Hess Corp. (NYSE:HES), the independent exploration and production company, reported first-quarter financial results and though the company's production and net income plunged compared to the year-earlier quarter, there were some encouraging signs that suggest Hess is making good progress in becoming a more focused exploration and production company capable of delivering stronger, more profitable growth in the years ahead. Let's take a closer look.

Source: Ole Jorgen Bratland/Statoil ASA.

First-quarter highlights
Hess reported first-quarter net income of $386 million, compared to $1,276 million in the prior-year quarter, while adjusted earnings came in at $446 million, or $1.38 per share, down from $669 million, or $1.95 per share, a year earlier. Total oil and gas production averaged 318,000 barrels of oil equivalent per day, or boepd, in the first quarter, down from 389,000 boepd a year earlier.

The main reason behind the year-over-year plunge in the company's production and earnings was because of lost output due to asset sales and civil unrest in Libya. Asset sales reduced its production by 77,000 boepd, while continued unrest in Libya cut output by approximately 23,000 boepd compared to the year-earlier period.

Strong performance in the Bakken
However, despite the overall decline in production volumes, Hess made solid progress in ramping up production from the Bakken Shale -- its key driver of near-term production growth. Despite harsh winter weather that delayed the start-up of its Tioga gas plant until late March, the company's net first-quarter Bakken production averaged 63,000 boepd, and has increased substantially since Tioga started up. Current Bakken production is running in excess of 80,000 boepd and is expected to average between 80,000-90,000 boepd in 2014.

Not only are Hess' Bakken wells significantly more productive than the industry average, but the company also continues to improve returns through substantial reductions in well costs. First-quarter Bakken drilling and completion costs fell 13% year over year to an average $7.5 million per well. Going forward, investors may want to monitor the results of its downspacing pilot programs, which could mean greater productivity, lower costs, and increased resource potential.

Don't worry too much about production decline
Though Hess' earnings and companywide production took a big hit during the quarter, this shouldn't worry investors too much when viewed through the lens of Hess' asset sale strategy, which has resulted in the sale of some $7.8 billion worth of non-core assets during the past year. While asset sales will weigh on production in the near term, they will allow the company to improve its financial position by paying down debt, buying back shares, and growing production from the Bakken.

In the first quarter, Hess' total debt fell from $5.8 billion as of year-end 2013 to $5.58 billion as of the end of the first quarter, resulting in a slight improvement in its debt-to-capitalization ratio from 19% to 18.7%. It also reported that it has purchased 14.3 million common shares for roughly $1.1 billion through April 29, bringing its total shares repurchased since the program commenced in August 2013 to 33.6 million, for a total cost of roughly $2.7 billion.

Hess also announced several additional asset monetizations during the first quarter, including the sale of offshore Indonesian assets for $650 million, the sale of dry gas assets in Ohio's Utica Shale for $590 million, the sale of offshore assets in Thailand for roughly $1 billion, and an agreement to sell its remaining dry gas acreage in the Utica Shale for $924 million. Proceeds from these asset sales will allow the company to continue to pay down debt and return more cash to shareholders.

Investor takeaway and one risk to consider
All told, Hess is making good progress on delivering on its new strategy, and remains on track to deliver 5%-8% compound annual production growth through 2017, which should position it to generate free cash flow starting in 2015. 

However, while 5%-8% production growth looks achievable, investors should recognize that, as the Bakken accounts for a much larger share of the company's production, earnings, and cash flow in the coming years, it increases Hess's vulnerability to weakness in Bakken oil prices. Though Hess' Bakken price realizations rose modestly in the first quarter, continued production growth in the region could depress Bakken crude prices during the next few years, hurting the company's cash flow outlook.

Arjun Sreekumar has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.