October, as you've probably heard by now, was the worst month for energy stocks all year, as oil prices posted their biggest monthly declines since 2016. As usual, oil and gas production companies like Hess (HES 2.87%) were hit far harder than integrated majors like ExxonMobil (XOM 2.97%)

Some of that market pessimism bled into earnings season, as oil and gas producers that posted impressive or even extraordinary quarterly earnings results saw their shares barely budge, or even sag. Hess was one of them. But the stock market is clearly ignoring these key details from Hess' Q3 earnings report on Oct. 31.

Yellow pipes above blue water

Oil and gas industry player Hess has a leading position in the Bakken Shale, but its offshore joint venture with ExxonMobil is a top prospect. Image source: Getty Images.

Production is up, not down

Hess reported quarterly production of 279,000 barrels of oil equivalents per day (BOE/D). That was lower than in Q3 2017, when production was at 299,000 BOE/D. But that isn't because Hess is underperforming. Instead, it reflects the company's numerous asset sales over the past year. 

In August 2017, Hess sold its Permian Basin assets, which was somewhat surprising, since most companies are looking to enter the red-hot Permian, not leave it. However, Hess's Permian position was small: It only amounted to about 3,000 BOE/D during Q3 2017. Then, in August of this year, Hess sold its assets in the Utica Shale of Ohio, leaving its Bakken Shale assets as its sole onshore U.S. play. In spite of those sales, though, the company's onshore U.S. production increased by 11,000 BOE/D, a testament to the strength of its Bakken assets.

Elsewhere, Hess exited its 20,000 BOE/D position in Norway and its 27,000 BOE/D position in Equatorial Guinea in 2017, leaving a single field in Denmark and assets in Libya -- which has been beset by civil unrest -- as its only European and African assets. 

So, in spite of its divestiture of assets producing about 60,000 BOE/D in Q3 2017, production only decreased by 20,000 BOE/D. All of the company's remaining assets (excluding Libya) saw production increases. Malaysia performed particularly well, with production there increasing by 121.4% over the prior-year quarter. Better yet, because none of Hess' production is located in the Permian Basin, it doesn't need to worry about the transportation constraints that are hurting Permian providers.

Production guidance is up even higher

A spike in production in a single quarter would be good news, but Hess anticipates that it will continue to increase. Many analysts have been focused on the company's leading position in the Bakken Shale. But management seems especially excited about the opportunities in its joint venture with ExxonMobil in Guyana. 

The 6.6 million acre Stabroek Block, off the coast of Guyana in South America, has been an embarrassment of riches for the two companies. Exxon and Hess had already discovered eight significant oil fields within the block. In Q3, a ninth field was found, as the Hammerhead-1 exploration well discovered about 200 feet of high-quality, oil-bearing sandstone. The Hammerhead discovery brings the total number of recoverable barrels of oil equivalents discovered within the block to more than 4 billion, with the potential for billions more to exist. 

That oil and gas should start flowing in early 2020 when the first oil field, dubbed Liza-1, will begin production through 17 wells, with production capacity of 120,000 BOE/D. A second, larger development of the Liza oil field will come on line in mid-2022, and will have production capacity of 220,000 BOE/D. Hess and Exxon are currently planning a third development to start production in 2023, with capacity of 180,000 BOE/D.

Because all this petroleum -- up to 520,000 BOE/D, of which Hess has a 30% stake -- won't begin coming on line until 2020, Hess hasn't begun including it in the company's official guidance. But the company is now suggesting that its production for 2018 will come in at the top end of its guidance range at about 255,000 BOE/D.

But costs are down

Hess' management is very clear about reporting its costs on a per-BOE basis. The company's "cash operating costs" -- which, according to Hess, include operating costs and expenses, production and severance taxes, and E&P general and administrative expenses -- were $11.41/BOE in Q3. That's a 17% reduction from the $13.77/BOE the company reported in the prior-year quarter. That means Hess is not only benefiting from higher oil prices, but also lower costs to pump each barrel. The company attributes these savings to increased low-cost production in the Gulf of Mexico and Malaysia and sales of higher-cost assets.

In other words, by selling off the assets it did, which cost more per barrel, and ramping up low-cost production, Hess may be producing slightly less oil overall, but is making higher profits on the oil it is pumping. That's a winning combination while oil prices are high, but is also good for the company if prices begin to slip. 

For now, though, it's allowing Hess to generate gobs and gobs of cash -- $423 million in Q3 2018, to be precise. That's up 380.7% from the $88 million it generated in Q3 2017. It's already used $250 million of that cash to buy back shares as part of a $1.5 billion share repurchase authorization that it expects to complete by the end of the year. One thing it hasn't done, however, is significantly pay down debt, although its cash on hand of $2.6 billion does make its debt of $5.7 billion seem slightly less worrisome. Its debt-to-capital ratio of 37.5% is in line with its peers'.

What the market missed

Hess has made impressive progress in streamlining its operations. It has successfully jettisoned higher-cost projects and increased lower-cost/higher-margin alternatives. Its joint venture with ExxonMobil in Guyana looks set to pay dividends for the company for many years. And -- perhaps most importantly -- it's rewarding stockholders through share buybacks (and even pays a decent 1.7% dividend to boot).

Given all of this, you'd expect the market to have rewarded the stock at least a little bit, but you'd be wrong. Hess' shares are down slightly from where they were before it reported earnings to the time of this writing. If you're looking for some oil production exposure in your portfolio, now is an excellent time to consider buying into Hess.