HESM - Hess Corporation: Tough Headwinds On The Horizon

2023-05-31 13:30:57 ET

Summary

• Hess Corporation quarterly revenues were $2,453 million, up from $2,371 million last year.
• Hess Corporation produced 374K net Boep/d in 1Q23. It was up from 297K Boep/d the same quarter a year ago.
• The company declared a quarterly dividend of $0.4375 per share this quarter, or an increase of 17% sequentially.
• I recommend buying Hess Corporation stock between $127.2 and $125, with possible lower support at $118.75.

Introduction

U.S.-based independent oil and gas producer Hess Corporation (HES) released its first-quarter 2023 results on April 26, 2023.

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

1 - Q1 2023 Results Summary

1.1 - Q1 2023 results

Hess Corporation reported an adjusted first-quarter 2023 earnings per share of $1.13 , beating analysts' expectations again this quarter. It compared with $1.34 per share a year ago.

The quarterly revenues were $2,453 million from $2,371 million last year.

Production was 374K Boep/d in 1Q23. Production from Guyana reached 112K Boep/d this quarter. Net cash provided by operating activities was $638 million in the first quarter of 2023, up from $546 million in the first quarter of 2022.

Cash and cash equivalents, excluding the Midstream segment, were $2.100 billion on March 31, 2023.

The midstream business generated adjusted net earnings of $61 million in 1Q23, down from $72 million a year ago. HES owns about 41% of HESM.

In the press release (emphasis added):

In March 2023, Hess Midstream Operations LP (HESM Opco), a consolidated subsidiary of Hess Midstream LP ((HESM)), repurchased approximately 3.6 million HESM Opco Class B units from Hess Corporation and Global Infrastructure Partners for $100 million, of which the Corporation received net proceeds of $50 million. The purchase was financed by HESM Opco's revolving credit facility. After giving effect to this transaction, the Corporation continues to own approximately 41% of HESM on a consolidated basis.

1.2 - Guyana and Suriname

The net production from the Liza Destiny and the Liza Unity FPSOs totaled 112K Bop/d in the first quarter of 2023 compared with 30K Bop/d in the prior-year 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 Bop/d net for HES.

Another discovery this quarter. In the press release, HES announced:

The Corporation today announced an oil discovery at the Lancetfish-1 well on the Stabroek Block, offshore Guyana. The Lancetfish-1 well encountered approximately 92 feet of oil bearing sandstone reservoir. The well was drilled in 5,843 feet of water by the Noble Don Taylor and is located approximately 4 miles southeast of the Fangtooth discovery.

1.3 - The Bakken

Oil and gas production from Bakken is still the leading segment for HES, with 163K Boep/d produced in 1Q23. The company's only onshore asset represents 40.6% of the total output.

HES added a fourth drilling rig in July 2022, drilled 25 wells, completed 26 wells, and brought 24 new wells online during the first quarter of 2023.

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

Net production from the Gulf of Mexico was 33K boep/d, and net production at North Malay Basin and JDA was 66K boep/d in the first quarter of 2022.

2 - Stock Performance

HES has struggled on a one-year basis. The stock is now up 4% , whereas HESM is lagging behind its peers, with a loss of 17% on a one-year basis.

Hess Corp. Balance Sheet History and Trend Until 1Q23 - The Raw Numbers

Source: Company material .

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

1 - Quarterly total revenues were $2,411 million in 1Q23

Hess' oil revenues increased to $2,411 million in the first quarter of 2023, up from $2,316 million in the same quarter a year ago. Total revenues were $2,453 million .

The quarterly income was $346 million or $1.13 per diluted share, compared to $1.34 per diluted share in 1Q22.

Operating expenses in 1Q23 were $382 million compared with $313 million last year.

The midstream business generated adjusted net earnings of $61 million, down from $72 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 jumped sequentially to $1,722 million, with a free cash flow loss of $199 million in 1Q23.

The company declared a quarterly dividend of $0.4375 per share this quarter, or an increase of 17% sequentially.

3 - Net Debt and Cash on Hand

As of March 31, 2023, the company had $2,100 million in cash & cash equivalents, up from $1,370 million in the previous year.

E&P Debt (non-GAAP) was $5.397 billion. Its long-term debt (consolidated) was $8,387 million. HES had no current maturity of the long-term debt this quarter.

4 - Quarterly production analysis

4.1 - Production

HES produced 374K net Boep/d in 1Q23. It was up from 297K Boep/d the same quarter a year ago, with contributions from resources in the Bakken of 163K Boep/d this quarter and a jump in production in Guyana to 112K Boep/d.

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 57% of the total output.

Crude oil output was 213K Boep/d in the first quarter of 2023, up from 158K Boepd a year ago. Further, natural gas liquids production totaled 64K Bbls/d , and natural gas output was 96K Boep/d.

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 $76.02 (excluding hedging) significantly decreased from $94.04 in the year-ago period.
• Worldwide natural gas prices rose to $4.39 per Mcf from $5.28 last year.
• Worldwide natural gas liquids' prices declined to $24.25 per barrel from $39.79 a year ago.

4.3 - 2023 Guidance increased sequentially.

For 2023, Hess expects net production guidance of 365K-375K barrels of oil equivalent per day. Net production at Bakken is expected to be 165K-170K Boepd and 105K-110K Boep/d 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.

Technical Analysis and Commentary

Note: the chart has been adjusted for the dividend.

HES stock forms an ascending channel pattern with resistance at $132.3 and support at $126.3. RSI is 38 and is approaching oversold territory.

A Falling Wedge is a bullish chart pattern that takes place in an upward trend, and the lines slope down.

This means there is a high probability that Hess Corporation stock breaks down, potentially reaching the lower support. It will depend essentially on future oil and gas prices, and they are weakening now.

The short-term strategy is regularly trading LIFO at about 40%-45% of your position, expecting potentially lower lows. However, the chart pattern indicates a possible breakout only after a meaningful retracement that I do not see ending soon. Thus, invest with caution here.

Thus, I recommend taking profits between $132 and $136.2 with potential higher resistance at $140. Conversely, I recommend buying between $127.2 and $125, with possible lower support at $118.75.

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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