The Rising Influence of Rising Affluence

[DewDiligence]

HES Surpasses 4Q09 Estimates

[Roughly 85% of HES’ revenue comes from refining and marketing, but this is a misleading stat insofar as almost all of HES’ new investments are in upstream operations. The downstream segment (including the branded convenience stores) is the cash cow that enables HES to conduct an unusually high-profile exploration program (in Brazil, West Africa, Australia, the GoM, and the Bakken shale) for a company of its modest size. HES has promised to deliver an average annual growth of 3% in production volume and proven reserves, although the 2010 production forecast of 400-410K bod is flat vs 2009 (which was +7% vs 2008). HES recently increased its 2010 capital budget from the $3.9B earmarked in December (see details in #msg-44527891) to $4.1B (of which $850M is for exploration) due to an asset swap with Shell.

HES has strong buyout vig, IMO. (The Hess founding family owns only 11% of the stock.) The enterprise value (market cap + net debt) of $22B is only about half of what XOM paid to acquire XTO. Moreover, HES’ E&P portfolio is more heavily weighted towards oil than the portfolio of almost every midsized oil & gas company (#msg-45326827). Although HES is more of an asset play than an EPS play, the P/E is fairly cheap at ~14x est 2010 EPS and ~9x est 2011 EPS.]

http://finance.yahoo.com/news/Hess-Surpasses-zacks-3350605089.html?x=0

By Zacks Equity Research
January 27, 2010, 2:51 pm EST

Hess Corp. (NYSE: HES - News) reported fourth-quarter earnings of $1.10 per diluted share, easily beating the Zacks Consensus Estimate of 90 cents and the year-earlier loss of 15 cents.

The Exploration and Production (E&P) segment posted a $494 million profit in the quarter, compared to a loss of $125 million in the year-earlier quarter. Results were positively impacted by significant increase in oil prices and volumes.

Quarterly crude oil and natural gas production, on an oil-equivalent barrel basis, was 415 thousand barrels of oil equivalent per day (MBOE/d) -- 72% liquids and 28% natural gas -- up more than 9% year over year but down 1% sequentially.

Worldwide crude oil realization per barrel during the quarter was $63.74 (including the impact of hedging), up 14% sequentially and 42% year over year. Worldwide natural gas prices (including the impact of hedging) increased approximately 13% sequentially but were down 17% year over year to $5.19 per thousand cubic feet (Mcf).

The Marketing and Refining segment posted earnings of $17 million [the profit was due entirely to the convenience stores rather than the refining business], compared to $152 million in the year-earlier quarter, primarily due to lower margins. Hess’ share from the HOVENSA refinery (located on the island of St. Croix in the U.S. Virgin Islands) was a $64 million loss, compared to a $21 million profit in the year-earlier quarter.

Quarterly net cash flow from operations was $1.27 billion. Hess’ capital expenditures totaled $992 million, of which approximately 96% went into the E&P business. At the end of the quarter, the company had approximately $1.36 billion in cash and $4.47 billion in long-term debt, reflecting a debt-to-capitalization ratio of about 24.8%.

The company’s proved reserves were 1,437 million barrels of oil equivalent as on December 31, 2009 (almost flat with the year-end 2008 data), replacing nearly 103% of 2009’s production, resulting in a reserve life of 9.5 years.

We continue to see upstream momentum on the back of the company's large inventory of exploration and development projects. The success on the exploration front, particularly in Australia and Libya, increase in interest in two offshore fields in Norway and commodity price leverage has improved the company’s prospects.‹