Hess Corp. (HES, Financial) reported wider-than-expected losses in the second quarter on July 26 with the stock down 4.2%. Hess has declined by 30% year to date, and this decline comes at a time when broad markets are trading at all-time highs.
The near-term bearish trend for Hess is an excellent opportunity to accumulate the stock for the next two to three years.
Hess also has a current dividend payout of $1.00 per share that translates into dividend yield of 2.3%. I expect dividends to sustain and potentially swell in the coming years.
Therefore, Hess is worth considering not just for long-term stock upside but also for potentially higher dividends.
Ample liquidity for growth
One of the key reasons to be bullish on Hess is the company’s strong liquidity buffer for growth. While I will discuss the asset quality that will drive growth, Hess is well positioned with $2.5 billion in cash and equivalents, $4.0 billion of unused revolver and $500 million in unused committed lines.
With total liquidity buffer of $7.0 billion, I see no concerns from a financing perspective; considering potential cash flows, the company is fully funded for investments in the next 24 to 36 months.
Further, it is important to point out that Hess has net debt to capitalization of 18% with no significant debt maturity in the near term. The company’s balance sheet strength rates as excellent.
Hess has the potential to pay current levels of dividends in the foreseeable future and potentially increase dividends once big projects deliver first oil.
For the first half of the year, Hess reported operating cash flow of $514 million with the company reporting capital expenditure of $786 million for the same period. While the free cash flow is negative for the first half, I don’t see this as a concern considering the company’s liquidity buffer.
Further, as oil trends higher, I expect cash flows to be firm in the coming quarters. Operating cash flow will also get a long-term boost as some prized assets are operational.
Overall, Hess has strong fundamentals. Once upside sustains for oil, the company is positioned to accelerate investments meaningfully.
Quality assets for growth
As of March Hess had 33% of production and 31% resources concentrated in the Bakken. With 556,000 net acres, the asset will remain as a key long-term cash machine for the company.
For fiscal 2017 the company expects net Bakken production in the range of 95 to105mboed and with growth visibility to 175mboed, there is little doubt that the asset is likely to deliver growth for the company in the next few years.
An important point to note here is that Hess has reduced drilling cycle time along with drilling and completion cost on a sustained basis. As oil trends higher, I expect the number of rigs to increase (2,850 future drilling operated locations), and this will deliver high returns from the asset.
In the next three to four years, offshore Guyana is likely to be another asset that will deliver value and serve as a cash flow machine for the company. The offshore asset has seen four discoveries to date with 2.0 billion to 2.5 billion barrels of oil equivalent in gross discovered recoverable resources. Hess has a 30% stake in the asset where first oil is expected in 2020.
While I have briefly discussed two assets that excite me about the prospects for Hess, it is worth mentioning that assets like Valhall and South Arne will also continue to support the company’s cash flow through steady production. Valhall and South Arne currently contribute to 13% of the company’s production, but these assets have 23% of the company’s resources. Similarly, Deepwater Gulf of Mexico (Stampede) is one of the largest undeveloped fields in the Gulf and will contribute to the company’s production growth in fiscal 2018 and beyond.
Hess has quality assets that can deliver steady production as well as assets that are likely to deliver production growth in the next three to five years. While the stock is lower due to near-term bearish sentiments, the long-term outlook remains bullish.
Conclusion
Oil has moved higher in recently due to dollar weakness, and oil will gradually trend higher as OPEC production cut impact is seen with a lag. Further, oil consumption trend is robust in emerging markets; in the next few years, oil will be meaningfully higher than trading sideways or lower.
Quality names in the exploration industry can be considered at current levels for investors willing to hold with patience for the next few years. Hess is certainly among the quality names that can be considered.
Disclosure: No positions in the stock.
