Oil prices have been moving in a narrow range, and I expect black gold to move gradually higher instead of a sharp upside anytime soon. In sync with this view, the recovery in the oil and gas exploration industry also will be gradual.
There is little doubt that the industry has robust prospects in the long term, and I have been recommending quality stocks in the exploration sector whenever prices have been appealing for fresh exposure.
This article will evaluate why Hess Corp. (HES, Financial) is interesting at current levels and the factors that will trigger stock upside in the long term. Hess stock has been moving sideways since the initial public offering of Hess Midstream Partners LP (HESM, Financial), and I see this as an accumulation opportunity.
Healthy balance sheet
One of the key reasons (besides asset quality) to like Hess is the company’s balance sheet, which is among the best in the industry. Challenging times continue for the exploration industry, and Hess is well positioned to navigate the crisis and emerge strong.
Just to put things into perspective, Hess has $2.7 billion in cash, $4.0 billion in unused revolver capacity and $500 million in unused committed lines. With total liquidity of $7.2 billion, the company is fully financed for the next 12 to 24 months.
Hess has net debt to capitalization of 18%; with no significant near-term debt maturities, the company’s financial flexibility is robust. Even if the company leverages for growth in the next 12 to 24 months, debt is not a concern.
In addition, Hess has no significant near-term debt maturity. With no refinancing pressure, the company is well positioned from a financial perspective.
Talking about the balance sheet and financial health, it is also important to mention that Hess has target 2017 capital expenditure of $2.25 billion. With decent cash flows, the company’s leverage will remain in check.
Overall I rate the company’s financial health as strong, and this factor will trigger stock upside supported by robust development in prized assets.
Strong upside from Bakken
The company’s Bakken asset contributes to 33% of production and 31% of the company’s resources. In offshore assets, deepwater GoM (Gulf of Mexico) contributes to 21% of production and 11% of resources. In the future, the company’s Bakken assets will drive growth.
Hess has quality positions in the Bakken with 556,000 net acres and 2017 net production estimated to be in the range of 95-105mboed. The key point to note here is that the production has the potential to grow to 175,000mboed, and this makes Bakken the game changer for Hess.
With 2,850 drilling locations, the company has multiyear drilling inventory, and I expect a gradual increase in rig count in the asset in sync with oil price upside. The company has already planned to increase the rig count to six by year end.
Another important point is that the company’s drilling performance has been consistently improving along with drilling and completion cost at the Bakken. Low cost coupled with high productivity translates into robust margins. As oil trends higher, I expect EBITDA margin expansion to be significant. This is another potential upside trigger for the stock.
Besides the positives from Bakken, the company’s deepwater assets are likely to be among the key production growth drivers from 2018 and beyond. With one of the largest undeveloped fields in GoM (300-350mmboe gross recoverable), there is immense value being unlocked and waiting to happen in the asset in the next few years.
Conclusion
Hess has some quality assets that can be game changing for cash flows in the long term. With the stock trading sideways recently, I see this as a good opportunity to accumulate.
Broad markets look stretched, and I would recommend gradual exposure to the stock instead of a big plunge in the stock or the sector. Investors willing to hold the stock with a two- to three-year time horizon can expect robust returns.
Disclosure: No positions in the stocks discussed.
