HESM - Hess Corp.: Increased 2023 Guidance Is A Good Sign Of Strength

2023-08-28 12:19:07 ET

Summary

• Hess Corporation reported adjusted earnings per share of $0.65, beating expectations, with quarterly revenues of $2,289 million.
• Exxon Mobil and its partners plan to spend over $12.9 billion to develop their sixth oil offshore Guyana oil project.
• Full-year 2023 net production guidance has been raised between 385K boepd to 390K boepd.
• I recommend buying HES between $149 and $147, with possible lower support at $143.95, which is the 50MA, or eventually at $139.75 if oil turns bearish.

Introduction

U.S.-based independent oil and gas producer Hess Corporation (NYSE: HES) released its second-quarter 2023 results on July 26, 2023.

Important note: This article updates my February 14, 2023 article. I have followed HES on Seeking Alpha since 2017.

1 - 2Q23 Results Summary

1.1 - 2Q23 results

Hess Corporation reported an adjusted first-quarter 2023 earnings per share of $0.65 or $201 million , beating analysts' expectations again this quarter. It compared with $2.15 per share a year ago.

The quarterly revenues were $2,289 million from $2,955 million last year.

Net income was $119 million , or $0.39 per share, compared with net income of $667 million, or $2.15 per share, in the second quarter of 2022. Operating expenses for the second quarter totaled $454 million versus the year-ago level of $356 million.

Production was 387K Boepd in 2Q23. Production from Guyana reached 110K Boepd this quarter. Net cash provided by operating activities was $974 million in the second quarter of 2023, down significantly from $1,509 million in the second quarter of 2022.

E&P capital and exploratory expenditures were $933 million compared with $622 million in the prior-year quarter.

Cash and cash equivalents, excluding the Midstream segment, were $2.226 billion on June 30, 2023.

The midstream business generated adjusted net earnings of $62 million in 2Q23, down from $65 million a year ago.

Changes in ownership of HESM. HES now owns 38% of HESM.

During the second quarter of 2023, the Corporation received total net proceeds of $217 million from the public offering of approximately 6.4 million Hess Midstream LP ( HESM ) Class A shares held by the Corporation in May 2023 and the repurchase by Hess Midstream Operations LP (HESM Opco), a consolidated subsidiary of HESM, of approximately 1.7 million HESM Opco Class B units held by the Corporation in June 2023.

1.2 - 2023 Updated Guidance:

Full-year 2023 net production has been raised to 385K boepd to 390K boepd, compared with previous guidance of 365K boepd to 375K boepd primarily due to strong operational performance and the expected startup of the Payara development early in the fourth quarter.

Details of production per Region:

1.3 - Guyana and Suriname

The net production from the Liza Destiny and the Liza Unity FPSOs totaled 110K Bopd in the second quarter of 2023 compared with 67K Bopd in the prior year's quarter.

The third development, Payara, which will use the Prosperity FPSO with a production capacity of approximately 220K gross bop/d, is targeted for startup early in the fourth quarter. It is 66K Bopd net for HES.

On August 22, 2023, we learned that :

According to a filing published by the government, Exxon Mobil (XOM) and its partners plan to spend more than $12.9B to develop their sixth oil project offshore Guyana.

The filing said the floating production platform for the Whiptail project would start operations in 2027 and increase the Exxon-led consortium's oil output in Guyana above 1.2M bbl/day.

Exxon and its partners plan to drill up to 72 wells, with development drilling scheduled from late 2024 through mid-2030. Also, the installation of subsea components would begin in late 2025 or early 2026.

1.4 - The Bakken

Oil and gas production from Bakken is still the leading segment for HES, with a record of 181K Boep/d produced in 2Q23. The company's only onshore asset represents 46.8% of the total output.

reflecting increased drilling and completion activity, higher NGL and natural gas volumes received under percentage of proceeds contracts due to lower commodity prices, and higher uptime after weather related shut-ins in the prior year quarter. (press release)

During the second quarter of 2023, HES drilled 32 wells, completed 28 wells, and brought 30 new wells online. Bakken net production is expected to be in the range of 175K boepd to 180K boepd for the full year 2023, up from the previous guidance range of 165K boepd to 170K boepd.

1.5 - Offshore productions from the Gulf of Mexico and Southeast Asia

Net production from the Gulf of Mexico was 32K boepd, and net production at North Malay Basin and JDA was 64K boepd in the second quarter of 2022.

2 - Stock Performance

HES performed well on a one-year basis. The stock is now up 21% , whereas Hess Midstream LP ((HESM)) is lagging behind its peers, with a loss of 3% on a one-year basis.

Hess Corp. Balance Sheet History and Trend Until 2Q23 - The Raw Numbers

Source: Company material .

