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Hess (HES) Up 22.9% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Hess (HES). Shares have added about 22.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Hess due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Hess Q1 Earnings Beat on Strong Production Volumes

Hessreported adjusted first-quarter 2020 loss per share of 60 cents, narrower than the Zacks Consensus Estimate of a loss of 65 cents. In the year-ago quarter, the company had recorded earnings of 9 cents per share.

Quarterly revenues decreased to $1,369 million from $1,599 million in the year-ago quarter. Also, the top line missed the Zacks Consensus Estimate of $1,504 million.

The better-than-expected earnings were due to higher oil and gas production, backed by the prolific Bakken play and improved Midstream profits due to increase in throughput volumes. This was partially offset by lower commodity price realizations and increased operating expenses.

Q1 Operational Update

Exploration and Production

In the quarter under review, the Exploration and Production business reported an adjusted net loss of $120 million against a profit of $109 million a year ago. The business was affected by lower realized commodity prices, partially offset by higher production volumes.

Quarterly hydrocarbon production was 349 thousand barrels of oil equivalent per day (MBoe/d), up from 299 MBoe/d in the year-ago period on contributions from resources in the Bakken play and Liza Field offshore Guyana.

Crude oil production increased from 164 thousand barrels per day (MBbls/d) in first-quarter 2019 to 191 MBbls/d. Moreover, natural gas liquids production totaled 56MBbls/d, up from 40MBbls/d in the prior-year quarter. Also, natural gas output was 611 thousand cubic feet (Mcf), up from 572 Mcf a year ago.

Worldwide crude oil realization per barrel of $42.08 (excluding the impact of hedging) declined from $54.84 in the year-ago period. The average worldwide natural gas liquids selling price also fell to $9.32 per barrel from $18.46 in the year-ago quarter. Moreover, worldwide natural gas prices declined to $3.16 per Mcf from the year-ago level of $4.43.

Midstream

From the midstream business, the company generated adjusted net earnings of $61 million, significantly up from $37 million a year ago. The rise can be attributed to higher throughput volumes.

Operating Expenses

Operating expenses in the first quarter totaled $303 million, up 13.9% from the year-ago figure of $266 million. Exploration expenses significantly rose to $189 million from $34 million in the year-ago period. Also, G&A expenses in the quarter totaled $102 million, up from $87 million in the first-quarter 2019. However, marketing costs (including purchased oil and gas) fell to $378 million from the year-ago figure of $408 million.

Total costs and expenses rose to $3,814 million from $1,430 million in first-quarter 2019.

Financials

Quarterly net cash flow from operations was $445 million in the first quarter, reflecting a significant rise from the year-ago level of $238 million. Hess’ capital expenditures for exploration and production activities totaled $631 million, up from $542 million in the prior-year quarter.

As of Mar 31, 2020, the company had $2,080 million in cash & cash equivalents, which rose from the fourth-quarter 2019 level of $1,545 million. Its long-term debt rose to $8,191 million at first quarter-end from $7,142 million in the fourth quarter. The debt to capitalization at the end of the quarter was 50.8%. 

Guidance

The company expects 2020 exploration and production capital and exploration expenditure to be $1.9 billion, down 37% from the original guidance of $3 billion. The company chartered three huge crude carriers to store 2 million barrels of crude oil produced in the Bakken Play in each of May, June and July. The commodity will likely be sold in the fourth quarter. This is a crucial move, given the prevailing capacity shortage problem stemming from oversupply in the market.

Through 2020, Hess expects net production volumes — excluding Libya — to be 320,000 barrels of oil equivalent per day (Boe/d), indicating an increase from the 2019 level of 290,000 Boe/d. The company revealed plans to reduce the Bakken shale play drilling program to one rig from six rigs at present. The upstream firm added that it will defer most of its discretionary drilling and exploration activities, excluding some operations in Guyana. 

The company temporarily idled two drilling rigs in the Stabroek Block due to travel restrictions, while two are still operational. Notably, its Liza Phase 2 development in the offshore Guyana is currently on schedule to commence production in 2022.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted 5.02% due to these changes.

VGM Scores

At this time, Hess has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Hess has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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