We reaffirmed our Neutral recommendation on Hess Corporation (HES) on Aug 7, 2013. The company’s multi-year transformation program is on track and is likely to enhance shareholders’ value in the long term. However, the company’s growth and returns picture will likely be hindered by its asset sale program in the near term.
Hess – an integrated energy company – is executing a transition from an integrated oil and gas company to a predominantly E&P entity, thereby shifting its growth approach from high-impact exploration to lower-risk unconventionals and a smaller, more focused exploration portfolio.
The company announced the closure of its Port Reading, New Jersey refinery, which marked its complete exit from the refining business. Hess also aims to shed assets in Indonesia and Thailand as well as its terminals, retail, energy marketing and trading businesses in the downstream.
For 2013, Hess expects pro forma production of 290–305 MBoe/d, excluding asset sales compared to pro forma production of 289 MBoe/d in 2012. A five-year compounded annual growth rate of 5–8% is expected to be achieved through 2017 by the company, driven by its lower risk assets.
We expect unconventional oil (including sources like oil shales, coal-based liquid supplies etc.) and gas extraction (using non-traditional techniques) to play important roles in the world energy mix in the long run. After building up its position in the North American Bakken oil field for unconventional oil, Hess is pursuing unconventional gas in the Marcellus Shale play. Hess’ smaller exposure to the Eagle Ford and Utica shale plays as well as several global development projects (such as Ghana, Brunei, Gulf of Mexico and Kurdistan) are likely to be the growth drivers beyond 2013.
However, to support its capital expenditures through 2013, the company depends on major asset sales. This year, Hess will likely register a downfall in both its parameters, i.e., production and reserves. Hence, the company’s growth and returns picture will likely be hindered by the asset sale program in the near term.
Other Stocks to Consider
While we prefer to remain on the sidelines for Hess, Zacks Ranked #1 (Strong Buy) stock – Range Resources Corp. (RRC), Susser Petroleum Partners LP (SUSP) and Dril-Quip, Inc. (DRQ) could be good buying options for the short term.
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