Hess Corp. (HES) remains upbeat on its U.S. shale acreage and expects its oil output to double in the coming few years in the region.
New York-based Hess Corporation said production to hit 1.5–2 million barrels of oil per day in the coming five to seven years, backed by a ramp-up in unconventional oil play activity across North Dakota to Texas. Presently, the region produces approximately 700,000 barrels per day.
Hess is the largest gas producer and the third-largest oil producer in North Dakota, producing more than 40,000 barrels of oil equivalent per day. Going forward, we expect unconventional oil (including sources like oil shales and coal-based liquid supplies) and gas extraction (using non-traditional techniques) to play important roles in the world energy mix. After building up position in the North American Bakken oil field for unconventional oil, Hess is pursuing unconventional gas in the Marcellus Shale play.
In January, the company had boosted its 2011 capital and exploratory budget to $5.6 billion (up 44% year over year), to focus on the Bakken oil shale in North Dakota, the deepwater Gulf of Mexico (GoM) and Equatorial Guinea.
However, lofty prices could come in the way of drilling these resources. The federal government is also mulling over regulations on chemicals intended for the hydraulic drilling in these regions. Last quarter, Hess experienced exploration expenses and dry hole costs of $257 million as against $172 million in the year-ago period.
While giving updates on its Libyan operations, the company also remains hopeful of securing its previous position in the field of oil production in the region. Last quarter, Hess’ hydrocarbon production declined more than 10% year over year. Lower production in Africa (due to political upheaval in Libya) and the divestiture of certain natural gas producing assets in the United Kingdom North Sea were responsible for the loss in volumes.
Although we hold a positive view on Hess’ production growth strategy following management’s confidence over U.S. unconventional resources, we believe the exploration and production business is inherently risky, often with an equal share of successes and failures. We also remain skeptical about Hess’ ability to fund large-scale, longer-term developments, especially in the light of higher exploration expenses and dry hole costs.
Hence, we are maintaining our long-term Neutral recommendation on the stock. Hess, which faces competition from Marathon Oil Corporation (MRO) and ConocoPhillips (COP) currently, retains a Zacks #3 Rank, which translates into a short-term 'Hold' rating.
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