May 28, 2015
Hess Corporation
(HES - NYSE)
$72.01*
Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 1Q15 Earnings Update
Prev. Ed.: Mar 12, 2015; 4Q14 Earnings Update (broker material considered till Mar 2, 2015)
Brokers Recommendations: Positive: 53.3% (8 firms); Neutral: 46.7% (7); Negative: 0.0% (0)
Brokers Target Price: $87.50 ( $3.0 from the last edition; 10 firms)
Prev. Ed.: 4; 10; 0
Brokers Avg. Expected Return: 17.3%
*NOTE: Though dated May 28, 2015, broker material are as of May 26, 2015
Note: A Flash Update was done on Apr 29, 2015; 1Q15 Earnings Release
Note: The tables below (Revenues, Margins, and Earnings per Share) contain material from fewer brokers than in
the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying
spreadsheet models.
Portfolio Manager Executive Summary
Hess Corporation (HES or the Company) is a global exploration and production (E&P) company. Core
operations are located in the U.S. (onshore and Gulf of Mexico), the North Sea, Africa, and AsiaPacific.
Of the 15 firms in the Digest group covering Hess, 8 provided positive ratings and 7 rendered neutral
ratings. None of the firms were negative on the stock. The firms provided the lowest target price of
$66.00 (6.7% downside from the current price) and a highest target price of $105.00 (38.8% upside
from the current price), with the average price being $87.50. The following is a summarized opinion of
the diverse brokerage viewpoints:
Positive or equivalent (53.3%; 8/15 firms): The firms with a positive outlook believe that Hess is one
of the few companies with a backlog of projects that should enable attractive medium-term production
expansion and reserve growth. It has a proven exploration program that provides investors with a
unique upside potential. The firms have confidence in Hess ability to deliver maximum value from its
portfolio with the combined strength of reserve replacement and production growth.
North Dakota is likely to be a key production growth driver. The firms remain positive on Hess smaller
exposure to Eagle Ford as well as several global development projects (such as Norway, Gulf of
Mexico, Malaysia, Ghana and the Utica Shale (Ohio)). These are likely to be the growth drivers in
2015 and beyond. Further, the Company s drilling and completion cost per well in the Bakken
averaged $7.1 million in the first quarter of 2015, down 6.6% from $7.6 million per well in the year-ago
quarter. The cost economies in the play will further boost earnings. The exploration budget for 2014 is
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focused primarily on three regions: the Gulf of Mexico; Southeast Asia, particularly Malaysia; and the
West Africa play, including Ghana. Moreover, Hess priority remains investment in future growth with a
balanced approach between unconventional, exploitation and exploration. Such investment is
expected to realize an average annual production growth of 5% 8% through 2017 and beyond. With
the growing free cash flow over the years, Hess will be able to augment its share buyback and boost
dividend.
Neutral or equivalent (46.7%; 7/15 firms): These firms remain concerned as the Company s
earnings are heavily inclined toward the E&P segment. Although there is significant resource potential
from new discoveries, the E&P business is inherently risky, often with equal successes and failures.
While future projects have the potential to add value to share price, they believe the risk/reward
potential is essentially neutral.
Hess remains on track with its multi-year transformation program. However, the firms contend that to
support its capital expenditures through 2014, the Company remains highly dependent upon major
asset sales. This year, the firms believe Hess will likely register a downfall in both its parameters
production and reserves. As of year-end 2014, Hess proved reserves tally stood at 1.431 billion oilequivalent barrels, down 0.4% from the 2013-end level. Hence, the Company s growth and returns
picture will likely be hindered by the asset sale programs in the near term.
While Hess has a number of exploration projects in its pipeline, which could provide a meaningful
upside to production growth, the firms remain concerned about the Company's relatively high cost
structure that makes it more dependent on high oil prices than its peers. Further, the long gestation
period for new projects to come online could cause capital spending to outpace volume growth to a
greater extent than its peers. This could further hinder multiple expansion plans.
