(HES) Rewards Even Out Risks at Hess

We are maintaining our long-term Neutral recommendation for Hess Corporation (HES). The company’s lower-than-expected first quarter 2011 results and tempered production outlook for 2011 were balanced by the ramp-up in activities in its extensive exploration and development projects for the balance of the year.

Although Hess underperformed in the first quarter, its earnings improved significantly from the year-ago period on higher crude oil realizations.

However, we remain apprehensive about the company’s reduced 2011 production guidance of 385–395 thousand barrels of oil equivalent per day (MBoe/d) versus its prior expectation of 415–425 MBoe/d. The lowered forecast mainly reflects loss of Libyan volumes, a shut-in well at the Llano field in the Gulf of Mexico (GoM) and Production Sharing Contract (PSC) impacts from higher oil prices.

But stepped up activities at Bakken, Eagle Ford and Marcellus in the U.S. and the Paris Basin in France, accompanied by a rich portfolio of offshore drilling opportunities in the GoM, Brazil, West Africa and Egypt, will strengthen Hess’ future production growth and drive its earnings, cash flow and valuation. The company has a long line-up of high-impact exploration in 2011, and we believe any potential upside has not been priced in yet.

Management also remains enthusiastic about its acreage in both Eagle Ford and Bakken shale plays onshore U.S. In Bakken, Hess plans to invest $1.8 billion in 2011 and double its production to 40,000 barrels per day by the year end. The company also maintains an 18-rig program for Bakken, as was guided earlier.

Moreover, preliminary indications from Paradise in Ghana look highly encouraging. The well, which was drilled to a total depth of 16,436 feet in water depth of 6,038 feet, hit oil and gas condensates with an estimated net pay of 490 feet over three separate intervals. Hess acts as the operator of the license with 90% working interest, while Ghana National Petroleum Corp., the West African state-run oil company, controls the remaining 10%.

We believe that Hess has a competitive advantage over its peers owing to its improving fundamentals, commodity price leverage and exposure to areas with high resource potential (such as Brazil, Ghana, Libya and offshore Australia). Its upstream activities, based on the large exploration and development pipeline, is expected to provide impetus in the future.

New York City based Hess along with its subsidiaries is engaged in production, development, purchase, transportation and sale of crude oil and natural gas. As of year-end 2010, the company’s proved reserves tally stood at 1.54 billion oil-equivalent barrels and replaced 176% of its production, resulting in a reserve life of 9.9 years.

The company competes with peers such as ConocoPhillips (COP) and Exxon Mobil Corporation (XOM), and retains a Zacks #3 Rank (short-term Hold rating).

CONOCOPHILLIPS (COP): Free Stock Analysis Report

HESS CORP (HES): Free Stock Analysis Report

EXXON MOBIL CRP (XOM): Free Stock Analysis Report

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