Integrated oil company Hess Corp. (HES) reported adjusted first quarter 2011 earnings of $1.83 per share (excluding the one-time items), which fell short of the Zacks Consensus Estimate of $1.85, but improved significantly from $1.49 earned in the year-earlier quarter.
Total revenue jumped 14% year over year to $10,515 million in the quarter, but missed the Zacks Consensus Estimate of $11,316 million.
Operational Performance
Exploration and Production (E&P): The segment posted $979 million in profit, higher than the year-earlier profit of $551 million. The company incurred a higher exploration expense related to the exploration well located on Block 1 offshore Egypt in the North Red Sea.
Quarterly hydrocarbon production was 399 thousand barrels of oil equivalent per day (MBOE/d), down almost 6% year over year. Production disruption, due to the political upheaval in Libya, as well as the divestiture of certain natural gas producing assets in the United Kingdom North Sea were responsible for the production loss.
Crude oil production was 274 thousand barrels per day (down from 289 thousand barrels per day in the year-ago quarter), natural gas liquids accounted for 18 thousand barrels (up from 17 thousand barrels) and natural gas was 643 thousand cubic feet (Mcf) (down from 705 Mcf).
Worldwide crude oil realization per barrel of $87.22 (including the impact of hedging), showed a significant 37% year-over-year jump. Worldwide natural gas prices (including the impact of hedging) slipped 1% year over year to $5.84 per Mcf.
Marketing and Refining: The segment posted a profit of $39 million, down substantially from the year-earlier quarter’s earnings of $87 million. The reported quarter experienced a loss of $48 million from refinery operations compared with a loss of $56 million in the year-ago quarter. Marketing earnings dropped 44% year over year to $68 million, and Trading activities generated income of $19 million versus $22 million in the year-ago period.
Financials
Quarterly net cash flow from operations was $1.14 million. Hess’ capital expenditures totaled $1.19 billion in the reported quarter, of which approximately $1.17 billion were absorbed into the E&P business.
Earlier in January, Hess 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 of $3.1 billion for production focuses mainly on the Bakken oil shale in North Dakota, deepwater Gulf of Mexico (GoM) and Equatorial Guinea.
The developmental capex is aimed at the enhancement of Bakken, Valhall, and 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 March 31, 2011, the company had approximately $1.97 billion in cash and $5.55 billion in long-term debt. Hess’ debt-to-capitalization ratio at the end of the quarter stood at 23.5% versus 23.7% in the preceding quarter.
Outlook
We believe that the 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 scenario.
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.
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 $313 million in the quarter from $151 million in the year-ago period.
The company faces competition from Occidental Petroleum Corporation (OXY) and ConocoPhillips (COP).
We are maintaining our long-term Neutral recommendation on the stock. Hess shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.
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HESS CORP (HES): Free Stock Analysis Report
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