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Can Hess (HES) Soar Further After Gaining 15.5% in 6 Months?

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Zacks Equity Research
·4 min read
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Hess Corporation’s HES shares have jumped 15.5% in the past six months compared with the industry’s 0.1% gain. While the overall energy space is grappling with coronavirus woes, Hess has managed to navigate through the challenges. The New York-based company — with a market cap of $16.6 billion — is engaged in exploration and production activities all around the globe.

Hess has a trailing four-quarter earnings surprise of 2.9%, on average. It continues to benefit from prolific Guyana resources.

Can It Retain Momentum?

The answer is yes and here’s why we think so:

The company has made world-class oil discoveries at the Stabroek Block, located off the coast of Guyana. It estimates gross resources of much more than 9 billion barrels of oil equivalent from its 18 promising discoveries in the Stabroek Block. The discoveries made so far on the block have the potential of adding five FPSO vessels that will be capable of yielding 750,000 barrels of oil per day (bpd) by 2025. Hess is expected to record significant production from the Guyana prospect in the coming years. The company expects the Liza Phase 2 development to remain on schedule and commence production in 2022.

Its 2020 exploration and production capital and exploration expenditures are likely to amount to $1.8 billion, down from the original guidance of $3 billion. Despite lower capital spending, the company expects production volumes to increase on operational efficiency. It expects 2020 net production volumes, excluding Libya, to reach 325,000 barrels of oil equivalent per day (Boe/d). From the prolific Bakken shale play, Hess now expects 2020 net production to be 190,000 Boe/d versus the earlier projection of 185,000 Boe/d.

The Zacks Rank #3 (Hold) company has implemented a cost-reduction program, through which it will likely boost profitability and cash margins. From 2017 through 2023, it estimates cash unit production costs to decline 30%. This will provide a northbound thrust to the company’s bottom line. Moreover, it has hedged 150 thousand bpd for 2020 to safeguard itself from oil price declines.

Its midstream assets, which enable it to earn stable fee-based revenues, are a huge positive. From the midstream business, the company generated adjusted net earnings of $56 million for the third quarter, significantly up from $39 million a year ago. The rise can be attributed to higher throughput volumes.

Downsides

However, there are a few factors that are holding back the stock from reaching its true potential.

As of Sep 30, 2020, the company had $1,285 million in cash & cash equivalents, down from $1,646 million in second quarter-2020. Its long-term debt was recorded at $8,280 million at third quarter-end, up from $8,205 million in the prior quarter. Debt to capitalization at quarter-end was 55.3%, reflecting significant debt exposure.

Oil prices are still in the bearish territory owing to coronavirus-hit global energy demand and oversupplied commodity market. Weak crude prices, which are way below the level at the beginning of the year, are thereby affecting the company’s upstream business. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.

Key Picks

Some better-ranked players in the energy space include Covanta Holding Corporation CVA, Ameresco, Inc. AMRC and Antero Midstream Corporation AM, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Covanta Holding’s bottom line for 2021 is expected to rise 95.3% year over year.

Ameresco’s bottom line for 2020 is expected to rise 21.7% year over year.

Antero Midstream’s bottom line for 2020 has witnessed two upward estimate revisions and no downward movement in the past 60 days.

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Hess Corporation (HES) : Free Stock Analysis Report
 
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