Hess Corporation: Slow And Steady Wins The Race

Jun. 06, 2022 8:08 AM ETHess Corporation (HES)HESM12 Comments7 Likes

Summary

  • Hess Corporation's Guyana asset has continued to grow despite its enormous size. Yellowtail should be commissioned in 2025.
  • The company's attributable production in 2025 is expected to be ~250k barrels / day with continued growth in other assets.
  • The company's 2026 FCF yield is expected to be roughly 8% at $65 / barrel Brent with significant additional cash flow potential at current prices.
  • We expect continued growth and shareholder rewards past that point.
  • Looking for higher risk/reward options trading ideas? I offer this and much more at my exclusive investing ideas service, The Energy Forum. Learn More »

Marathon Petroleum To Purchase Hess Gas Stations

Joe Raedle/Getty Images News

Hess Corporation (NYSE:HES) is becoming one of the larger midstream companies with a market capitalization of roughly $40 billion. The company has performed well, almost quadrupling from its 2020 pandemic lows. However, despite that, as we'll see throughout this article, the company has strong continued upside for shareholders.

Hess Corporation Positioning

Hess Corporation is an incredibly well positioned company with a unique portfolio of assets.

Hess Corporation Overview

Hess Corporation Positioning - Hess Corporation Investor Presentation

Hess Corporation is expected to have some of the fastest portfolio growth among any midstream company. The company has a differentiated portfolio expected to provide >10% production growth and expects to start generating substantial FCF this year. We'll discuss the company's specific assets in more detail later in the article.

The company has already sanctioned 4 Guyana developments and expects cost to continue declining supporting additional FCF. By 2026, the company sees the potential for $3 billion in FCF at $65 Brent / $62 WTI with minimal debt. The company offers investors a dividend yield of just over 1% despite its substantial recent share price appreciation.

Hess Corporation Guyana

Hess Corporation has an impressive portfolio of assets and the crown jewel is the company's 30% stake in the massive Guyana offshore development.

Hess Corporation Guyana

Hess Corporation Guyana - Hess Corporation Investor Presentation

Hess Corporation's 30% stake is in a 6.6 million acre field with 1150 blocks and 26 major discoveries to date. There are dozens of additional potential exploration site and across the board the reservoirs have exceptional quality. The projects so far have an incredibly low breakeven of roughly $30 / barrel Brent.

Liza Phase 2 production is expected to be ramped up taking total production to more than 300 thousand barrels / day. The Payara and Yellowtail developments are expected to take production to more than 750 thousand barrels / day. These assets come from roughly 11 billion barrels in discovered resources which are continuing to increase.

The company is continuing to ramp up production and discoveries both.

Hess Corporation production

Hess Corporation Phases - Hess Corporation Investor Presentation

Hess Corporation in Guyana has been finding roughly 1-2 billion barrels/day of additional reserves, attributable to millions of barrels/day of production. Liza Phase 1 has been running successfully for several years, and Liza Phase 2 has already achieved first oil. In the next 3 years, Payara and Yellowtail are expected to start-up.

These two new projects will have a roughly $30/barrel Brent breakeven. They'll bring more than 1.5 billion barrels in reserves online and add almost 500 thousand barrels/day in production, taking total production to more than 800 thousand barrels/day. By 2025, that's almost 250 thousand barrels/day attributable to Hess Corporation.

The current plan is a line of sight towards 10 FPSOs. That means roughly 2.5 million barrels/day in peak production or 750 thousand barrels/day attributable to Hess Corporation at a low breakeven. At $30/barrel, there's the potential for billions in profits for investors in the company.

Hess Corporation Bakken

Hess Corporation's Bakken assets are the company's other source of impressive growth.

Hess Corporation Bakken

Hess Corporation Bakken - Hess Corporation Investor Presentation

Hess Corporation is focused on continued efficiency in the Bakken where it has greater than 70 rig years worth of assets. The company has 460 thousand acres where it is the primary operator and it is planning to spend $790 million in capital expenditures in 2022. From this the company expects to generate almost 165 thousand barrels / day in production.

The company has 1.8 billion barrels of assets here, or 30 years of production at current production rates. The company is moving to a 4 rig program, which is still almost 20 years of production. From Hess Midstream (NYSE: HESM), the company has more than $3 billion worth of assets. The company has significant gathering and processing assets here showing its strength.

Hess Corporation Financial Strength

Hess Corporation's strong portfolio isn't overwhelmed by substantial debt or anything like that. The company has impressive financial strength.

Hess Corporation Financials

Hess Corporation Financial Strength - Hess Corporation Investor Presentation

Hess Corporation has $1.4 billion in cash and $2.4 billion in near term debt maturities. The company recently repaid a $500 million term loan and has $150 thousand barrels/day hedged to maintain cash flow. The company expects cash flow per operations to grow at 25% annualized and expects to return a significant amount of that to shareholders.

At $65/barrel Brent, the company can earn $3 billion in annual FCF. The company expects roughly 75% of its FCF to be allocated to shareholder rewards which would imply a 2-3% dividend and a similar share buyback yield. Those share buybacks can help support longer term shareholder rewards as the company grows from 4 towards 10 FPSOs in Guyana alone.

The company's 2026 production should be roughly 500 thousand barrels/day. The company's FCF margin will be roughly $16/barrel. That's at $65/barrel Brent implying a breakeven of roughly $40-45/barrel Brent. At current Brent prices of roughly $120/barrel Brent, that implies billions in additional FCF and rewards.

The company's FCF yield at current prices would go from ~8% to ~30-40%. More so it's worth emphasizing that the company's growth won't be done in 2026, production could double from there into the early 2030s. That highlights Hess Corporation's strength and ability to drive shareholder returns.

Thesis Risk

The largest risk to the thesis is crude oil prices. The company is growing rapidly, and investing billions in capital. That makes it more reliant on crude oil prices than companies that are maintaining their existing production. At $60+/barrel the company might be profitable, however, at prices below that that'll change significantly, making the company a worse investment.

Conclusion

Hess Corporation has an impressive portfolio of assets. The company has billions of barrels in attributable reserves and is focused on ramping up its production. By 2026, the company will have more than half a million barrels/day of production, and we can see the company's production continuing to expand significantly from there.

The company at $65/barrel Brent would be earning a FCF yield of ~8%. Current prices are much higher and with capital spending remaining low, they show no sign of quieting down. We expect the company to opportunistically buyback shares and increase overall shareholder rewards at current prices, highlighting how it's a valuable investment.

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