Integrated oil company Hess Corporation (HES) has reported adjusted third quarter 2011 earnings of $1.11 per share, which were below the Zacks Consensus Estimate of $1.40. The quarterly result was also below the adjusted year-earlier earnings of $1.31. The underperformance was mainly due to lower production realized in the reported quarter.
Total revenue slid 2.5% year over year to $8,726 million in the quarter, and failed to meet the Zacks Consensus Estimate of $10,596 million.
Operational Performance
Exploration and Production (E&P): The segment posted $422 million in profit, drastically lower than the year-earlier profit of $1,277 million.
Quarterly hydrocarbon production was 344 thousand barrels of oil equivalent per day (MBOE/d), down 16.7% year over year. Production disturbances in Libya as well as in the Valhall and Llano fields, accompanied by the divestiture of certain natural gas producing assets in the United Kingdom North Sea and natural field declines were responsible for the loss in volumes. These negatives were partially mitigated by the higher production from the Bakken oil shale play in North Dakota.
Crude oil production was 224 thousand barrels per day (down from 290 thousand barrels per day in the year-ago quarter), natural gas liquids production totaled 17 thousand barrels (down from 18 thousand barrels) while natural gas output was 615 thousand cubic feet (Mcf) (down from 630 Mcf).
Worldwide crude oil realization per barrel of $85.81 (including the impact of hedging), showed a significant 32.4% year-over-year jump. Worldwide natural gas prices (including the impact of hedging) upped by a marginal 0.2% year over year to $5.74 per Mcf.
Marketing and Refining: The segment posted a loss of $23 million, narrower than the year-earlier loss of $38 million.
Refinery operations suffered a loss of $38 million compared with a loss of $50 million in the year-ago quarter. However, Marketing earnings climbed marginally to $41 million in the reported quarter from the year-ago earnings of $40 million, and Trading activities incurred a loss of $26 million versus a loss of $28 million in the year-ago period.
Financials
Quarterly net cash flow from operations was $1,022 million. Hess’ capital expenditures totaled $2,550 million in the reported quarter, of which approximately $2,517 million were expended toward E&P.
As of September 30, 2011, the company had approximately $827 million in cash and $5,592 million in long-term debt (including current maturities). Hess’ debt-to-capitalization ratio at the end of the quarter stood at 22.0% versus 22.7% in the preceding quarter.
Guidance
Hess expects full-year 2011 production to range between 375 MBOE/d and 385 MBOE/d. The company also said that the production level will shrink because of lower 2011 Bakken production, the shut-in wells at Valhall in Norway and longer-than-expected downtime at Llano in the Gulf of Mexico.
Notably, it has also boosted this year’s capex to $6.2 billion from $5.6 billion recently, due to its entry into Kurdistan and increased activity in the Bakken and Eagle Ford shale plays.
Outlook
We have maintained our Neutral recommendation on New York-based Hess Corporation, an integrated energy company engaged in oil and gas exploration, production and refining as well as marketing.
Despite the quarterly production setback, we believe that Hess has a competitive advantage over its peers based on improving fundamentals, commodity price leverage and exposure to areas with high resource potential in areas of Brazil, Ghana, Libya and offshore Australia.
We believe that the company’s strong exploration upside in Ghana and continued improvement in Bakken productivity hold a lot of promise. Recently, the company boosted its annual long-term oil and gas production growth target to the range of 3−5% versus its prior expectation of 3% mainly on higher output from unconventional assets like Bakken Shale.
Hess also remains upbeat on its U.S. shale acreage and expects its oil output to double in the coming few years in the region. The company said that its production will hit 1.5–2 million barrels of oil per day in the coming five to seven years, backed by a pickup in unconventional oil play activity across North Dakota to Texas. Presently, the region produces approximately 700,000 barrels per day. Again, we believe the company’s recent Utica Shale tie-up with CONSOL Energy Inc. (CNX) will serve as a catalyst for its future growth in reserves as the covering areas have high liquids content.
However, the company’s reduced 2011 production guidance along with increased expenditure keep us on the sidelines for the near term. Hess’ sensitivity to gas/oil price volatility, as well as drilling results, costs, geo-political risks and project delays, also limit the upside potential of its shares.
We are maintaining our long-term Neutral recommendation on the stock. Hess, which faces competition from ConocoPhillips (COP), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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