Hess Corporation (HES) in on track to strengthen its traction in one of the emerging shale plays in the U.S. –– the Utica Shale –– by entering into a second transaction in a week. The company shelled out $750 million for the purchase of the 85,000 acre Marquette Exploration LLC and other leases in the same play.
The deal comes a day after the company agreed to jointly explore and develop 200,000 acres of CONSOL Energy Inc. (CNX) in Utica Shale play in eastern Ohio. The joint venture agreement with CONSOL entitles Hess to acquire 50% interest of the former in Utica Shale for an aggregate consideration of $593 million. Upon closure, Hess will pay $59 million, while the balance $534 million will be expended in the form of a 50% drilling interest obligation over a five-year span. The transaction is expected to be completed next month, pending customary closing conditions.
Overall, the purchases give Hess an 185,000 net acreage position in Utica. The latest contract calls for Hess to operate in Jefferson, Harrison and Belmont counties with a 100% working interest. The company intends to commence the appraisal drilling operation in the fourth quarter.
Utica Shale –– located approximately 3,000 to 7,000 feet below the Marcellus Shale formation –– stretches southwest from New York and Canada to Tennessee. Utica happens to be one of the emerging shale plays in the U.S. and oil giants like Chesapeake Energy Corporation (CHK) remain proactive in ramping up their development activities in the region.
We believe that the recent tie-ups will serve as a catalyst for New York-based Hess’ future growth in reserves as the covering areas have high liquids content. The company also boosted its annual long-term oil and gas production growth target in the range of 3−5% versus its prior expectation of 3%. The hike is mainly attributable to higher output from unconventional assets like Bakken Shale.
We continue to see an upstream momentum for Hess on the back of its large inventory of exploration and development projects. The company aims to resume its production at two idled offshore fields namely Llano in the U.S. Gulf of Mexico and Valhall in the Norwegian North Sea, this year. Nevertheless, we see limited upside potential for the shares considering Hess’ sensitivity to gas/oil price volatility, as well as drilling results, costs, geo-political risks and project timing delays.
We are maintaining our long-term Neutral recommendation for Hess, which holds a Zacks #3 Rank (short-term Hold rating).
