Introduction
U.S.-based independent oil and gas producer Hess Corporation (NYSE:HES) released its second-quarter 2022 results on July 27, 2022.
Important note: This article is an update of my article published on July 5, 2022. I have followed HES on Seeking Alpha since 2017, with 18 articles published and counting.
1 – 2Q22 results Snapshot
HES reported an adjusted second-quarter 2022 earnings per share of $2.15, beating again analysts’ expectations this quarter.
The quarterly revenues rose to $2,988 million from $1,598 million last year.
Production including Libya was 322K Boep/d in 2Q21.
HES should be considered an excellent long-term play in oil, mainly due to the potential for growth from the Stabroek block in Guyana.
2 – Stock Performance
HES is doing quite well on a one-year basis despite correcting significantly in June 2021. The stock is now up 41% on a one-year basis. HES and HESM are underperforming their peers, as we can see below:
Hess Corp. 2Q22 Balance Sheet and Trend – The Raw Numbers
Hess Energy | 2Q21 | 3Q21 | 4Q21 | 1Q22 | 2Q22 |
Total Revenues and other in $ Billion | 1.60 | 1.81 | 2.26 | 2.37 | 2.99 |
Net income available to common in $ Million | -73 | 115 | 265 | 417 | 667 |
EBITDA $ Million | 647 | 804 | 1,087 | 1,162 | 1,594 |
EPS diluted in $/share | -0.24 | 0.37 | 0.85 | 1.34 | 2.14 |
Cash from operations in $ Million | 785 | 615 | 899 | -156 | 1,509 |
Quarterly CapEx in $ Million | 355 | 498 | 509 | 546 | 663 |
Free Cash Flow in $ Million | 430 | 117 | 390 | -702 | 846 |
Cash and cash equivalent $ Billion | 2.43 | 2.42 | 2.71 | 1.37 | 2.16 |
Long-term debt (consolidated) in $ Billion | 8.22 | 8.51 | 8.46 | 7.96 | 8.33* |
Dividend per share in $ | 0.25 | 0.25 | 0.25 | 0.375 | 0.375 |
Shares outstanding (diluted) in Million | 307.5 | 308.1 | 308.3 | 308.9 | 311.26 |
Oil Production | 2Q21 | 3Q21 | 4Q21 | 1Q22 | 2Q22 |
Oil Equivalent Production in K Boep/d (incl. Libya) | 328 | 284 | 316 | 297 | 322 |
Global liquids price ($/b) | 59.79 | 63.17 | 71.04 | 86.75 | 99.16 |
Global Natural gas price ($/M Btu) |
4.05 |
4.71 |
4.77 |
5.28 |
6.45 |
Source: Company material
* The Midstream segment had cash and cash equivalents of $3 million and total debt of $2.9 billion on June 30, 2022.
Analysis: Revenues, Generic Free Cash Flow, and Oil and Gas Production Worldwide
1 – Quarterly total revenues were $2,988 million in 2Q22
Hess’ revenues increased to $2,988 million in the second quarter of 2022 from $1,598 million in the same quarter a year ago. The quarterly income was $2.14 per diluted share or $667 million, compared to a loss of $0.24 per diluted share in 2Q21.
The adjusted net income was $667 million or $2.15 per share compared with an adjusted net income of $74 million in the prior-year quarter.
The midstream business generated adjusted net earnings of $65 million, down from $76 million a year ago.
2 – Free cash flow (not including divestiture) and net debt
Note: The generic free cash flow is the cash flow from operation minus the CapEx.
HES’s trailing 12-month free cash flow jumped to $651 million, with a free cash flow of $846 million in 2Q22, contrasting with the preceding loss of $702 million in 1Q22.
The company declared a quarterly dividend of $0.375 per share this quarter.
The consolidated net debt (including the midstream) went slightly down to $5.395 billion this quarter.
As of June 30, 2022, the company had $2,159 million in cash & cash equivalents, up significantly from $1,370 million in the previous quarter. Its long-term debt (consolidated) was $8,333 million, up sequentially from $7,956 million. HES had no current maturity of the long-term debt this quarter.
The Midstream segment had cash and cash equivalents of $3 million and total debt of $2.9 billion on June 30, 2022. The Corporation’s debt to capitalization ratio as defined in its debt covenants was 37.9% on June 30, 2022, from 42.3% on December 31, 2021.
E&P debt to adjusted EBITDA is down to 1.2x.
The debt profile is improving but not fast enough, and I believe the company should focus more on cutting the debt while the oil market is hot.
3 – Quarterly production analysis
3.1 – Oil equivalent Production
HES produced 322K net Boep/d in 2Q22 (including Libya). It was down 1.8% from the same quarter a year ago, with contributions from resources in the Bakken of 140K Boep/d this quarter. It was good progress from the preceding quarter.
