Hess has a large Bakken Shale position that will be a key growth driver for the company in the both the near and long term, helping to keep it moving forward until its Guyana projects start coming online in a couple of years. Those dual growth drivers make Hess a compelling oil growth stock for the long term. In this Industry Focus: Energy clip, host Nick Sciple and Fool.com contributor Matt DiLallo discuss:
- An overview of Hess.
- Its growth rate in the Bakken, as well as its partnership with ExxonMobil (NYSE:XOM) in Guyana.
- Hess Midstream Partners, an MLP formed by Hess to assist in building out its Bakken midstream infrastructure.
A full transcript follows the video.
This video was recorded on Oct. 25, 2018.
Nick Sciple: Let's talk about another player in the Bakken region. That's Hess Corporation, HES. Hess has some plays going on in the Bakken. They're also involved in Guyana. They partnered with Exxon to drill one of the largest offshore discoveries in recent memory. Do you want to talk about what's going on with Hess? What's going on in the Bakken with them? How does the Bakken fit into their overall strategy for the business?
Matt DiLallo: Hess has been an interesting name. They've really reshaped their portfolio the last couple of years. They sold off a lot of different things. They sold off their Utica shale stuff; they sold off a lot of international plays. But they've kept what they think are the best. In their case, it's the Bakken. Hess is one of the better drillers out there. They have a manufacturing process that they've taken toward it, where they're drilling wells focused on cutting costs and really manufacturing oil out there by drilling wells that they have a high probability of delivering certain production growth rates and certain returns. They're using things like the Bakken, Guyana, as the growth engine of the company. They think they can grow production of the Bakken at a 15%-20% compound annual growth rate through 2021. They have enough inventory to drill for about 15 years at $60 oil. Higher oil prices free up some more inventory. There's plenty of growth out there. They just added another rig earlier this year; they plan on adding another rig. Lots of growth out in the Bakken.
That will help them in the near term while they and ExxonMobil ramp up this Guyana find, which is truly amazing. It has loads and loads of low-cost oil out there. Hess sees that as being the next growth driver, probably 2020-2021 when that'll come online.
They think they can grow cash flow at a 25% compound annual rate for years to come. These two plays are so high-margin, will produce so much money. Hess, between these two, could be a really great long-term oil company, because they can do it at $60 a barrel. Really interesting long-term name.
Sciple: Let's talk a little bit more about, in Guyana, Hess' partnership with Exxon, that relationship there. Exxon is the operator there. How advantageous is that for Hess? That has to be a great resource to have, partnering with such a large oil player like Exxon.
DiLallo: Yeah, Exxon is one of the better companies in the business at drilling for returns. They've been phenomenal over the years at some of the interesting metrics, like returns on capital employed. Because they're so focused on returns, that's what benefits Hess here. Exxon will invest in this play because it's going to produce long-term returns and very good returns. Exxon sees this as being one of the key drivers, along with the Permian, of enabling it to double earnings by 2025. For a company the size of Exxon, that's a huge, huge growth potential. So, for Hess to be a partner on this, it's really a great deal for Hess. Exxon knows how to drill, knows how to produce oil. I like Hess specifically because it's locked in. But you add the two together, and it's a really nice company to follow.
Sciple: When you look at management's presentations, they talk about that Guyana and the Bakken are their growth drivers, but they have some other plays that are more of their cash flow drivers that they use to feed those growth engines. That's their assets in Malaysia and the Deepwater Gulf of Mexico. They're saying those plays are getting them 70% of the cash from operations through 2020, but only 20% of their capex. These are things that don't require a lot of capex to keep throwing off cash, but they can really use those other assets that they have to generate cash, to really invest in those big growth drivers, like you mentioned in Guyana and the Bakken.
DiLallo: Right. That's something that investors should look at when they're looking at oil companies. Some, like Continental, are just focused on shale plays. These pump in a lot of money upfront, and they produce really fast. Then there's longer-term things like offshore, oil sands, LNG. They take a lot of money upfront, and take years before they come online, but then they produce lots of cash and production for years to come. That's what Guyana will be. It's a large upfront investment, but in the future, it'll turn out to be like Malaysia, like the Gulf of Mexico, where it can produce cash flow for years to come with little long-term investment. That's another reason why I like Hess over a company such as Continental. It does have these cash flow drivers, so it'll make more steady income over the years. It just reduces the risk for, if oil prices were to collapse again, we'd see the Bakken shale probably not grow as fast, which would hurt Continental, but it probably wouldn't hurt Hess' long-term growth.
Sciple: We wanted to mention, for folks that are income investors, Hess also has a midstream entity that you can buy shares in. It has a 6% yield. It's been growing distribution at 15%. Strong financials, no debt. Do you want to talk about what opportunity that Hess Midstream vehicle might be for more income-focused investors?
DiLallo: If investors don't want to be exposed to oil prices, Hess Midstream is an interesting way to play the Bakken without having that exposure to oil prices. It basically builds gathering pipelines, which are the need to hook oil and gas wells to the country's midstream pipeline system. It helps Hess be able to get this production to customers. It's basically like a toll booth, and they just collect steady cash flow as volumes flow through. They're able to take that cash flow, reinvest some of it into building more pipelines, more processing facilities, that sort of thing, and then distributing it to shareholders. 6% in today's environment is pretty good, and it's a very safe 6%. They have no debt. They cover their dividend very well with cash flow. They have lots of growth ahead because they're helping Hess, with Hess growing its production over 15%. Those volumes will flow through the midstream pipelines, generating cash flow. They think they can grow that distribution by about 15% a year for the foreseeable future. Add in the potential to help third parties out, and I think it's a really interesting way to play the Bakken without getting all that exposure to oil.