Hess Corp. (HES) reported modestly better-than-expected second-quarter earnings of $1.15 per share, compared with the Zacks Consensus Estimate of $1.14 and the year-earlier profit of 31 cents. The increase was driven by increased production volumes and improved realized commodity prices, partially offset by a Marketing and Refining loss. Total revenue increased 14.7% year over year to $7.75 billion, but remained well below the Zacks Consensus Estimate of $9.48 billion.
Operational Performance
The Exploration and Production (E&P) segment posted a $488 million profit in the quarter, more than double than the year-earlier profit. Results were positively impacted by a significant increase in oil and gas prices and volumes.
Quarterly crude oil and natural gas production on an oil-equivalent barrel basis was 415 thousand barrels of oil equivalent per day (MBOE/d) — 73% liquids and 27% natural gas — up more than 2% year over year.
Worldwide crude oil realization per barrel during the quarter was $64.81 (including the impact of hedging), up 31.5% year over year. Worldwide natural gas prices (including the impact of hedging) increased more than 22% year over year to $5.57 per thousand cubic feet (Mcf).
The Marketing and Refining segment posted loss of $19 million, compared with the loss of $30 million in the year-earlier quarter. From the HOVENSA refinery (located on the island of St. Croix in the U.S. Virgin Islands), Hess incurred a loss of $6 million compared with a $75 million loss in the year-earlier quarter.
Quarterly net cash flow from operations was $981 million. Hess’ capital expenditures totaled $963 million in the second quarter, of which approximately 97% went into the E&P business. At the end of the quarter, the company had approximately $1.36 billion in cash and $4.33 billion in long-term debt. Hess’ debt-to-capitalization ratio at the end of the quarter stood at 22.9%, compared with 24.8% at the end of 2009.
Acquisition Update
Management has growing confidence in the company’s performance in Bakken Shale play, North Dakota. Subsequently, the company agreed yesterday to acquire American Oil and Gas Inc. in an all-stock transaction (0.1373 Hess hare for each share of American Oil & Gas common stock). The acquisition will augment Hess’s acreage position in this play by 85,000 net acres.
Outlook
We continue to see upstream momentum on the back of the company’s large inventory of exploration and development projects. Hess’ improving fundamentals, commodity price leverage and exposure to areas with high resource potential have improved its prospects. The acquisition is based upon Hess’ strong fundamentals and we believe that it will unlock shareholder value.
We have a long-term favorable view for Hess’ exploration and production portfolio that complement its low-risk drilling opportunities. However, the company’s premium valuation already reflects these positives. Our Neutral recommendation for the stock remains unchanged at this stage with the Zacks #3 Rank (Hold).
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