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Hess Corporation: Driving Costs Down While Growing Production

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About: Hess Corporation (HES)
by: Robert Boslego
Summary

First oil expected from offshore Guyana in December.

Phase one production to reach 120,000 b/d and 750,000 b/d by 2025.

Bakken per well costs dropping while production rising.

New discovery of oil in the Gulf of Mexico.

On target for a $40/b Brent breakeven by 2025 while growing production.

Hess Corporation (HES) reported “a net loss of $205 million, or $0.68 per common share, in the third quarter of 2019, compared with a net loss of $42 million, or $0.18 per common share, in the third quarter of 2018. On an adjusted basis, the Corporation reported a net loss of $98 million, or $0.32 per common share, in the third quarter of 2019, compared with an adjusted net income of $29 million, or $0.06 per common share, in the prior-year quarter. The decrease in after-tax adjusted results primarily reflects lower realized selling prices, partially offset by reduced exploration expenses.”

In the third quarter of 2018, the oil market was anticipating that Iranian sanctions, which were scheduled to take effect in early November, would remove a significant volume of oil exports from Iran. Oil prices surged in anticipation. Saudi oil facilities were attacked in September 2019, but the loss of production was temporary, and Saudi Aramco (ARMCO) was able to deliver exports on its contract, and so the price effect was ephemeral.

Breakeven Below $40 Brent by 2025

Hess’ goal is to deliver cash flow growth and a portfolio breakeven below $40 per barrel Brent by 2025. Its investments in Guyana and the Bakken are its growth engines, and Malaysia and deepwater Gulf of Mexico are its cash engines, according to CEO John Hess, focusing only on low-cost and high-return opportunities.

The company plans to invest more than 75 percent of its capital expenditures in Guyana and Bakken over the next five years. Exxon Mobil (XOM) and Hess announced they were moving up the start date of first oil to December in offshore Guyana.

The Liza Destiny is the first oil production vessel, called an FPSO for floating, production, storage and offloading vessel, to arrive off the coast of Guyana. The vessel will begin producing oil from the deepwater wells in early 2020. Photo: Exxon Mobil

Source: Exxon Mobil.

The Liza Destiny FPSO (floating, production, storage and offloading vessel) arrived on site offshore Guyana in August. Apart from focusing on shale oil in the Permian Basin, XOM’s biggest growth area is Guyana. The first Liza phase is expected to produce around 120,000 b/d in about three months from first oil. The second phase is expected to add 220,000 b/d in mid-2022. And a third phase is projected to produce another 220,000 b/d in 2023. By 2025, Exxon expects to be producing 750,000 b/d offshore Guyana, about 20 percent of its current worldwide production.

In the Bakken, Hess brought online 33 new wells and increased production to 163,000 barrels of oil equivalent per day, up 38% from 118,000 b/d v. a year ago. Its average drilling and completion costs were $6.7 million per well, down to 8% from $7.3 million in the first quarter.

The company expects to deliver net production of 200,000 barrels of oil equivalent per day by 2021, while driving costs down to $6 million per well. Then it plans to reduce its current six rig program to four rigs, which it expects will maintain production of approximately 200,000 b/d, resulting in material free cash flow generation across the range of prices.

Gulf Of Mexico

Hess announced the discovery of oil at the Esox-1 exploration well in deepwater Gulf of Mexico on October 29. HES is the operator and owns 57.14% interest and Chevron (CVR) owns the balance.

John Hess said, “We expect the well to be producing in the first quarter of 2020. As a low cost tieback to existing infrastructure, Esox should generate strong financial returns.”

Source: Hess.

Net production from the Gulf of Mexico was 59,000 b/d in the third quarter, compared with 71,000 b/d in the prior-year quarter, reflecting hurricane-related downtime, as well as higher planned maintenance.

Conclusions

With lower costs per well, Hess expects to maybe get more wells in 2020 than in 2019. That is based on a capital budget of $3 billion for 2020. The company also mentioned that it still has $60 WTI put options in place for 95,000 barrels a day for the remainder of the year. And so it is in a really good, strong financial position to fund its spending program.

There are doubts in the market that oil production can keep growing, given a lower price environment. HES expects it can while reducing its breakeven costs.

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.

Additional disclosure: I have consulted with Hess for years, but that was when Leon Hess was in charge.