Hess Corp.: Guyana Is Still The Main Inspiration

Summary

• In the first quarter of 2020, Hess' revenues decreased to $1,369 million from $1,599 million in the same quarter a year ago.
• HES produced 349K net Boep/d in 1Q'20 (including Libya). It was up 16.7% from the same quarter a year ago on contributions from the Bakken segment.
• I recommend trading the short term with about 40%-50% of your total amount invested, due to increased volatility in the oil sector.
• Looking for a helping hand in the market? Members of The Gold And Oil Corner get exclusive ideas and guidance to navigate any climate. Get started today »

Courtesy: Hess Corporation

Investment Strategy

The US-based independent oil and gas producer Hess Corporation (NYSE:HES) can be considered as a "good bet" due to the potential of the Guyana prospect, which has been funded without issuing additional equity or debt.

This significant prospect has been a challenge for this independent oil and gas producer due to the sheer size of the CapEx that it has required and still demands as we speak. However, the company is now indicating the first production from Guyana with 15K Boep/d, and the situation is improving quickly. However, it is still a long way to go before free cash flow turns positive.

For the ones who want more information about the Stabroek prospect in Guyana, please read my 11 preceding articles on Hess.

The problem is that oil prices have dropped significantly, and despite some optimism due to the recent OPEC proposed cut, we should expect fierce headwinds on the horizon. The investment thesis that I recommend for Hess Corporation is a dual strategy combining a long-term investment with a significant part allocated to short-term trading to take full advantage of the oil volatility. We are in a period of exuberance, and it is precisely the time to make some profit off the table before the market regains some common sense. The oil prices have reacted to the cut proposed by OPEC+ but has disregarded the other part of the problem, which is the dismal demand. As always, the market looks only to the part it deems advantageous and encourages the momentum. So far, momentum is positive, but it is only temporary.

I recommend trading the short term with about 40%-50% of your total amount invested, due to increased volatility in the oil sector.

1Q'20 Balance Sheet and Trend - The Raw Numbers

Hess Energy	3Q'18	4Q'18	1Q'19	2Q'19	3Q'19	4Q'19	1Q'20
Total Revenues in $ Billion	1.83	1.68	1.60	1.70	1.58	1.70	1.37
Net income available to common in $ Million	-53	-16	28	-6	-212	-222	-2433
EBITDA $ Million	712	693	765	757	584	617	-1771
EPS diluted in $/share	-0.18	-0.05	0.09	-0.02	-0.70	-0.73	-8.00
Cash from operations in $ Million	423	881	238	675	443	286	445
Quarterly CapEx in $ Billion	540	664	671	624	709	825	818
Free Cash Flow in $ Million	-117	217	-433	51	-266	-539	-373
Cash and cash equivalent $ Billion	3.00	2.69	2.30	2.21	1.86	1.55	2.08
Long-term debt in $ Billion	6.69	6.67	6.56	6.53	6.54	7.34	8.19
Dividend per share in $	0.25	0.25	0.25	0.25	0.25	0.25	0.25
Shares outstanding (diluted) in Million	294.3	291.5	299.7	302.2	302.5	302.7	304.0
Oil Production	3Q'18	4Q'18	1Q'19	2Q'19	3Q'19	4Q'19	1Q'20
Oil Equivalent Production in K Boe/d	297	289	299	293	312	338	349
Global liquid price ($/b)	66.08	55.24	55.91	61.37	56.03	54.90	45.94
Global Natural gas price ($/M Btu)	4.11	4.82	4.43	3.92	3.81	3.48	3.16

Click to enlarge

Source: Company release, Morningstar

Analysis: Revenues, Generic Free Cash Flow, and Oil & Gas Production Worldwide

1 - Quarterly revenues and other income were $1.37 billion in 1Q'20

In the first quarter of 2020, Hess' revenues decreased to $1,369 million from $1,599 million in the same quarter a year ago. The adjusted first-quarter 2020 was a loss of $182 million or $0.60 per share.