As we can see below, production was weaker sequentially.
The Bakken production is by far the primary production for the company and will support the business while ramping up Guyana, which will take many years and a significant CapEx.
Crude oil represents 55.3% of the total output.
Crude oil output was 178K Bop/d in the second quarter of 2022. Further, natural gas liquids production totaled 49K Bbls/d, and natural gas output was 97K Boep/d. I expect an increase in crude oil ratio with Guyana growing steadily.
3.1.1 – Bakken:
Net production from the Bakken was 140k boep/d, which remained within our guidance range for the second quarter. However, production was low due to unplanned production shut-ins caused by severe weather in April and May.
3.1.2 – Gulf of Mexico:
Net production from the Gulf of Mexico was 29k boep/d, compared with 52k boep/d in the prior-year quarter, primarily due to field decline and unplanned downtime at the Stampede and Penn State fields.
3.1.3 – Guyana – A massive potential long-term.
The Stabroek Block is operated by Exxon Mobil’s subsidiary Esso Exploration and Production Guyana (“EEPGL”) with 45% interest. Hess Guyana Exploration and CNOOC Petroleum Guyana are the other partners in the block, with interests of 30% and 25%.
At the Stabroek Block, net production totaled 67k bop/d in the second quarter of 2022 compared with 26k bop/d in the prior-year quarter. Output from the Liza Destiny FPSO reached its new production capacity of more than 140k gross bop/d in the second quarter of 2022 following the completion of production optimization work initiated in March.
Net production from the Liza Unity FPSO, which commenced in February, was 35k bop/d in the second quarter of 2022 and reached its production capacity of 220k gross bop/d in July.
Net production guidance for Guyana for the full year 2022 is expected to be approximately 75k bop/d, which includes about 6k bop/d of tax barrels.
Net production guidance for the third quarter of 2022 is expected to be 90k bop/d to 95k bop/d, which includes approximately 7k bop/d of tax barrels.
Payara’s third development will utilize the Prosperity FPSO with an expected capacity of 220k gross bop/d, with the first production expected in late 2023. Exxon Mobil now believe they have discovered massive reserves of at least 11 billion BOE, up from the previous estimate of more than 10 billion BOE.
CEO John Hess said in the conference call:
Key to our strategy is Guyana, the industry’s largest oil province discovered in the last decade. On the Stabroek Block in Guyana, where Hess has a 30% interest and ExxonMobil is the operator, we continue to see the potential for at least 6 floating production storage and offloading vessels, or FPSOs, in 2027 with a gross production capacity of more than 1 million barrels of oil per day and up to 10 FPSOs to develop the discovered resources on the block.
3.1.4 – Southeast Asia:
Net production at North Malay Basin and JDA was 67k boep/d in the second quarter of 2022 compared with 66k boep/d in the prior-year quarter.
3.2 – Oil and Natural gas prices
Below are the historical trends of global liquid prices and NG prices.
In 2Q22, the company sold its crude oil at an average price worldwide of $99.16 per barrel, including hedging, and $6.45 for natural gas.
3. 3 – 2022 and 3Q22 Guidance
For 3Q22, Hess projects net production (excluding Libya) of 330K-335K Boep/d. Net Bakken production is expected to be 155K-160K Boep/d and Guyana 90K-95K Bop/d.
Net production, excluding Libya, is forecast to be in the range of 330,000 boepd to 335,000 boepd in the third quarter, in the range of 365,000 boepd to 370,000 boepd in the fourth quarter, and approximately 320,000 boepd for the full year
The company expects E&P CapEx to be $2.7 billion, 80% of which will be allocated to Guyana and the Bakken Shale Play.
4 – Midstream
The company posted adjusted net earnings of $65 million in 2Q22, down from $72 million a year ago.
Note: The Corporation owns approximately 41% of HESM on a consolidated basis
Technical Analysis and Commentary
Note: the chart has been adjusted for the dividend.
HES forms a descending channel pattern with resistance at $110.7 and support at $91.
The short-term strategy is regularly trading LIFO at about 30%-35% of your position, and it may be wise to increase it to 40%-50% due to downward pressure in oil prices.
I recommend taking profits between $112 and $110.5 with potential higher resistance at $135. Conversely, I recommend buying at or below $91 with possible lower support at $89.
However, this simple short-term strategy will have to be adjusted depending on the situation in Ukraine and the growing risk of inflation that will significantly affect the oil stocks, which have been overheating over the past few months and may have started to retrace gradually.
Watch oil prices like a hawk.
Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States to generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stocks, one for the long term and one for short-term trading.
Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.
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