion. It was achieved despite the sale of the company interest in the JV in the Utica shale play completed on August 31, 2018, for approximately $400 million.

Production in details below:

However, net production was lower sequentially in the fourth quarter of 2018, despite a good production in the Bakken.

Greg Hill said in the conference call:

Based on these results, we expect production to grow to approximately 200,000 net barrels of oil equivalent per day by 2021, after which the asset should generate approximately $750 million of free cash flow annually at current prices through the middle of the next decade.

In the Gulf of Mexico, net production came in at 68K Boe/d.

Full-year guidance 2019

For the full-year 2019, production will average between 270K and 280K net barrels of oil equivalent per day (excluding Libya,) or approximately 10% above 2018 production. In the first quarter of 2019, the company forecast production to average about 270K net Boe/d.

Conclusion and Technical Analysis

Hess Corporation is a compelling story viewed from a long-term investor's perspective. However, it is perhaps reasonable to be a little patient before turning bullish on the stock. We are still in a ramp-up phase.

The company offers a definitive potential with its two main production engines, which are the Bakken shale and the Stabroek project offshore Guyana.

However, while the possibility is there, the company is still on its way to become a significant producer who generates free cash flow regularly. From an investor's perspective, "on its way" means large spending that will affect return until the investment is paying off and stable free cash flow can be realized, if all goes smoothly.

John Hess said in the conference call:

We are adding an exciting inflection point, transitioning from an investment phase in 2019 to a free cash flow generation phase beginning in 2020 with a start-up of the Liza Phase 1 development offshore Guyana, followed by the Bakken growing to 200,000 barrels of oil equivalent per day in 2021. And then the Liza Phase 2 start-up offshore Guyana by mid-2022 with an additional ship planed in Guyana for each year thereafter through 2025.

Large offshore projects require a great deal of CapEx upfront which makes the company more vulnerable to oil prices volatility as we experience the last quarter of 2018. As we can see in my chart below, the global oil price realized in 4Q'18 dropped 16.4% sequentially.

Note: Oil price includes the impact of Hedging

However, this quarter was a good one, despite a concerning drop in the oil prices the past few months, which prompted the company to reiterate that 2019 CapEx will be around $2.9 billion on capital projects, which is a 40% increase from 2018. 2019-2020 is another transitional phase for the company that should be used to accumulate HES on any weakness below $45, in my opinion.

The stock is not cheap, and while we can see a possible resistance at $61 being re-tested, I would not recommend buying now.

Hess Corporation - Technical Analysis (short-term and mid-term)

HES has managed a remarkable recovery since the end of December 2018 where the stock established a low at ~$37, which was an excellent price that may be hard to re-test in 2019.

However, the precedent descending wedge pattern was crossed decisively in January with above-average volume (breakout). My opinion is that we have entered a mid-term new descending channel pattern with line support around $37 (I recommend buying at this level) and line resistance at about $61 (I recommend selling at least 30% of your position at this level unless oil prices continue to climb, which is not likely.)

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Analyst’s 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.