The rise of Hess Corporation is not over (NYSE:HES)

0

deeltijdgod/iStock via Getty Images

Hess Corporation (NYSE: NYSE: HES) has outperformed recently, pushing its market capitalization to over $30 billion. The company has had a strong run-up recently, however, with Brent crude prices still above $100/barrel, the company has a unique ability to continue to generate strong and growing shareholder rewards.

Hess Corporation Positioning

Hess Corporation has a unique business positioning that will enable it to generate long-term rewards for its shareholders.

Hess Company

Hess Company

Positioning of Hess Corporation – Hess Corporation Investor Presentation

Hess Corporation has a differentiated portfolio and is one of the few mid- and large-cap oil companies to expect >10% production growth through 2026. The company expects to generate sustainable FCF from all its assets in the future, and this FCF can be expected to continue to grow rapidly as the company’s assets continue to grow.

The company’s assets in Guyana are growing rapidly. The company has a line of sight of up to 10 FPSOs with over 10 billion barrels of resources and breakeven points in the $10 per barrel range. The company’s annual FCF is expected to reach a return of 10% by 2026, with annual growth of 25% from 2021 to 2026 and we see it as having significant growth potential beyond that point.

Financial Strength of Hess Corporation

Hess Corporation has incredibly strong financials, supporting future shareholder returns.

Hess Company

Hess Company

Hess Corporation Financial Strength – Hess Corporation Investor Presentation

The company has $2.7 billion in cash and only $2.4 billion in debt through YE 2031. The company repaid its remaining term loan about 1 month ago and hedged its cash flow. The company has a strong E&P/EBITDAX debt outlook and with its expected cash flow growth, its debt should be comfortably manageable.

The company is focused on increasing shareholder rewards. The company announced a 50% increase in its regular dividend on March 1, 2022, which pushed the company’s dividend to over 1.5%. By 2026E, the company plans to return up to 75% of its FCF to shareholder returns. With a return of 10% FCF, this means a return of 7.5% towards shareholder returns.

According to the company’s indications, this means ~3-4% in dividends and the rest in share buybacks.

Hess Corporation Guyana

The company’s growth does not end in 2026. The company’s assets have significant growth potential beyond this level.

Hess Company

Hess Company

Hess Corporation Guyana – Hess Corporation Investor Presentation

Hess Corporation has a massive 30% stake in the Stabroek block as well as a working interest in several other nearby blocks. The company has access to 6.6 million acres with 23 major discoveries to date. The company’s projects have an oil price balanced at a midpoint of $30/barrel and are working to increase Liza Phase 2 production beyond 300,000 barrels/day.

Production by 2026, when the company forecasts $3 billion annual FCF, is expected to be around 800,000 barrels/day. However, at that time the company will add 1 FPSO/year. The 800,000 barrels/day come from the first 4 FPSOs alone. We see the production, taking into account the assets, peaking at more than 2 million barrels/day.

This could add billions of additional FCF at low cost and give the company a track for continued FCF growth into the 2030s.

Hess Corporation Bakken

The company also has significant growth potential in the Bakken Basin with significant and growing production potential.

Hess Company

Hess Company

Hess Corporation Bakken – Hess Corporation Investor Presentation

Hess Corporation has billions of barrels of reserves here with hundreds of thousands of barrels of assets. The company has kept capital expenditures low with approximately 162,000 bbl/day of production in 2022. At $60/bbl WTI, the company has >70 years of drilling or >20 years of drilling from its program at 3 platforms.

At current prices, the company has the capacity to increase production significantly. The company is incredibly profitable at over $60 WTI, which means that with current prices over $100 WTI, it has enormous strength. From there, the company also has more than $3 billion in Hess Midstream (NYSE:HESM) value that pays a dividend yield of nearly 7%.

Hess Corporation Alternative Assets

Hess Corporation also owns several other assets that have significant potential to generate substantial shareholder rewards.

In Southeast Asia, the company has approximately 65,000 barrels/day in production. The company has spent $270 million in net caps, or about $10 a barrel, a comfortably affordable capital outlay. The company has pursued long-term contracts that are expected to run through the late 2020s/early 2030s.

The company also has impressive assets in the Gulf of Mexico producing ~32,000 barrels/day and costing ~$8/barrel in annual capital expenditure. These alternative assets should provide reliable long-term cash flow and the company plans to resume drilling for the first time since the COVID-19 pandemic by adding additional production.

These additional alternative assets will help provide another reliable long-term base for the company’s cash flow.

Hess Corporation free cash flow

Hess Corporation’s 2022 FCF forecast assumes $6.1 billion in net cash from operating activities with approximately $3.1 billion in capital expenditures, providing approximately $3 billion in FCF. This represents a more than 50% increase in the company’s FCF, implying that it will continue to have significant capital investments at this stage.

More so, these estimates are at $65/barrel of Brent. At $105/barrel of Brent, the company’s operating cash flow should increase from $6 billion to more than $15 billion. Since capital expenditure would not increase significantly, this would imply an FCF at current oil prices of 30+%. Even at $85/barrel, the yield of FCF would be around 20%.

Given the company’s plan for shareholder rewards, this would imply the potential for double-digit shareholder rewards. More so, production is expected to increase significantly. Projected production for 2026 is >500,000 bpd, but company-attributable production, but by the mid-2030s could be over 1 million bpd.

Hess Corporation Thesis Risk

The thesis risk around Hess Corporation is twofold.

First, the company is in an aggressive growth phase. Not only does this make it more sensitive to crude oil prices, but complex oil prices always carry geopolitical and execution risk. Any failure here could harm the company’s ability to achieve its growth goals and lead to a significant decrease in the company’s cash flow.

The other business risk is the price of crude oil. By 2026, the company could generate 10% FCF. It’s at $65/barrel of Brent. At current crude oil prices, the company is much more profitable. Although a lack of existing crude oil projects points to higher prices,

Conclusion

Hess Corporation has an impressive portfolio of assets. The company is in a phase of rapid growth where it is increasing both its production and its capital expenditure. This means that when the company achieves a return of 10% FCF in 2026, it will be far from declining, and we can see that return more than doubling in the second half of the decade.

In an environment where oil companies are reluctant to invest more, Hess Corporation represents an impressive asset with significant growth potential. The company’s low-cost assets ($46/barrel breakeven by 2026) position it well to generate substantial FCF in a higher oil price environment, which we can see continuing given the trends. recent.

Share.

Comments are closed.