Analysis: Revenues, Generic Free Cash Flow, and Oil and Gas Production Worldwide

1 - Quarterly total revenues were $2,289 million in 2Q23

Hess' oil revenues decreased to $2,289 million in the second quarter of 2023, down from $2,955 million in the same quarter a year ago. Total revenues were $2,320 million .

The quarterly income was $119 million or $0.39 per diluted share, compared to $2.15 per diluted share in 2Q22.

Operating expenses for 2Q23 were $454 million compared with $356 million last year.

The midstream business generated adjusted net earnings of $62 million , down from $65 million a year ago.

2 - Free cash flow (not including divestiture) and net debt

Note: The generic free cash flow is the cash flow from operation minus the CapEx.

HES's trailing 12-month free cash flow dropped sequentially to $1,029 million , with a free cash flow of $153 million in 2Q23.

The company declared a quarterly dividend of $0.4375 per share this quarter, unchanged from the prior quarter.

3 - Net Debt and Cash on Hand

As of June 30, 2023, the company had $2,226 million in cash & cash equivalents, up from $2,159 million in the previous year.

E&P Debt (non-GAAP) was $5.6 billion as of June 30, 2023. Its long-term debt (consolidated) was $8,467 million . HES had no current maturity of the long-term debt this quarter.

Excluding the Midstream segment, Hess Corporation had cash and cash equivalents of $2.2 billion and debt and finance lease obligations totaling $5.6 billion at June 30, 2023. The Midstream segment had cash and cash equivalents of $4 million and total debt of $3.1 billion at June 30, 2023. The Corporation’s debt to capitalization ratio as defined in its debt covenants was 35.1% at June 30, 2023 and 36.1% at December 31, 2022.

4 - Quarterly production analysis

4.1 - Production

HES produced 387K net Boepd in 2Q23. It was up from 322K Boepd the same quarter a year ago, with contributions from resources in the Bakken of 181K Boepd this quarter and production in Guyana of 110K Boepd.

As I said earlier, the Bakken production is the company's primary production. It supports the business while ramping up Guyana, which is slowly catching up.

Note: Bakken is expected to produce ~200K Boepd net production in 2024+.

Crude oil represents 55.8% of the total output.

Crude oil output was 216K Boepd in the second quarter of 2023. Further, natural gas liquids production totaled 69K Bbls/d , and natural gas output was 102K Boepd.

4.2 - Oil and Natural gas prices are going down.

Below are the historical trends of global liquid prices and NG prices.

• Worldwide crude oil realization per barrel of $71.13 (excluding hedging) significantly decreased from $99.16 in the year-ago period.
• Worldwide natural gas prices rose to $3.82 per Mcf from $6.45 last year.
• Worldwide natural gas liquids' prices declined to $17.95 per barrel from $40.92 a year ago.

4.3 - 2023 Guidance increased sequentially.

For 2023, Hess expects net production guidance of 385K-390K barrels of oil equivalent per day. Net production at Bakken is expected to be 175K-180K Boepd and 115K Boepd in Guyana.

For 2023, the capital and exploratory budget are expected to be $3.7 billion, with 80% directed toward Guyana and North Dakota’s Bakken Shale field. A substantial increase from $2.7 billion in 2022.

The improved 2023 guidance is principally due to the company’s strong performance in the Bakken Basin and the expected startup of the Payara development project at the beginning of the fourth quarter of 2023.

Technical Analysis and Commentary

Note: The chart has been adjusted for the dividend.

HES stock forms an ascending channel pattern with resistance at $157.8 and support at $148.4 .

Ascending channel patterns or rising channels are short-term bullish in that a stock moves higher within an ascending channel, but these patterns often form within longer-term downtrends as continuation patterns. The ascending channel pattern is often followed by lower prices, but only after a downside penetration of the lower trend line.

The short-term strategy is regularly trading LIFO at about 40%-45% of your position, expecting potentially lower lows, at least to the 50MA at $144.

Thus, I recommend taking profits between $157.5 and $158.5 with potential higher resistance at $159 . Conversely, I recommend buying between $149 and $147, with possible lower support at $143.95, which is the 50MA, or eventually at $139.75 if oil turns bearish.

H2 2023 oil price outlook.

The oil forecast for H2 2023 is quite supportive of the HES price, which suggests a buying opportunity on weakness between $148 and $140.

In its August Short-Term Energy Outlook, the US Energy Information Administration forecasts the Brent crude oil price to average $86/bbl in the second half of 2023, up about $7/bbl from its July STEO forecast for the same period.

In its August Short-Term Energy Outlook (STEO), the US Energy Information Administration forecasts the Brent crude oil price to average $86/bbl in second-half 2023, up about $7/bbl from its July STEO forecast for the same period. Crude oil prices have increased since June, primarily because of extended voluntary cuts to Saudi Arabia’s crude oil production and growing global demand. EIA expects these factors will continue to reduce global oil inventories and put upward pressure on oil prices in the coming months.

Thus, watch oil and gas prices like a hawk.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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