Hess: Smart Moves Make It a Buy

In a weak oil gas pricing environment, Hess (HES) is making the right moves by lowering its cost base. For instance, its drilling and completion costs per operated well at Bakken shale play averaged $5.3 million for the quarter, down 26% from the year-ago quarter.

The corporation spent $849 million in the third quarter of 2015 down from $1,371 million in the same quarter last year. This decrease was mainly the result of reduced exploration and production activity in the US located plays. The total exploration and production related capital expenditure for the full year 2015 is expected to amount to $4.1 billion.

Hess is making some judicious asset sale deals over the course of the downturn.

For instance, the corporation sold 13,000 dry gas exploration acres for a sale price of approximately $120 million, including a note in the amount of $37 million Utica shale play. Earlier in July 2015, the company sold 50% of its interest in its Bakken Midstream for a cash consideration of $2.7 billion which in total, even after-tax cash proceeds, will give a net of approximately $3.0 billion to Hess.

New developments

Hess will continue with its development of the North Malay Basin project.
Hess: Smart Moves Make It a Buy
Image by anita_starzycka / Pixabay
The corporation is planning to exploit the nine offshore natural gas fields in the North Malay Basin through its joint-venture with state-run PETRONAS. This area has a reserve capacity of approximately 1.7 trillion cubic feet of recoverable natural gas and Hess owns 50 % of that. Hess has enough cash to continue the development especially when it has no big plans elsewhere. As per the management it will need to spend between $500 million and $600 million through the current year. Once operational, the net production will be up from about 40 mmcf/d this year to 165 mmcf/d and the additional cash generation will be of the order of $700 million, $800 million. Hence, this is the project which Hess investors must keep track of.

A similar but longer term development taking place is the Stampede development project in the Gulf of Mexico. Hess owns 25% in this joint venture with Chevron, Statoil and Nexen being the partners. Its capacity is between 300 million boe and 350 million boe of recoverable reserves. Both the fields here contain mostly oil which makes it a good move by Hess to plan the completion by not before 2018. Had it been completed within the next one year, the 80,000 barrels of oil per day potential at its peak would have been a waste because the stress today is on reducing production. The project is going to take about $300 million in each of 2016 and 2017. But then it is expected to generate in the range of $400 to $600 million per year from 2018.

Liquidity and debt:

The company has $ 3 billion of cash, $ 4 billion from an undrawn revolving credit facility and $ 900 million from its undrawn committed credit lines available. It is planning to spend about $ 3 billion in 2016 under capital expenditures which it can easily manage with this liquidity of nearly $8 billion. Also, it doesn’t need to borrow this year as it does have the reserves and cash flows enough to cover its capex, interest payments, and dividend pay-outs. The debt load of below $ 6.5 billion is also not hefty unlike peers.


Hess is one of those companies which can look for new developments even when the oil prices are at rock-bottom. The main characteristics of Hess’s operations are the ability to deliver strong operating performance while maintaining a robust financial and liquidity position. While the oil outlook looks bleak for 2016, it is quite possible for Hess to deliver the goods for investors.

Published on Sep 27, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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