We reaffirmed our Neutral recommendation on Hess Corporation (HES), on May 17, 2013. The company’s new strategy of concentrating on high-impact exploration areas compared to low risk areas in more stable regions has increased its spending on Bakken as well as North Malay Basin, Valhall and Tubular Bells. However, a tentative price environment reduces Hess’ ability to generate cash flow and, consequently, production and reserve growth.
Why Maintained?
Hess is executing a transition from an integrated oil and gas company to a predominantly exploration & production (E&P) entity. In the first quarter of 2013, Hess announced its intent to exit all its downstream businesses, including its terminal, retail, energy marketing and trading operations, as a result of the multi-year strategic transformation into a pure play E&P company.
In addition, the Corporation closed its Port Reading refinery in Feb 2013, completing its exit from the refining business. All of these downstream businesses have now been classified as discontinued operations.
In view of the global economic slowdown and new refining capacity entering the world market, these aforesaid decisions will help boost Hess’ shareholder value. 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.
Bakken recorded a notable production growth of 87% in 2012, while experiencing a reduction in drilling and completion costs by more than 30%. For 2013, this region is expected to average 64–70 thousand barrels of oil equivalent per day (Mboe/d) and the majority of growth is expected to occur in the second half of this year.
The exploration budget for 2013 focuses primarily on three regions: the Gulf of Mexico; Southeast Asia, in particular Malaysia; and the West Africa play, including Ghana.
Although there is significant resource potential from new discoveries, the E&P business is inherently risky, often with an equal share of successes and failures. 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.
Other Stocks to Consider
While we prefer to remain on the sidelines for ExxonMobil, there are other stocks in the sector that appear more rewarding. These include Dawson Geophysical Company (DWSN), InterOil Corporation (IOC) and Exterran Holdings, Inc. (EXH), which are expected to outperform over the next few months and carry a Zacks Rank #1 (Strong Buy).
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