On Jan 14, 2015, we issued an updated research report on Hess Corporation (HES), an integrated energy company engaged in oil and gas Exploration & Production (E&P) and refining as well as marketing.
Hess is undergoing a transition from an integrated oil and gas company to a predominantly E&P entity. The company is shifting its growth approach from high-impact exploration to low-risk unconventionals, and a smaller, more focused exploration portfolio. It announced the closure of its Port Reading refinery, marking its complete exit from the refining business. Hess also sold its Indonesian assets and aims to shed assets in Thailand as well as its terminals, retail, energy marketing and trading businesses in the downstream. In view of the global economic slowdown and new refining capacities entering the world market, the aforesaid decisions will help enhance Hess’ shareholder value.
Hess remains on track with its multi-year transformation program. However, the company is highly dependent on major asset sales to support its capital expenditures through 2015. Again, in 2014, Hess is likely to register a downfall in both its parameters – production and reserves. As of year-end 2013, Hess’ proved reserves tally was 1.44 billion oil-equivalent barrels, down 7.1% from the 2012 level. Hence, the company’s growth and returns will likely be hindered by the asset sale programs in the near term.
Although there is significant resource potential from new discoveries, the E&P business is inherently risky, often with equal chances of successes and failures. While future projects have the potential to add value to the share price, we do not feel the risk/reward trade-off will favor the company.
Other key risks for Hess are project execution, decline in yield due to unscheduled downtime, higher royalties and taxes, unsuccessful drilling results and limited access to energy resources. Additionally, the considerable political unrest, instability and major security issues in Libya make the production unpredictable despite oil supply glut. The tentative price environment reduces Hess’ ability to generate cash flow and consequently, production and reserve growth. The company's earnings depend on the strength of refining margins in the U.S.
Other Stocks to Consider
Currently, Hess carries a Zacks Rank #4 (Sell). Better-ranked stocks in the same industry include Spectra Energy Partners, LP (SEP), NextEra Energy Partners, LP (NEP) and Seadrill Partners LLC (SDLP). All of these stocks sport a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment