Bakken Boosts Hess Earnings

Zacks

Hess Corporation (HES) reported adjusted first quarter 2013 earnings of $1.95 per share, up 30.9% from adjusted earnings of $1.49 in the first quarter of 2012. Earnings also comfortably beat the Zacks Consensus Estimate of $1.57. The increase was mainly attributable to higher volumes in the Bakken.

Total revenue increased 39.0% year over year to $4,117 million in the quarter from $2,961 million.

The company is gradually moving from an integrated oil and gas company towards becoming a pure play exploration and production (E&P) entity. As part of this strategy, Hess has sold assets worth billions of dollars, as it looks to exit the downstream business. The company has classified its Marketing and Refining business as discontinued operations.

Operational Performance

In the reported quarter, Exploration and Production (E&P) business posted profits of $1,286 million which more than doubled from the year-earlier profit of $635 million.

Quarterly hydrocarbon production was 389 thousand barrels of oil equivalent per day (MBOE/d), down 2.0% year over year. Lower production was due to the impact of asset sales and lower production from the Valhall Field in Norway. This was partially offset by higher Bakken production year over year.

Crude oil production was 272 thousand barrels per day (down from 276 thousand barrels per day in the year-ago quarter), natural gas liquids production totaled 18 thousand barrels per day (down from 19 thousand barrels), while daily natural gas output was 593 thousand cubic feet (Mcf) (down from 610 Mcf).

Worldwide crude oil realization per barrel of $95.24 decreased 5.2% year over year. Worldwide natural gas prices upped 6.3% year over year to $6.62 per Mcf.

In the reported quarter, Marketing and Refining business (now discontinued) clocked earnings of $100 million versus $12 million in the year-ago period. Results were boosted by gains from the liquidation of LIFO inventories. This was partially offset by refinery shutdown costs and employee severance costs.

Financials

Quarterly net cash flow from operations was $819 million. Hess’ capital expenditures totaled $1,631 million, of which approximately $1,613 million were expended toward E&P.

As of Mar 31, 2013, the company had approximately $444 million in cash and $7,376 million in long-term debt (including current maturities). Hess’ debt-to-capitalization ratio at the end of the quarter was 24.3%.

Outlook

New York-based Hess Corporation was an integrated energy company engaged in oil and gas exploration, production and refining as well as marketing.

Hess remains on track with its strategy of becoming purely an E&P company while boosting its shareholder value, much like ConocoPhillips (COP) and Marathon Oil Corporation (MRO).

In this regard, the company in the first quarter announced that it would divest its downstream businesses. In this regard, the company has pocketed $3.4 billion to date through asset sales. The downstream businesses to be divested consist of terminal, retail, energy marketing, and trading operations. Separately, the company closed its Port Reading refinery in Feb 2013, marking its exit from the refining business.

In Jan 2013, Hess sold its stake in the Beryl area fields and the Scottish Area Gas Evacuation System to Royal Dutch Shell Plc (RDS.A). The company subsequently sold its interests in the ACG fields in Azerbaijan in March. Then in April, the company entered into an agreement to sell its Russian subsidiary Samara-Nafta for a total consideration of $2.05 billion. Hess’ 90% stake in Samara-Nafta will bring in approximately $1.8 billion as sales proceeds. Finally, Hess also reached an agreement to sell its Eagle Ford assets in Texas for $265 million and is scouting to dispose its interests in Indonesia and Thailand.

Going forward, we believe that the company’s strong exploration upside in Ghana and continued improvement in Bakken productivity hold a lot of promise. This would help the company to consistently deliver 5-8% annualized production growth in the near future.

The company has also announced that it would resume share repurchase under its pre-existing $4 billion authorization in the second half of 2013. We feel these would handsomely add to shareholder value.

However, Hess’ sensitivity to gas/oil price volatility, as well as drilling results, costs, geo-political risks and project delays limit the upside potential of its shares.

Hess shares currently retain a Zacks Rank #3, which translates into a short-term Hold rating.

Read the Full Research Report on HES

Read the Full Research Report on COP

Read the Full Research Report on RDS.A

Read the Full Research Report on MRO

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