Why Hess Corporation Stock Is A Good Bet In The Battered Energy Sector

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Amid declining crude oil and natural gas demand, the strong hedge position of Hess Corporation (NYSE: HES) is expected to support its revenues through the coronavirus crisis. The company has put options for 150 MBD of crude oil for 2020, which accounts for nearly 80% of the total crude oil production. In 2019, the company generated $6.5 billion in operating revenues with an 80% contribution from crude oil sales. Considering the positive impact of put options, the company’s revenues are expected to contract by just 15% for full-year 2020 despite the turmoil in oil prices over the first half of the year. Also, the plan to reduce capital expenditure by 37% is likely to support dividend payouts and preserve cash. Trefis analyzes the Impact Of The COVID-19 Recession On HES Corporation in an interactive dashboard and concludes that the company has a strong balance sheet with little to worry about assuming a scenario where the demand for crude oil recovers by the end of the December.

Revenues to decline by just 15% due to Hess’ strong hedge position

  • Per EIA, the global crude oil demand is expected to contract by 10-15% in FY2020.
  • While the benchmark crude oil prices have been volatile in the past few months, WTI is expected to remain under $40 for the full year despite deep production cuts by OPEC and allies.
  • Hess Corporation produces 80% of crude oil from the onshore and offshore locations in the United States.
  • As revenue contribution and production share of crude oil is the largest, the company has hired 3 very large crude carriers (VLCCs) to store 2 million barrels of its Bakken produce for May, June, and July.
  • Also, the company has not announced any deep production cuts despite rising commercial crude oil inventory levels in the U.S.
  • Considering a recovery in liquid fuel demand and easing of crude oil inventories in Q3, Hess Corporations’ revenues are likely to contract by just 15% to $5.5 billion in 2020.

Excluding the impact of non-cash charges, net income margin to remain fairly stable

  • In 2019, the company incurred $18 per barrel of lifting cost, which includes lease and well, transportation, and certain tariff expenses.
  • While the company also incurs production taxes, general and administrative, and interest expenses, a lower contraction in topline is likely to support operating margins.
  • Considering a single-digit reduction in depreciation and depletion expenses compared to the prior year, the net income margin is expected to remain negative in 2020.
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Liquidity supported by variable bottom line and positive operating cash

  • In the last two years, Hess Corporation has invested more than its operating cash on exploration and development of new oil & gas properties – primarily by growing long-term debt obligations.
  • With the sharp decline in benchmark prices and uncertainty surrounding demand recovery, the company has reduced its exploration and capital expenditure plan by 37% to $1.9 billion for the full year.
  • While higher depreciation and impairment charges will impact earnings, a combination of cash reserve and operating income can support $300 million in annual dividend payout.
  • With $1.6 billion of operating cash, $1.7 billion in capital expenses, $300 million in annual dividend, the company is likely to end FY2020 with $1.1 billion in cash (considering no debt retirals).
  • Per 10-k filings, the company has just $10 million of long-term debt retiring in 2021.

As the commercial crude oil inventories continue to trend upwards and negatively impact the oil & gas industry, will the Covid-19 Treatment Stocks continue their growth trajectory?

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