A major collaboration with ExxonMobil (NYSE:XOM) could significantly boost oil production over the next five years, and that could make it a great time to add Hess Corporation (NYSE:HES) to portfolios. The upstream oil producer's shares have fallen by over 12% since early January, and recently, management doubled its share repurchase program to $1 billion to take advantage of the dip -- I believe this a top stock to buy in March.
What's going on now
Hess Corp is refocusing its oil and gas production portfolio toward low-cost growth and away from mature, low-growth areas, including the North Sea and Permian basin.
In 2017, selling slow-growth assets provided Hess management with $3.4 billion in cash. It also pocketed $175 million from unlocking value from its Bakken midstream facilities via the IPO of Hess Midstream Partners (NYSE:HESM). Combined with cash coming in from production in the Bakken, Gulf of Mexico, and Malaysia, that's given management plenty of financial firepower to pre-fund expenses tied to its collaboration with ExxonMobil offshore Guyana, pay down $500 million in debt, boost investments in its 554,000 net acres in the low-cost, high-growth Bakken Shale, and launch its new share buyback program.
Overall, Hess Corp.'s production was 295,000 barrels of oil equivalent per day in 2017, or if you back-out production from assets sold in the past year, then production was 242,000 barrels of oil equivalent per day. Average production would have been better in 2017 if not for unplanned downtime in the Gulf of Mexico due to a fire at the Shell-operated Enchilada platform on Nov. 8. That fire reduced Hess Corp.'s 2017 production by an average 4,000 barrels of oil equivalent per day. A 15% year-over-year increase in production in the Bakken Shale to an average of 110,000 net barrels of oil equivalent per day helped offset that drop, though.
Hess Corp. repurchased $120 million of its shares in the fourth quarter of 2017, and as of Dec. 31 the company's cash balance was $4.8 billion. In January it announced it's redeeming $350 million of the $500 million in debt it plans to retire this year, and in February, it reported it's begun a reorganization that's targeting annual savings of $150 million. In March, it followed up all that good news by adding $1 billion to its existing share buyback plan. It plans to spend $500 million in an accelerated stock repurchase program and the other $500 million will be used to buyback stock on the open market throughout this year.
Where we're going next
In 2018, Hess Corp. is targeting average production of between 245,000 and 255,000 barrels of oil equivalent per day. However, that forecast may undersell Hess Corp.'s potential for significant production growth as it ramps up activity this year in the Bakken and prepares for future production offshore Guyana.
The company plans to add two more rigs in the Bakken Shale in the second half of 2018, and as a result total production is expected to increase substantially over the course of the year. For example, total average production is forecast to increase from between 220,000 to 225,000 net barrels of oil equivalent per day in Q1 2018 to between 265,000 to 275,000 net barrels of oil equivalent per day in Q4 2018.
Looking beyond 2018, average production in the Bakken is forecast to increase by 15% to 20% per year through 2020 and reach 175,000 net barrels of oil equivalent per day in 2021. If it hits that target, then production would be significantly higher than the company's 105,000 barrels per day of oil equivalent recorded in 2017 and nicely higher than the 115,000 to 120,000 barrels per day expected in 2018. While it remains to be seen if Hess Corp. can deliver on its target, the outlook is supported by the fact that management recently increased its estimate of ultimate recovery from Bakken to 2 billion barrels of oil equivalent from its previous forecast of 1.7 billion barrels of oil equivalent.
Given that management thinks it can generate internal rates of return of between 40% and 50% on Bakken production at west Texas crude oil prices of $50, this production growth could be very profit-friendly for investors.
An even bigger opportunity, however, may be Hess Corp.'s activity offshore Guyana, where it has a 30% interest in the Stabroek block, a 6.6-million-acre asset operated by ExxonMobil.
Development drilling in the Stabroek is slated to begin later this year and initial production from it should start in early 2020. Management's estimating that production capacity will reach 220,000 barrels of oil per day by the middle of 2022, and given an expected cash payback of approximately three years at $50 per barrel Brent oil prices, Guyana is arguably one of the most attractive exploration and production projects in the industry.
It's anyone's guess just how big this play will be, but recently, the asset's gross discovered recoverable resources were bumped up to more than 3.2 billion barrels of oil equivalent, which is triple the outlook from one year ago. That amount could increase too, because the 3.2 billion figure doesn't include its Ranger-1 well discovery in January or the Pacora-1 discovery in February. Following those discoveries, Hess Corp. expects gross production from the first three phases of development offshore Guyana to exceed 500,000 barrels of oil per day.
So, why now?
There's no telling where Hess Corp.'s shares will find their footing, but I'm betting it will happen sometime in the next year for five reasons:
- The recently announced $1 billion buy-back program may put a floor under current share prices.
- Benefits from debt reductions and cost-cutting, plus its shift to lower-cost production, should become more evident as the year progresses.
- A ramp up in Bakken production later this year offers revenue tailwinds.
- The shuttered Gulf of Mexico assets should be back to full production by Q4 2018.
- Investor optimism could accelerate ahead of offshore Guyana production beginning in 2020.
If these catalysts spark more widespread interest in adding Hess Corp. to portfolios, then investors who are willing to buy in March could end up being rewarded handsomely.