Hess (HES, Financial) recently came up with its results for the third quarter of fiscal 2014. The company is suffering in a lower oil price environment. Still, the company has managed to post impressive growth in its net income. In the ongoing oil pricing environment, Hess is adopting several strategies and is focusing on various initiatives to improve its financial performance. In fact, Hess seems well-positioned in the current price environment to drive cash flow and sustainable returns to its shareholders.
Hess' smart approach
To safeguard its financial position, Hess is taking a disciplined approach towards some of the key initiatives. It has plans to allocate good capital in projects which have high probability of higher risk-adjusted returns. A strong balance sheet is one of the key preferences by the investors before choosing any stock in their portfolio. Hess is making moves to maintain a strong balance sheet and high degree of financial flexibility. Since the oil prices are low, Hess is finding ways to improve or maintain the profit margins to a profitable level. To achieve this, it is managing capital and exploratory spending within its cash flow limits. This will help the company to secure profitability for long term in this environment also.
Moving on to drilling now, Hess is focused on drilling at Bakken. The impressive thing with Bakken is that the company has pin pointed the lowest cost highest return wells in that region and is expecting good production from this initiative. It is further expecting its well to continue to be productive in the play. Similarly, it is expecting good contribution from Utica for the long term as it seems to be well in position to produce 11,000 barrels of oil per day on an average.
Moving to the deep water Gulf of Mexico, the tubular wells are nearing completion and it is expected to yield its first production in few weeks. Tubular is expected to deliver net production of approximately of 25,000 barrels per day.
According to the analysis done by the World Bank, the crude oil prices are expected to decline in the long term. The lower oil prices will be a further headwind for Hess as it is expected to drive demand to the lower end. This will hurt Hess’ smooth cash flow generation which will also reflect on its balance sheet. This might scare away many investors away from the stock leading the company to lose market share in future.
Conclusion
Now moving on to the fundamentals, the company doesn’t have a trailing P/E and forward P/E as it is still suffering from the soft oil pricing. Even in the long term, the company’s earnings are growing at a CAGR of just 6.73% which is lower than the industry average of 16.30%. This might be because of over production that Hess is seeing. The anticipated lower oil prices can lead Hess to sell the oil at soft prices which might hurt its profit margins. So as per investment perspective I would like to suggest the investors stay away from the stock.
