Hess Corporation Stock Is A Risky Bet

Hess Corporation stock (NYSE: HES) has rallied by 44% this month supported by a surge in crude oil prices and hopes of an early macroeconomic rebound. Given the likelihood of an easing in OPEC+ mandated cuts later this week, Trefis believes that Hess stock remains a risky bet at present. The company’s third quarter revenues showed substantial improvement by declining just 22% (y-o-y) as compared to 50% (y-o-y) contraction in the second quarter. While the company has a strong liquidity position to cover near-term operating losses, further upside in the stock hinges on OPEC’s decision to increase supply in lieu of rising prices. Interestingly, the U.S commercial crude oil inventories reached 1,354 million barrels last week and the EIA expects WTI benchmark to remain under $40/bbl at an average inventory level of 1,336 million barrels in the fourth quarter.  We compare Hess stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 63% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how HES and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Hess Corporation vs S&P 500 Performance Over 2007-08 Financial Crisis

HES stock declined from levels of around $67 in September 2007 to levels of around $54 in March 2009 (as the markets bottomed out), implying HES stock lost 19% from its approximate pre-crisis level. It recovered post the 2008 crisis to levels of about $60 in early 2010 – rising by 11% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

Hess Corporations’ Fundamentals are likely to improve in the coming quarters

Hess Corporation’s Revenues grew by 35% from $4.8 billion in 2016 to $6.5 billion in 2019, supported by improving benchmark prices and rising production volumes. Excluding the impact of impairments, the company’s margins remained relatively flat due to higher depreciation costs – resulting in negative earnings in the past few years. Recovery in benchmark prices and growing production volumes led to a sequential improvement in third quarter revenues and earnings. Considering the declining trend in commercial crude oil inventories, we expect Hess Corporation’s fundamentals to improve in the coming quarters.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Given the likelihood of an easing in OPEC+ mandated cuts later this week, Trefis believes that Hess stock remains a risky bet at present.

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