Net loss was $2,433 million, or $8.00 per common share, including non-cash impairment and other after-tax charges of $2,251 million resulting from the low price environment compared with net income of $32 million, or $0.09 per share, in the first quarter of 2019.

In the presentation below, the company indicates that:

From the midstream business, the company had a net income of $61 million in the first quarter of 2020 compared with net income of $37 million in the prior-year quarter.

CEO John Hess said in the conference call:

In terms of preserving long-term value of our assets, our top priority is Guyana, which is one of the industry's most attractive investments. On the Stabroek Block, where Hess has a 30% interest and Exxon Mobil is the operator, we have made 16 discoveries since 2015.

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

Note: The generic free cash flow is the cash flow from operation minus the CapEx.

HES's free cash flow yearly is a loss of $1,127 million ("ttm") with a loss of $373 million in 1Q'20.

Meanwhile, the company is paying a quarterly dividend of $0.25 per share, which is roughly $304 million per year. It is covered by free cash flow.

Consolidated net debt (including the midstream) jumped this quarter to $6.11 billion (debt and finance lease obligations totaling $6.6 billion on March 31, 2020).

Cash and cash equivalents were $2.08 billion (excluding the midstream segment). The Midstream segment had cash and cash equivalents of $3 million, and total debt was $8.19 billion on March 31, 2020, while debt and finance lease obligations totaled $6.6 billion.

Debt attributed to Hess Corp. was $6,379 million, and Midstream debt was $1,815 million.

The net debt-to-capitalization ratio (consolidated basis) at the end of the first quarter was 50.8% (including finance lease obligations) compared to 43.2% in 4Q'19.

3 - Quarterly production analysis

HES produced 349K net Boep/d in 1Q'20 (including Libya). It was up 16.7% from the same quarter a year ago on contributions from resources in the Bakken play, which produced 190K Boep/d this quarter. Below are the historical trends of the global liquid prices and NG prices.

Crude oil output rose from 191K Bop/d in the first-quarter 2020 to 183K Bop/d in the fourth-quarter 2019. Further, natural gas liquids production totaled 56K Bbls/d, up from 40K Bbls/d the same quarter last year. Also, natural gas output was 611 Mcf compared to 618 Mcf a year ago.

Production details are as follow:

Compared to the precedent quarter. Bakken:

Production was 190K Boep/d in 1Q'20 (114K Bop/d oil), up from 130K Boep/d in 1Q'19. Net oil production up 34.1% to 114K Bop/d from 85K Bop/d, primarily due to increased drilling activity and new plug and perf well completion design. Production details:

• 114K Bop/d for oil (66.7%)
• 49 Boep/d for NGL
• 27 Boep/d for natural gas

The Gulf of Mexico

Net production for the company came in at 74K Boep/d, up from 70K Boep/d in 1Q'19.

From Hess Corp. presentation

For the full-year 2020, production will average ~320K net barrels of oil equivalent per day (excluding Libya), with about 312K net barrels of oil equivalent per day in 2Q. Bakken is expected to average 175K Boep/d in 2020.

2020 capital budget for exploration and production activities is set to $1.9 billion, down significantly from the previous $3 billion.

Conclusion and Technical Analysis

Hess Corp.'s first quarter of 2020 was a mixed bag, but not as bad I was expecting. The company was forced to reduce CapEx drastically to preserve precious cash during the COVID-19 pandemic situation.

The Bakken segment has been a prolific one, and production increased again this quarter and was 46% higher year over year.

But Hess's potential lies in Guyana with the Stabroek prospect, which has started to produce oil and needed cash flows. It is perhaps the main reason why the stock should be accumulated on any weakness.

Technical Analysis (Short-Term and Mid-Term)

HES experienced a resistance breakout of its ascending channel pattern on Friday and is likely to retest new resistance at $60-$61, at which point I recommend selling about 25% of your position and wait for a possible retracement in the coming weeks. The support is now $53, and I believe it is an excellent start to accumulate again.

Exuberance is following despair, and it will take a while before the market adjusts to the new economic paradigm. The best solution is to trade short term volatility and avoid planning for the future.

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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.