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Hess Corporation HES is well poised to grow on the back of robust offshore Guyana oil reserves and solid midstream business.
Hess Corp. — with a market cap of $26.7 billion — is a global integrated energy company. The New York-based company engages in exploration, production, development, transportation, and purchase and sale of crude oil, natural gas liquids (NGLs) as well as natural gas. Moreover, it is involved in gathering, compressing, and processing natural gas as well as fractionating NGLs. Additionally, Hess Corp. offers gathering, terminaling, loading and transporting operations for both crude oil and NGLs.
It beat earnings estimates thrice and met once in the last four quarters, with an average surprise of 27.7%.
Hess Corporation Price and EPS Surprise
Hess Corporation price-eps-surprise | Hess Corporation Quote
Courtesy of solid prospects, this Zacks Rank #3 (Hold) stock is worth holding on to at the moment.
What’s Driving the Stock?
The company has made multiple 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 the Stabroek Block. The discoveries made so far on the block have the potential to add at least six FPSO vessels that will likely be capable of yielding 800,000 barrels of oil per day (bpd) by 2025. Furthermore, production is expected to reach 1 million bpd by 2027. It anticipates multi-billion barrels of exploration potential to be still left in Guyana.
It expects 2021 exploration and production capital as well as exploration expenditure to be $1.9 billion, the majority of which will likely be directed toward Guyana and Bakken. The company is focusing on preserving cash and implementing a cost-reduction program, through which it will likely boost profitability and cash margins. From 2017 through 2021, it decreased cash unit production costs by 20%. This trend will provide a northbound thrust to the company’s bottom line.Moreover, it has hedged 150 thousand barrels of oil per day for 2021 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 $75 million for the first quarter, significantly up from $61 million a year ago due to higher throughput volumes. Also, with the rollout of vaccines and easing of COVID-19 restrictions, it sees a quick and sustained demand recovery.
However, there are a few factors that are impeding the growth of the stock lately.
As of Mar 31, 2021, the company had only $1,866 million in cash and cash equivalents. Its long-term debt was recorded at $8,273 million at first quarter-end. Debt to capitalization at quarter-end was 56.5%, reflecting significant leverage. This can affect the company's financial flexibility.
Hess Corp. expects 2021 net production (excluding Libya) in the band of 290,000-295,000 Boe/d, lower than the previous guidance of 310,000 Boe/d. Moreover, the latest guidance indicates a decline from the year-ago level of 320 Boe/d. Its net Bakken production will likely be in the range of 155,000 160,000 Boe/d in 2021, signaling a decline from the 2020 level of 193,000 Boe/d. Lower production volumes can affect its bottom line.
The company has been persistently generating lower dividend yields than the market over the past few years. Its dividend yield of 1.2% is even lower than the industry average of 2.4%.
To Sum Up
Despite significant prospects as mentioned above, high debt burden and low production volumes are concerns for the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Some better-ranked players in the energy space include Suburban Propane Partners, L.P. SPH, NOW Inc. DNOW and PHX Minerals Inc. PHX, each having a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Suburban Propane’s bottom line for 2021 is expected to rise 58.8% year over year.
NOW’s bottom line for 2021 is expected to rise 86.2% year over year.
PHX Minerals’ bottom line for 2021 is expected to surge 40% year over year.
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