May 28, 2015
Overview
The key positive and negative arguments, according to the firms, are addressed below:
Key Positive Arguments
Fundamentals
Accelerating exploration success
Sharp focus on core asset development and
revival of growth
Upgrading its high-grade deepwater exploration
programs where technical risk is high while
success rate is higher
Growth Opportunities
Production growth is expected to be in the midto-upper single-digit range over the next few
years
Acquisitions extend production growth into the
next decade
Key Negative Arguments
Fundamentals
Risk of unfavorable decisions from the pending
litigations
Significant delays in new upstream projects
Tight markets for skilled labor
Growth Impediments
Spin off of downstream segment has led to a
weaker company profile
Macro Issues
Volatile oil and gas prices
Slow recovery of the global economic conditions
Competitive Advantages
Dividend yield higher than the peer group
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Based in New York, Hess Corporation (HES), previously known as Amerada Hess Corporation, is a
global exploration and production (E&P) company that develops, produces, purchases, transports and
sells crude oil and natural gas. The company s E&P activities are concentrated in Algeria, Australia,
Azerbaijan, Brazil, Denmark, Egypt, Equatorial Guinea, Gabon, Ghana, Indonesia, Libya, Malaysia,
Norway, Russia, Thailand, the United Kingdom and the United States. As of year-end 2014, Hess
proved reserves tally stood at 1.43 billion oil-equivalent barrels, while the company replaced 158% of
its production, resulting in a reserve life of 11.7 years.
The company previously operated under two segments: E&P and Refining & Marketing ( R&M ) which
it began to divest during 2013. The Refining and Marketing segment has now been classified under
discontinued operations.
Hess now operates as a pure play E&P and is working toward becoming a more focused, higher
growth and lower risk company. The company continues to concentrate on its E&P portfolio by
divesting assets that do not fit its growth profile.
Its website is www.hess.com. The Company operates on a calendar-year basis.
May 28, 2015
Long-Term Growth
Hess expects significant upstream growth opportunities in the coming years and a long-standing asset
base to likely enhance value in the long term. The company exhibits a sound financial position to fund
growth together with the global asset portfolio review, which is underway, to enhance shareholders
value. Moreover, the firms believe that long-term growth for Hess will be supported by acquisitions that
will drive its unconventional production.
According to most of the firms, Hess has a considerable exploration potential in the sector, mainly in
offshore Gulf of Mexico, Brazil, West Africa, Indonesia, Egypt, and Libya. The drilling success could
significantly boost the stock performance in the next two years.
In the long term, the Company s strong portfolio of exploration prospects is expected to support
meaningful increases in both production and reserves and the Company continues to forecast 3% per
annum production growth over the next few years.
However, the Company has divested its downstream businesses which consist of terminal, retail,
energy marketing and trading operations. Separately, the Company closed its Port Reading refinery in
Feb 2013, marking its exit from the refining business.
The firms also believe that the spin-off of Hess downstream business would be accretive in terms of
higher dividend yields, higher unit profit, and lower net debt ratios than the averages of its respective
peer groups. Hess' new growth strategy is oil focused and the company will continue to expand mainly
in liquids-rich plays.
May 28, 2015
Target Price/Valuation
Provided below is the summary of valuation and ratings as compiled by Zacks Digest:
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Rating Distribution
Positive
53.3%
Neutral
Negative
Average Target Price
46.7%
0.0%
$87.50
Digest High
$105.00
Digest Low
$66.00
Number of Firms with Target Price/Total
10/14
Impediments to the price target include high commodity risk due to sensitivity to changes in oil price,
high financial risks being leveraged in the sector, management credibility issues, high-risk long-term
projects, lower diversification as compared to its peers leading to more earnings volatility, a low credit
rating, a slowdown in global economic growth, cost reduction and exploration success as it relates to
future growth and geopolitical risks.
