I recently renewed my focus on the oil and gas exploration sector with a discussion on stocks that did well in the first quarter and are likely to do well in the coming quarters.
Hess Corporation (HES, Financial) has been in my recommendation radar, and I discussed the stock in the past with a positive view on the back of solid fundamentals. For the year to date, Hess has trended higher by 20%.
Before discussing company-specific factors, I would like to point out the following factors that are likely to be bullish for oil. As oil trends higher, Hess can expect renewed upside.
- IEA recently commented that it expects “dramatic reduction” in global oil inventory and the supply-demand to rebalance in early 2017. If this holds true, I expect oil to trend higher in the second half of the year, and this will be positive for oil and gas companies with solid fundamentals.
- After a strong 2015, the dollar is likely to weaken in 2016 as the Fed defers the date for another rate hike. I also expect that the Fed can potentially cut rates toward the end of 2016 if economic conditions remain weak. The recently released jobless claims numbers were the highest since February 2015, and this provides insights in the economic scenario. Overall, a weak dollar is positive for oil and commodities (in general), and I expect oil to firm up on dollar weakness in the coming months.
These two factors are likely to ensure that the momentum for oil prices remains positive, and I expect Hess to trend higher with upside in oil.
Coming to company-specific factors, the company’s balance sheet and cash position continue to remain robust, one of my primary reasons to be bullish on Hess. Just to put things into perspective, Hess closed the first quarter with total cash position of $3.6 billion. This ensures that the company is fully financed for the next 12 to 24 months.
Further, robust cash position ensures the balance sheet debt does not increase in the coming quarters and the company’s credit profile remains strong even if energy prices remain sideways. It is worth mentioning here that for March, the company’s total liquidity (cash and undrawn credit facility) was $8.3 billion. This allows Hess to expand investments significantly if oil trends meaningfully higher.
Continuing with the discussion on debt and credit profile, Hess has debt maturity of only $600 million through 2018. This debt can be repaid through internal cash flows, and there is no refinancing need for the next 36 months.
From an asset perspective, the point I like about Hess is that 76% of the company’s reserves are liquid reserves, and this is among the highest in the industry with Marathon Oil (MRO, Financial) leading the pack and having liquid reserves of 81%. As a result of a high percentage of liquid reserves coupled with attractive assets and declining cost profile, the company’s 2015 cash margin was $27 per barrel. While cash margin will decline in 2016, the company’s EBITDA margin will be attractive when oil trends higher. This makes Hess worth holding for the next three to five years.
Hess is certainly one of the better positioned companies in the oil and gas sector, and the stock’s recent rally still has legs. The stock has corrected marginally from highs of 2016, and this correction is a good opportunity to consider fresh exposure to the stock. However, I still advise against a big plunge in any stock in the energy sector.
Disclosure: No positions in the stock.
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