We have maintained our Neutral recommendation on Hess Corporation (HES) given its poor first quarter results, which remains equally balanced by its exploration operations.
The New York-based integrated energy company’s first quarter underperformance was mainly due to the lackluster production volume, which registered a downfall from the year-ago level. Moreover, Hess sees its Bakken production to be below the current expectation of 60 thousand barrels of oil equivalent per day (MBoe/d) for the year due to permit delay and HBP (held by production) drilling. This will likely put downward pressure on the company’s production, since the Bakken forms a major part of its total output.
Notably, Hess’ 2012 capital expenditure budget of $6.8 billion remains unchanged. Although management did not hike the budget for the year, it plans to add two extra rigs to Bakken, putting pressure on its cost.
Despite the recent setback in quarterly production, we remain positive on Hess’ strong exploration upside in Ghana. The company’s Paradise discovery offshore Ghana is expected to offer the needed momentum over the coming years. Further, with the resumption of activities in the deepwater Gulf of Mexico, Hess got involved in the Tubular Bells project in the region with Chevron Corporation (CVX). Holding 57% interest, Hess acts as the operator of the venture, which is expected to start production in 2014. We believe that this collaboration will act as a catalyst for Hess’ future growth and pave the way for more opportunities.
Although Hess revealed that its key growth possession, i.e. Bakken, will not meet its production expectation for the year and capex is likely to be revised upward, the company confirmed that its long-term target of 80 MBoe/d in 2013 and 120 MBoe/d in 2015 for the region remains unchanged. Hess also increased its rig count for the region to 16-17 rigs for 2012 from the present 14.
The closure of Hovensa refinery venture in Virgin Islands amidst the weak demand for refined petroleum products is also a positive for the company as it will help bring down further losses. In view of the global economic slowdown and new refining capacity entering the world market, this decision of Hess will help boost shareholders’ value.
Hence, considering these above mentioned aspects, we expect the stock to perform in line with other industry players and the broader market. The company retains a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.
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