This year hasn't played out the way Hess (NYSE:HES) expected. The company initially thought it would be a banner year because its partner, ExxonMobil (NYSE:XOM), finished the first phase of their offshore Guyana development last December. However, instead of cashing in on that investment, Hess' stock tumbled about 25% because of the COVID-19 fueled crash in crude oil prices.  

That sell-off might have value-hunting investors wondering if Hess' stock is now a buy given the upside it has to higher oil prices. Here's a look at the bull case for buying the stock as well as what could go wrong.

A drilling rig in the water with the sun setting in the background.

Image source: Getty Images.

The Hess bull thesis

Hess believes it can deliver high-octane growth in the coming years. The company's long-term plan foresees compound annual growth rates of 10% for its production and 20% for cash flow through 2025. That strategy would see it generate a gusher of free cash flow in the coming years, assuming oil prices cooperate. Hess built its outlook based on average barrel prices of $60 for West Texas Intermediate, the U.S. oil benchmark, and $64 for Brent, the global benchmark.

Two engines fuel Hess' plan. First, it expects to grow its production in the Bakken shale of North Dakota to around 200,000 barrels of oil equivalent per day by 2021, before leveling off. Second, it expects its partnership with ExxonMobil to finish five phases in offshore Guyana. Those two engines support the company's production growth plan, which would fuel even faster pace cash flow growth.

Meanwhile, if oil prices are above its baseline level, Hess would generate even more free cash. For example, at $75 Brent oil, Hess' operations would produce nearly $8 billion in cash flow by 2025, leaving it with about $5 billion in free cash after covering capital spending. That's a massive amount of money for a company that currently has a $15.5 billion market cap. It would give the company the funds to buy back a meaningful amount of its stock and pay a higher dividend. 

What could affect Hess' plan?

Because Hess is an oil producer, changes in oil prices have a significant impact on its operations. That has been the case this year, as Hess has already cut its capital spending plan twice -- from $3 billion to $1.9 billion or 37% overall -- to preserve its financial flexibility amid slumping oil prices. One of the casualties was its Bakken shale growth engine, where it reduced its rig count from six to one. The company and Exxon also deferred the development of their third phase in Guyana by six to 12 months. While this is a setback, it won't necessarily derail its five-year plan.

However, if oil prices don't improve from their current levels ($41 WTI and $43 Brent), Hess will probably need to keep a lid on its spending plan in 2021. That would probably have significant long-term ramifications, since it would prevent the company from achieving its Bakken shale production target next year and delay future phases in offshore Guyana. Thus, the company might not grow its production or cash flow as fast as it initially anticipated over the next five years if oil prices don't cooperate. 

Buying Hess is a bold bet on higher oil prices

If oil prices improve, Hess' stock could soar over the coming years, since that would give it the fuel to deliver on its ambitious five-year growth plan. However, the company needs a significant improvement in oil prices by the end of this year to stay on track. It's a higher risk oil stock and might not be the best option for investors in what is likely to remain a very volatile oil price environment.