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Morningstar | Hess Likely to Raise Guidance After Second Quarter Based on Strong Start to 2019. See Updated Analyst Note from 25 Apr 2019

Hess delivered production of 299 mboe/d in the first quarter, which was 4% higher sequentially and 17% higher year over year. Excluding Libya volumes, first-quarter production was 278 mboe/d, which was substantially higher than prior guidance of 270 mboe/d. The beat was driven by outperformance in the Gulf of Mexico and Malaysia--Bakken volumes were in line with guidance despite completing 10 fewer wells than planned due to weather interference. Despite the positive surprise there was no change to annual guidance, though management intends to review its estimates after the second quarter. Our current forecast for full-year volumes is about 7% above the midpoint of management estimates and includes a small contribution from the Liza project in Guyana, which could start up before year-end.

After incorporating these results our fair value estimate has risen to $63 from $61. The increase was mainly driven by the surge in near-term crude prices (the WTI benchmark has gained over $10 since our last update in February). Operational data was consistently strong, but already baked into our forecasts. In the Bakken, the company believes its new “plug and perf” completion design is working as expected, leaving prior guidance intact (at the Analyst Day in January management said initial production rates could increase by 15%-20% on average when compared with sliding sleeve completions). The change in methodology is expected to drive up well costs to about $7 million this year, from $6 million in 2018. In the first quarter, the firm brought 25 operated wells online, with an average cost of $7.3 million.

There was no change to the firm’s projections for its Exxon-operated Guyana assets, either, despite several positive exploration results during the quarter (three additional discoveries were announced, bringing the partnership’s tally of successes in the region to 13). Liza-1 is still scheduled for the first quarter of 2020, with some chance of first oil late in 2019 (as we expect). The operator still estimates 5.5 billion barrels for gross discovered recoverable resources and is planning for five phases of development delivering 750 mbbbls/d of oil by 2025. Last year, in “Hess: Guyana Deep Dive Supports Fair Value Increase,” we commented that the discoveries announced at the time could support incremental phases of development, and the string of further successes since then solidifies this view. We continue to model seven total phases, bringing output to 1.0-1.2 mmbbls/d by 2027. But while our production forecast exceeds guidance our long-term crude forecast of $60 Brent keeps our fair value estimate in line with the current price.