In the past, the stocks I have discussed in the energy sector have been with a focus on the balance sheet and liquidity profile. In challenging times, the key is survival, and companies with strong balance sheets will not only navigate the crisis but emerge strong once oil trends higher.
Hess Corporation (HES) is worth considering with an investment horizon of three to five years. For the year to date, Hess has trended higher by 11%, and more near-term upside can be expected as well for the stock.
Coming first to the liquidity position, Hess has cash (including recent equity offering) of $4.3 billion along with $4 billion in undrawn credit facility and $0.7 billion in unused revolver lines. With total liquidity of $9 billion, Hess Corporation is well positioned in challenging times for the industry.
From a capital expenditure perspective, Hess expects to incur capex of $2.4 billion for 2016, and this implies that the company is fully funded for the next 12 months only through cash holdings. Further, Hess reported operating cash flow of $623 million for fourth quarter 2015 and considering annualized numbers, 2016 OCF can be in the range of $2 billion to $2.5 billion. Even if OCF of $2 billion is considered, the company will close 2016 with total cash and equivalents of $3.9 billion. In other words, Hess is fully funded for 2016 and 2017 capital expenditure through internal cash and cash flows.
Another important point from a balance sheet perspective is that Hess has an excellent debt maturity profile. The company can potentially reduce debt through internal cash flow in the coming years. Hess has debt maturity of $100 million, $400 million and $100 million for 2016, 2017 and 2018. With just $600 million in debt maturity for the next three years, the company does not need any debt refinancing.
Besides the liquidity and balance sheet factor, Hess is also attractive from an asset perspective with the company having 76% liquids as a percentage of total reserves. Further, according to the company’s latest presentation, Hess Corporation had 2015 cash margin of $27 per barrel, which is among the best in the industry. Marathon Oil (MRO, Financial) had cash margin of $21 per barrel for 2015, and Occidental Petroleum (OXY, Financial) had cash margin of $16 per barrel for the same period. I am mentioning these two names as I recently discussed these stocks as well with a positive outlook.
From an asset perspective, there is also little doubt that Hess has one of the best positions in Bakken, and the asset will continue to deliver significant long-term value for shareholders. While the company’s 2016 Bakken capital expenditure is limited to $425 million, the asset will be a major contributor to future resources and production growth.
With all these positives in consideration, Hess is certainly an attractive energy stock to consider for the next three to five years. With the discussion of the company’s liquidity, it is likely that Hess can maintain robust credit health for the next 24 months even if industry conditions remain largely the same.
While the stock has trended higher recently, I expect more upside in the coming quarters. If there is a global agreement on an oil production freeze, Hess will surge higher. With the recent equity offering, the company is now well positioned, and I expect no further earnings dilution in the next 24 to 36 months. This adds to the positive factors for considering exposure to Hess Corporation.
Disclosure: No positions in the stock.
