In difficult times for the oil and gas exploration industry, there are quality names that are available at attractive valuations.
While I still don’t recommend big exposure to the sector, I have felt for the last six to nine months that investors can consider gradual exposure to some quality names in the industry. In line with this view, Hess Corporation (HES, Financial) is worth considering for the long term. The stock has returned 16% year to date, but there is meaningful upside potential for the next three to five years for investors willing to hold the stock with patience.
Coming to the fundamental factors that support my view, Hess has a robust credit profile and that’s the first reason to be bullish on the stock. For the quarter ended June 30 Hess reported cash and equivalents of $3.1 billion. Further, with $4.7 billion in undrawn credit facility, the company’s total liquidity buffer as of the second quarter was $7.8 billion.
For fiscal year 2016, the company expects an exploration budget of $2.4 billion and the current liquidity clearly implies that the company is fully financed for the next 24 months. Liquidity from operating cash flow will continue to provide additional buffer.
Therefore, from a financing for growth perspective, Hess is well positioned and a net debt of $3.4 billion as of the second quarter provides strong financial flexibility. In addition to these positives, Hess also has debt maturity of $600 million for the period 2016-2018. These obligations will be met through internal cash flows, and there is no refinancing need in the next 24 months. With these key factors in mind, the company’s credit profile is healthy and Hess is likely to emerge from current crisis with a strong credit profile.
From an asset perspective, the following points make Hess Corporation worth considering for long-term:
- Hess has 76% liquid reserves, which is among the highest in the industry. With robust cost control, the company’s cash margin is also among the best in the industry.
- Hess has significant acreage in Bakken and Utica where a deep drilling inventory is available. Just in Bakken, Hess expects 3,200 potential drilling locations. Further, North Malay Basin and Stampede assets will add to production in 2017 and 2018. This will add to steady growth in the company’s production and cash flows.
- The company’s Guyana asset also holds long-term potential and is still under appraisal. Once there is more development on this front, I expect it to act as a potential stock upside trigger.
From an industry perspective, oil prices should be supportive of stock upside in the medium term. EIA forecasts oil to be around $52 per barrel in 2017; if this holds true, I expect acceleration in investments in fiscal year 2017 as compared to fiscal year 2016. However, I would remain cautiously optimistic considering the point that global economic weakness can translate into decline in consumption growth even if supply side factors adjust.
In conclusion, even as the industry continues to face challenges, Hess Corporation has a strong financial profile and quality assets that can deliver robust returns in the long term. Current levels are good for accumulation, but investors should avoid a big plunge in the sector.
Disclosure: No position in the stock.
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