Hess Corporation (HES) has slashed its production guidance for the first two months of the fourth quarter of 2013 and overall guidance for the same quarter. The cascading trend in global oil prices prompted the cut.
Hess reduced its fourth quarter daily production guidance to 310,000 barrels of oil equivalent per day (boepd) from 320,000 boepd guided previously. The decrease reflects the closure of sale of its interest in the Natuna A Field in Indonesia and higher production downtime due to maintenance activities.
At the same time, having faced a global slump in realized selling prices for crude oil during the first two months of the fourth quarter, the company anticipates sequentially lower earnings. Worldwide realized selling prices for crude oil for October and November averaged $98.65 per barrel compared to $104.95 per barrel in the third quarter. This was primarily due to an $11 per barrel decrease in U.S. crude oil price realizations. The decrease reflects widening crude oil spreads between Brent and West Texas Intermediate and Brent and Louisiana Light Sweet.
Hess expects fourth quarterly total unit costs in the range of $48 to $50 per barrel. The exploration & production effective tax rate, excluding non-recurring items is expected within 39% to 41%.
The company remains proactive in returning value to its shareholders. During the first two months of the fourth quarter, the company purchased approximately 9.1 million shares of common stock, bringing cumulative purchases through Nov 30 to 15.6 million shares at a weighted average price of $79.37 per share. The weighted average number of shares (diluted) was approximately 336.2 million for the first two months of the quarter.
Hess is currently executing a transition from an integrated oil and gas company to a predominantly E&P entity, thereby shifting its growth approach from high-impact exploration to lower-risk unconventionals and a smaller, deeper-focused exploration portfolio.
To date in the fourth quarter, Hess has closed the sale of its U.S. East Coast and St. Lucia terminal network for $850 million, its Energy Marketing business for $1.2 billion and its Natuna A asset in Indonesia for $650 million. The company also announced the sale of its interest in the Pangkah asset in Indonesia for $650 million, bringing total after-tax proceeds from announced and completed asset sales to $7.8 billion year-to-date.
Overall, in an attempt to better manage its portfolio with respect to resource availability, project development and intricacy, Hess intends to arrive at a 50:50 ratio between unconventional and conventional assets by 2013 from its existing ratio of 80:20.
Although there is significant resource potential from new discoveries, the E&P business is inherently risky, often with an equal share of success and failure. While future projects have the potential to add value to the share price, we do not expect the risk/reward trade-off to favor the company.
Hess currently holds a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.
Other better-ranked players in the oil and gas exploration and production sector include Abraxas Petroleum Corp. (AXAS), Harvest Natural Resources Inc. (HNR) and SM Clayton Williams Energy, Inc. (CWEI). All these stocks sport a Zacks Rank #1 (Strong Buy).
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