Hess: Trying to Overcome Challenges in Crude Oil

Oil and gas exploration company Hess (HES) has turned in a woeful performance on the stock market this year as its financials have been weak due to low oil and gas prices. In fact, Hess’ loss during the second quarter rose to $567 million as compared to a net income of $930 million in the year-ago period. The oil and gas exploration major reported an increase in loss for the quarter primarily driven by the ongoing weaker commodity pricing environment.

But, despite the weakness in the end market, Hess is not being held back as the company is making moves to increase production from low cost assets.
Let’s take a look.

Hess’ moves

Hess sold a 50% interest in its Bakken midstream assets as it is looking to shift production to more profitable assets. This is because the company is trying to overcome a weak pricing environment as it has seen a rapid drop in its average selling prices of late. For example, Hess’ average global crude oil selling price that includes the impact of hedging declined 45% to $55.83 per barrel during the second quarter of 2015 from $102.16 per barrel during the second quarter of 2014.

The average global natural gas liquid selling price also fell to $11.06 per barrel from $36.59 per barrel during the same period last year, whereas the average global natural gas selling price fell to $4.49 per mcf during the second quarter of 2015 from $6.35 per mcf during the second quarter of 2014.

However, Hess reported 23% growth in its oil and gas production for the quarter to 391,000 barrels per day from 319,000 barrels per day during the second quarter of 2014. Assets that contributed to the volume expansion for the quarter were mainly the Gulf of Mexico, the Joint Development Area of Malaysia/Thailand, the Utica shale play and the Bakken shale play. However, the non-strategic asset sales lowered production by approximately 9,000 barrels per day.

Key growth areas

Hess announced oil and gas production in the Bakken of 119,000 barrels per day for the second quarter of 2015, an increase of nearly 49% from 80,000 barrels per day during the same period last year owing to the ongoing drilling activities. The company activated 67 gross operated wells for production during the second quarter of 2015 making the year-till-date net to 137 wells.

Hess also successfully controlled its drilling and completion costs per operated well to an average of $5.6 million during the second quarter of 2015, 24% below the cost level during the same period last year. In addition, Hess operated 8 rigs during the quarter.

Meanwhile, the total production from the Gulf of Mexico grew over the same period last year with improved volumes from Tubular Bells, which added to 23,000 barrels per day during the second quarter of 2015. This was somewhat offset by weaker production from the Llano and Conger Fields.

Hess also has a 30% operating share at the Stabroek Block and strategically declared a key oil discovery at the Liza #1 well. It is currently assessing the resource potential on the block. Importantly, Hess has completed the acquisition of 17,000 square kilometers of 3D seismic.

An expensive valuation

However, Hess as a disappointing valuation with a P/E ratio of 371.91, indicating that it is a very expensive stock as compared to the industry’s average P/E of 12.01. It also has a significant debt level $5.96 billion as against a weaker cash position of $931 million only. Thus, despite the positives, Hess looks like a risky investment since it is expensively valued and is suffering on account of weak oil prices.
Published on Sep 12, 2015
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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