Hess Corporation (HES, Financial) is focused on three key objectives. First, assign capital to the projects having maximum risk-adjusted returns; second, sustain a robust balance sheet with superior financial flexibility; and third, focused control of exploratory and capital spending within the free cash flow limits for the long-term post returning attractive capital to its shareholders in order to remain cash rich all through 2018.
Strategically strong
Hess is strategically positioned with its robust portfolio of supreme quality assets and solid balance sheet to enable healthy production growth with reduced risk along with generating significant free cash flow in different pricing environments.
The significant cost-cutting efforts are believed to help the company sustain enough free cash flows for supporting the key prospective investments.
Hess is enhancing its five-year production growth rate estimate in 6 to 10 percent range aggregated yearly from 2013 all through 2018 in the range of $90 to $100 Brent from earlier outlook of 5 to 8 percent growth due to an excellent performance at its Bakken shale segment and robust growth in offshore assets.
The company has also succeeded in reducing its workforce and is expanding its Bakken net maximum production guidance by 17% to about 175,000 barrels of oil equivalent per day (BOEPD) by 2020 in North Dakota with a focus on adding another 1,000 well locations to a total of over 4,000; and enhancing its total estimated ultimate recovery (EUR) to over 1.4 BBOE.
Strong financial position
The stable balance sheet of the company along with the successful cost-cutting initiatives is believed to give it confidence for expanding the production and stretching its production guidance.
Hess forecasts the total highest production at Utica to reach nearly 40,000 BOEPD by 2020, with about 500 well locations and total EUR of over 300 MMBOE.
Significant free cash flow generation and expanding production growth are estimated from the offshore assets of Hess, mainly in the deepwater Gulf of Mexico Tubular Bells project by working closely with Chevron Corp along with the Stampede field authorized in October for drilling first oil in 2018.
Hence, both Utica and Gulf of Mexico together are believed to significantly stretch the company production and thus deliver exciting investor returns.
Going forward, Hess expects an eventual pricing rebound, and it’s leveraging newer processes and innovative technologies to stay ahead of the competition. For instance, Hess has discovered utilizing sand proppant instead of largely costly ceramic proppant for developing some shale formations at reduced price.
In addition, the consensus forecast of 39 polled investment analysts analyzing Hess Corporation estimates that the company should outperform the market, supported by the improvement in the sentiment for the stock in May 2014. The earlier consensus estimate suggested investors hold their positions in Hess Corporation.
The improving analyst sentiments coupled with a focused approach towards innovation makes the stock an exciting investment opportunity for the long-term investors.
Fitch Ratings has reiterated a "BBB" rating for Hess Corp. with a stable rating outlook. This rating is supported by the company's robust operational metrics that include greater liquidity as depicted by nearly 77% of reserves and 72% of 2013 production; healthy reserve size with 1.437 billion boe of net reserves in 2013. There’s also significant debt reduction in 2014 compared to 2012 levels.
However, Hess is losing on the diversification front linked to the sale of retail and downstream assets; slight reduction of size in the upstream allowed by key asset sales and a major impact of the recent huge fall in oil prices on cash flows. If this continues, Fitch estimates this would reduce the company’s production growth rate, compelling Hess to make further capex adjustments.
Conclusion
Therefore, the investors are advised to cautiously invest in Hess Corp. looking at the relatively cheaper valuation of the stock with trailing P/E of 5.06. However, the PEG ratio of 2.15 suggests an expensive growth for the shareholders. The profit margin and operating margin of 19.87% and 10.02% respectively illustrates the solid operational metrics of the company as discussed above. However, the total cash position of $4.12 billion is concerning when compared to the huge total debt of $6.00 billion, making the company’s balance sheet unstable and debt laden.
