Integrated oil company Hess Corporation (HES) reported second quarter 2011 earnings of $1.78 per share, which was below the Zacks Consensus Estimate of $1.97. The company missed the earnings estimate primarily due to lower production.
However, the company improved significantly from its year-earlier earnings of $1.15 because of higher realized prices.
Total revenue jumped 26.5% year over year to $9.8 billion in the quarter, but missed the Zacks Consensus Estimate of $10.5 billion.
Operational Performance
Exploration and Production (E&P): The segment posted $747 million in profit, higher than the year-earlier profit of $488 million.
Quarterly hydrocarbon production was 372 thousand barrels of oil equivalent per day (MBOE/d), down more than 10% year over year. Lower production in Africa (due to political upheaval in Libya) as well as the divestiture of certain natural gas producing assets in the United Kingdom North Sea was responsible for the loss in volumes.
Crude oil production was 248 thousand barrels per day (down from 286 thousand barrels per day in the year-ago quarter), natural gas liquids production totaled 17 thousand barrels (up from 16 thousand barrels) while natural gas output was 643 thousand cubic feet (Mcf) (down from 679 Mcf).
Worldwide crude oil realization per barrel of $97.20 (including the impact of hedging), showed a significant 50% year-over-year jump. Worldwide natural gas prices (including the impact of hedging) upped 6.5% year over year to $5.93 per Mcf.
Marketing and Refining: The segment posted a loss of $39 million, substantially wider than the year-earlier quarter’s loss of $19 million. Refinery operations suffered a loss of $44 million compared with a loss of $31 million in the year-ago quarter.
Marketing earnings climbed 65% year over year to $28 million, and Trading activities generated a loss of $23 million versus a loss of $5 million in the year-ago period.
Financials
Quarterly net cash flow from operations was $1.69 billion. Hess’ capital expenditures totaled $1.49 billion in the reported quarter, of which approximately $1.47 billion were expended toward E&P.
Earlier in January, Hess had boosted its 2011 capital and exploratory budget to $5.6 billion, representing a 44% increase from $3.9 billion spent in 2010. The company’s capital and exploratory budget for the year constitutes $3.1 billion for production, $1.6 million for developments and $900 million for exploration.
Hess’ capital outlay for production is focused mainly on the Bakken oil shale in North Dakota, the deepwater Gulf of Mexico (GoM) and Equatorial Guinea.
The developmental capex is aimed at the enhancement of Bakken, Valhall, and the GoM projects. These include expansion of gas processing and export rail facilities in the Bakken and redevelopment of the Valhall field, along with the progression of the Pony and Tubular Bells projects in the deepwater GoM.
As of June 30, 2011, the company had approximately $2.19 billion in cash and $5.54 billion in long-term debt (including current maturities). Hess’ debt-to-capitalization ratio at the end of the quarter stood at 22.7% versus 24.9% in the preceding quarter.
Outlook
We believe that New York-based Hess Corp. is favorably positioned to benefit from an array of developments projects, commodity price leverage and improving fundamentals within the industry.
A ramp-up in activities at Bakken, Eagle Ford and Marcellus in the U.S. and the Paris Basin in France, accompanied by a rich portfolio of offshore drilling opportunities in the GoM, Brazil, West Africa and Egypt, will strengthen the company’s future production growth and drive its earnings, cash flow and valuation. Further, the latest discovery of oil at the Paradise-1 deepwater exploration well offshore Ghana holds a lot of promise.
However, we continue to remain concerned about Hess’ ability to fund large-scale, longer-term developments and its projected capital spending especially in the light of lofty exploration expenses and dry hole costs, which increased substantially to $257 million in the quarter from $172 million in the year-ago period.
We are maintaining our long-term Neutral recommendation on the stock. Hess, which faces competition from Marathon Oil Corporation (MRO) and ConocoPhillips (COP) currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.
CONOCOPHILLIPS (COP): Free Stock Analysis Report
HESS CORP (HES): Free Stock Analysis Report
MARATHON OIL CP (MRO): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment