Morningstar | Hess Expects Huge Growth From Its Guyana Assets
Hess' track record for efficiently allocating capital and generating value has been steadily improving for several years now. But this has been a source of frustration for shareholders in the past. Before 2012 the firm was struggling with persistent budget overruns and costly exploration failures, and the eventual collapse in its share price led to a heated proxy fight with an activist investor (which it lost). Subsequently, the board was reshuffled and management began streamlining the company, selling midstream and downstream assets and rationalizing its upstream portfolio. The current portfolio is certainly much more competitive, but the development cost requirements are heavily front-loaded. Therefore, we expect at least five more years of subpar returns on invested capital.Hess is one of the largest producers in the Bakken Shale, with more than 1,300 producing wells and about 550,000 net acres of leasehold. This includes a large portion in the highly productive Tier 1 area near the Mountrail-McKenzie county line in North Dakota. At the current pace, it will take around 10 years to develop this core portion, and the firm's entire Bakken inventory could last twice that long. Like peers, Hess has made huge strides with enhanced completions and expects 180-day initial production rates to average over 120 thousand barrels of oil equivalent in 2019 (consistent with break-evens of $40-$45/bbl of West Texas Intermediate).Hess also holds a 30% stake in the Exxon-operated Stabroek block in Guyana, which will be a major growth engine and is a potential game-changer for the company, due to its large scale and exceptional economics. The block contains several confirmed discoveries already, including Liza, which is first on deck for development (due on line in late 2019). The asset's gross recoverable resources are pegged at over 5 billion barrels of oil equivalent. Economically, these projects are about on par with the Bakken. But the up-front capital demands are onerous--Hess will pay almost $1 billion for the first phase of Liza and at least that much for subsequent developments (five phases are currently planned, culminating in gross volumes of 750 mb/d by 2025).Hess is a global exploration and production company engaged in exploration, development, production, transportation, purchase and sale of crude oil, natural gas liquid (NGL), and natural gas with production operations located primarily in the United States, Guyana, the Malaysia/Thailand Joint Development Area, Malaysia and Denmark. The company's Midstream operating segment provides fee-based services, including gathering, compressing and processing natural gas and fractionating NGL; gathering, terminaling, loading and transporting crude oil and NGL; storing and terminaling propane, and water handling services primarily in the Bakken shale play in the Williston Basin area of North Dakota.
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