Recent Events
On Apr 29, 2015, Baker Hughes reported 1Q15 financial results. Highlights are as follows:
Total revenue was $2,528.0 million against $3,108.0 million in 1Q14.
Adjusted net income was $53.0 million against $319.0 million in 1Q14.
Diluted earnings per share (EPS) were $0.18 per share compared with EPS of $0.96 in 1Q14.
Revenue
Total revenue was $2,528.0 million in 1Q15, down 18.7% from $3,108.0 million in 1Q14 and 54.1%
from $5,506.0 million in 4Q14.
Production
Quarterly hydrocarbon production was 362 thousand barrels of oil equivalent per day (MBOE/d), up
18% year over year. The increase in production came primarily on the back of higher output from the
Bakken shale play.
Crude oil production was 241 thousand barrels per day (up from 197 thousand barrels per day in the
year-ago quarter), natural gas liquids production totaled 32 thousand barrels (up from 16 thousand
barrels a year ago). However, natural gas output was 531 thousand cubic feet (Mcf) (down from 565
Mcf in the previous year).
Realized Prices
Worldwide crude oil realization per barrel of $44.78 (including the impact of hedging) decreased 54.8%
year over year. Worldwide natural gas prices fell 32.6% year over year to $4.74 per Mcf.
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Reserves Replacement
At the end of 2014, oil and gas proved reserves were 1,431 million barrels of oil equivalent compared
with 1,437 million barrels of oil equivalent at the end of 2013. During 2014, the Company added 193
million barrels of oil equivalent to proved reserves. Subject to final review, these additions replaced
approximately 158% of the Company s 2014 production, resulting in a reserve life of 11.7 years.
Guidance
The Company expects production to average between 350 MBOE/d and 360 MBOE/d for full-year
2015. This would be driven by a full year of production from the Tubular Bells Field in the Gulf of
Mexico following first production in late 2015 as well as continued growth in the Bakken and higher
production from the Valhall Field post completion.
The Company expects its 2015 production at 350 360 MBOE/d. Production excludes assets held for
sale in Thailand and Libya production due to civil unrest.
Hess Corp. intends to spend $4.7 billion on exploration and production in 2015, down 16% from 2014
as it focuses more on greater efficiency of its U.S. shale fields. Of the total budgeted amount, Hess
plans to allocate $2.1 billion (45%) toward unconventional shale resources, $1.2 billion (25%) for
production, $1 billion (21%) for development and the balance $0.4 billion (9%) for exploration.
Outlook
Most of the firms lowered their 2015 production forecasts based on the reduction the company has
made in the Bakken and U.S offshore. However, the firms expect meaningful production growth from
the Bakken/North Malay/Valhall regions as well as a full year of production from Tubular Bells.
Margins
Cost of goods sold totaled $542.0 million in 1Q15, reflecting an increase of 17.6% y-o-y and 37.9%
sequentially.
Total costs and expenses were $2,352.0 million in 1Q15 against $2,830.0 million in 1Q14 and
$1,841.0 million in 4Q14.
According to the Company, in the reported quarter, the Exploration and Production (E&P) business
posted adjusted profits of $147 million, down 66.3% from the year-earlier profit of $436 million.
Earnings per Share
The Company reported adjusted 1Q15 earnings of $0.18 per share, down 81.2% from $0.96 reported
in 1Q14.
The adjusted net income in 1Q15 was $53.0 million compared with $319.0 million in 1Q14.
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The average shares outstanding at the end of 1Q15 were 289.0 million compared with 334.3 million
in 1Q14.
Outlook
Most of the firms lowered their 2015 EPS estimates on expectations of lower oil prices as well as to
reflect higher per barrel cash operating expense and higher exploration and DD&A expenses.
Analyst
Nilendu Saha
Copy Editor
Sudipta Mukherjee
Content Editor
Lead Analyst
Nilendu Saha
QCA
No. of brokers
reported/Total brokers
Reason for Update
Nilanjan Choudhury
Earnings Update
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