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Hess Overcame Plunging Crude Prices to Come Out Ahead in Q4

Matthew DiLallo, The Motley Fool

Oil prices plunged 40% during the fourth quarter, which had a significant impact on oil producers. That was evident in Hess' (NYSE: HES) fourth-quarter report as it posted a loss, reversing its surprise gusher of a profit in the third quarter.

However, while the company wasn't able to stay in the black last quarter, its results were slightly better than anticipated, as it delivered strong production growth in the Bakken shale. Further, Hess and its partner ExxonMobil (NYSE: XOM) continued finding oil off the shores of Guyana, which should provide the fuel to grow production, as well as fast-paced profits in the coming years.

Drilling down into the numbers

Metric

Q4 2018

Guidance or Expectations

Difference 

Production

267,000 BOE/D

265,000 BOE/D

0.8%

Adjusted earnings (loss)

($0.31)

($0.37)

N/A

Data source: Hess. BOE/D=barrels of oil equivalent per day.

Hess' production came in ahead of its guidance, due in part to strong growth in the Bakken shale, where production rose 15% year over year, to 126,000 BOE/D. Driving that growth was an increase in drilling activities, as the company added a sixth rig to its fleet during the third quarter and improved well performance.

Hess also delivered solid results in the Gulf of Mexico, where production averaged 68,000 BOE/D, up from 40,000 BOE/D in the fourth quarter of 2017, thanks to higher output from two fields impacted by a third-party platform outage in the year-ago period and the addition of the Stampede Field, which started producing last year.

Hess also did a solid job keeping a lid on costs, as cash operating expenses were down 14% year over year, to $12.60 per BOE, thanks to higher production and lower costs in the Gulf of Mexico and the company's cost-reduction initiatives.

The highlight of the quarter, however, was that Hess and Exxon announced their 10th discovery offshore Guyana. As a result of this find and further evaluation of previous ones, the companies now believe that the field holds 5 billion barrels of recoverable oil and gas resources. That leads them to estimate that they can build five production platforms in the region over the coming years that should produce 750,000 BOE/D by 2025, with Hess entitled to 30% of that output.

An oil pump at dusk with rows of clouds in the sky.

Image source: Getty Images.

A look at what's ahead

Despite the plunge in oil prices over the past few months, Hess "enters 2019 with a great deal of momentum," according to CEO John Hess. That's why the company reaffirmed its spending plan for 2019 to invest $2.9 billion on capital projects this year, a 40% increase from 2018's level. That will enable the company to produce between 270,000-280,000 BOE/D this year, while also funding its share of development capital in Guyana. 

The CEO further noted that, "with our strong execution in 2018, our portfolio is well positioned to deliver approximately 20% compound annual cash flow growth and more than 10% compound annual production growth through 2025, with a portfolio breakeven of less than $40 per barrel Brent by 2025."

That forecast sets up the company to generate significant free cash flow in the coming years, with it on track to hit an inflection point next year where it could begin returning more money to shareholders above its current dividend level. That projected combination of growth and increasing returns of cash to shareholders positions Hess to produce strong total returns over the next several years, even if oil prices don't improve.

A solid end to an important year

Hess is in a transitional phase as it continues investing to grow its output in the Bakken, as well as work with Exxon to develop their oil resources in Guyana. The company made excellent progress on both fronts last year and hopes for more of the same in 2019. If all goes according to plan, this oil company could deliver a gusher of profit growth through the early part of the next decade, which makes it a compelling oil stock to consider buying for the long term.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.