Hess Stock Is An Energy Sector Outlier
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.
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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