- The first platform is now producing.
- First oil from the second platform is expected early next year.
- Guyana news dominates the company's future prospects.
- The first FPSO has increased production throughout the fiscal year.
- The second FPSO is due to begin production at the beginning of 2022.
- This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research.
Hess Corporation (HES) still reports quarterly as do most companies. But the most important value is the development of the Guyana discoveries in the partnership where Exxon Mobil (XOM) is the operator. Hess is generally the smallest company in the partnership where the different leases have varying interest levels. So the progress made off the coast of Guyana should have the largest effect on Hess.
This giant discovery has largely been ignored by the market due to the poor industry conditions. These last four years have been anything but good for the industry as shown by the miserable returns. Therefore the lack of response to the good news is more than understandable. However, now management has begun to report some decent production figures from the partnership. The expansion of production is about a year away because the next platform is expected to leave the shipyard in the second half of the year with first oil early next year.
Furthermore, the partners have enough discoveries to expand production for some time even if no more successful discovery wells are drilled. Some of the most optimistic projections show a possible 10 platforms producing based upon the current discoveries. Given that the partnership appears to add one platform every two years, that would mean the partnership should generate significant production growth for Hess for quite a while.
Source: Hess Corporation Bank of America Global Energy Conference November 10, 2020.
The discovery wells are actually miles apart as a rule. Therefore there's plenty of room to drill development wells that would justify the platforms ordered. These are relatively expensive wells and the platform itself is a large upfront cost. Therefore production needs to be high and long lived to justify the expense. That is the main reason that some wells found noncommercial quantities of oil.
Management has maintained a strong cash position to finance this project. There have been periodic asset sales to reduce the need for debt financing and possibly get through the coronavirus demand destruction as well. But the need for financing will decrease sharply as the second platform ramps up production. Once that platform reaches its full potential, the partnership will be producing 330,000 BOD. Depending upon the pace of development that level of production could satisfy the cash needs of the partnership. The next FPSO should provide some cash flow distributable to the partners.
This amount of development places the partnership ahead of others who have announced discoveries in the area. It also makes the prospect of more production and cash flow less risky because increases in production are now periodically underway whereas others have at least a year or more before that first platform arrives.
The latest quarterly press release shows about $1.7 billion in cash along with more than $6 billion of debt. Previously management had figured that amount of cash should get the corporation to "first oil" production of the second platform. Management has plenty of credit lines lined up just in case the cash were to run short. The real question is whether or not the exploration pace will increase as the cash flow increases. An increasing exploration and development pace could potentially mean a longer time for the partnership to achieve cash flow breakeven.
The key idea is that whatever happens in Guyana will dominate the future success or failure of Hess Corporation as an investment. The quarterly reports have diminished importance compared to the progress of this very important project. Hess is very likely to run losses due to the size of the Guyana project. Now once significant progress has been made producing these discoveries, then the company will need to report progress and probably will also focus on debt reduction. But with a world-class discovery, it probably will not be much of a problem to borrow any money needed to post sufficient progress on this project.
Nearly half the budget will be spent in Guyana. That should not surprise investors at all.
Source: Hess Corporation Fourth Quarter 2020, Supplemental Materials
The Bakken and other existing production will likely function as a cash flow generator to help lessen the needs of borrowing. Management mentioned that enough operational improvements have been made to allow production to be maintained on a one-rig program during the fiscal year just ended. Current pricing of commodities may well allow a two-rig program during the current fiscal year. However this company will likely show minimal growth during the current fiscal year outside of the partnership with Exxon Mobil.
Now should WTI prices remain in the $50 range, then there's a possible budget revision that could show more growth. Similarly should commodity prices demonstrate a period of weakness, that budget shown above could be pared more. Large projects such as the offshore Guyana project tend to continue through cyclical downturns and coronavirus demand destruction periods. However, large projects are not completely immune to such downcycles. Usually though a large project is not begun unless it shows the ability to profit from a very large variety of industry scenarios.
The Hess Corporation fourth quarter report was important, in that the progress of the most significant project to the company in some time was thoroughly discussed. The next most important item was that cash flow recovery was leading to less need for asset sales or more borrowing. Many other typical quarterly items are not as important as the Guyana project progress.
Hess will likely at least triple the current production over the next decade as a result of this project. That will be a very profitable cash flow for a company of this size. That forecast will be subject to the continuing pace of discovery announcements and the development of discoveries to the production stage.
This major oil find has allowed the company to project growth at a time when many competitors are hedging. The largely negative news surrounding the industry has allowed the stock price to stay at reasonable levels despite the apparent size of the discovery. Therefore it's probably still very reasonable for a good variety of investors to consider this investment.
Cash flow increases are now scheduled as the production platforms get approved. The company will first prioritize debt reductions. After that, dividends to shareholders should increase fairly rapidly. Therefore those who do not need dividend income now because they do not retire for awhile may want to consider the shares.
The risky part to finding growth was drilling successful discovery wells. That part has now been largely accomplished. Increasing cash flow from the discoveries made will provide the cash in the future for more exploration drilling. This is one company with very visible growth without the usual upstream exploration risk.