Hess Misses EPS in 1Q – Analyst Blog

Total revenue declined 7.3% year over year to $9,747 million in the quarter, but surpassed the Zacks Consensus Estimate of $8,646 million.

Exploration and Production (E&P): The segment posted profits of $635 million in the first quarter, 35.1% lower than the year-earlier profit of $979 million.

Quarterly hydrocarbon production was 397 thousand barrels of oil equivalent per day (MBOE/d), down 0.5% year over year.

Crude oil production was 276 thousand barrels per day (down from 274 thousand barrels per day in the year-ago quarter), natural gas liquids production totaled 19 thousand barrels (up from 18 thousand barrels) while natural gas output was 610 thousand cubic feet (Mcf) (down from 643 Mcf).

Worldwide crude oil realization per barrel of $89.92 (including the impact of hedging) showed a significant 3.1% year-over-year jump. Worldwide natural gas prices (including the impact of hedging) upped 6.7% year over year to $6.23 per Mcf.

At the end of 2011, oil and gas proved reserves were 1,573 million barrels of oil equivalent, compared with 1,537 million barrels at the end of 2010. During 2011, the Corporation added 203 million barrels of oil equivalent to proved reserves. Subject to final review, these additions replaced approximately 147% of the Corporation’s 2011 production, resulting in a reserve life of 11.4 years.

Marketing and Refining: The segment posted earnings of $11 million in the first quarter, down 71.8% from year-earlier earnings of $39 million.

Refinery operations suffered a loss of $6 million compared with a loss of $48 million in the year-ago quarter. However, Marketing earnings were $22 million in the reported quarter, down from the year-ago earnings of $68 million, due to the impact of a mild winter on energy marketing operations. Trading activities incurred a loss of $5 million versus an income of $19 million in the year-ago period.

Quarterly net cash flow from operations was $988 million. Hess’ capital expenditures totaled $1,986 million in the reported quarter, of which approximately $1,963 million were expended toward E&P.

As of March 31, 2012, the company had approximately $396 million in cash and $6,978 million in long-term debt (including current maturities). Hess’ debt-to-capitalization ratio at the end of the quarter was 26.7% versus 24.6% in the preceding quarter.

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 like 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. 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 rise in the coming five to seven years, backed by a pickup in unconventional oil play activity across North Dakota to Texas

However, 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.