Summary
The market is focused on Hess price action whereas the future should alleviate any fears about growth instead of a dividend.
Current prices are allowing for very fast paybacks of just about any project.
Cash flow will jump with the start of production from a second FPSO and projected growth in the Bakken in the current fiscal year.
Beginning in 2024, there will likely be one new FPSO beginning production each year.
Hess will grow at a pace that is faster than some technology companies.
This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »
imaginima/E+ via Getty Images The stock price of Hess ( HES ) has been rallying along with much of the industry. But this producer has the Guyana partnership with Exxon Mobil ( XOM ) as an “ace in the hole” that separates the company from many in the industry. Management has announced that the next FPSO in Guyana will begin production soon. The next FPSO is due to begin production i n 2024. After that it is very likely that the partners will be adding an FPSO every year.
The currently strong commodity prices are allowing some very fast paybacks of some very large expenditures. This makes the partnership in Guyana unusually profitable at a time when the partnership can use extra cash flow to avoid selling non-core assets or borrowing money. That is something that improves the cash flow from operating activities as well as the free cash flow that Mr. Market looks for. Hess Corporation Common Stock Price History And Key Valuation Metrics (Seeking Alpha Website March 12, 2022) The stock price has tended to respond to discovery announcements that appear periodically. The stock then retreats while waiting for the next announcement. The startup of the next FPSO is likely to boost cash flow sufficiently to move the stock into a higher trading range as long as oil prices remain in their current range.
The market may not be giving the company credit for the production growth expected from Guyana because there will be no new FPSOs in 2023. After that there is likely to be an FPSO each year. That would give Mr. Market ample evidence of very significant growth each year. This would be another occurrence that would enable Mr. Market to revalue the stock. Hess Corporation Details Of Guyana Discoveries And Estimated Reserves Discovered (Hess Corporation March 2022, Corporate Presentation) The partnership has mentioned the 10 billion BOE of reserves discovered. A common conservative value of “oil in the ground” is about $5 per barrel. That means that the reserves estimated above are worth about $50 billion so far. That 10 billion figure has not been revised for some time. Therefore the latest figure taking into account more discoveries will certainly be higher. The Hess share of that reserve figure (when revised) is likely more than two-thirds of the current enterprise value of the company. So the Bakken and the rest of the operations come dirt cheap. The stock could likely double from current values and still be cheap based upon the potential reserves discovered.
But Mr. Market frankly is tired of reserve reports and reserve proclamations that are not matched with cash flow. So many companies have gone under or disappeared sporting all kinds of wonderful reserves that are either too risky to develop or too expensive to produce. Therefore, it is very likely the market wants proof of the profitability of this brand-new discovery in a place that previously has produced no oil and completely lacks industry infrastructure.
That proof appears to be coming in short order. The next 3 years or so will be transforming this discovery from something with a lot of promise to a discovery that makes a lot of money for the partners. It would be very hard to make a case that the stock price has come close to responding to all the reserves discovered at the current time. But rising cash flow has a way of changing the market attitude about a completely new discovery in a new country.
If the stock price does not adequately respond, then there is a good chance that Hess would become a potential acquisition candidate. There is material cost savings if Hess combines with one of the partners. That is before mentioning that some very profitable reserves could be acquired for an extremely cheap price.
There is also a fair amount of exploratory upside potential for Hess […]
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