Hess: Near-Term Commodity Outlook Drags Down Our Fair Value to $84 Per Share

We’re lowering our fair value estimate for Hess HES to $84 per share from $93 after incorporating its first-quarter results. As we previously commented, the firm is ostensibly off to a terrific start to 2023, with both production and cash costs significantly beating quarterly guidance and putting the firm in a strong position to exceed its annual goals. But the execution, while solid, was not as spectacular as the headline numbers suggest.

Firmwide production was 374 mboe/d, handily beating the target range of 345-355 mboe/d. But not all of the upside reflects genuinely better-than-expected production. The Guyana portion includes 15 mb/d of “tax barrels,” which are essentially a cash-neutral gross-up to offset taxes recognized under U.S. GAAP but not actually paid by Hess. As oil prices dropped during the period, the number of barrels required to offset the theoretical tax increased beyond what management would have incorporated in guidance. Similarly, Hess receives NGL volumes as recompense for gas processing in the Bakken region, and when prices fall more barrels are needed to cover fixed fees under its percentage-of-proceeds contracts. So while full-year volume guidance was raised, not all of the increase supports higher cash flows.

Additionally, E&P cash costs were $12.96 per boe, below the low end of guidance for both the quarter and the full year. But the artificial volume increases highlighted above also spread actual cash costs more thinly on a per barrel basis. We note that management left full-year guidance for unit cash costs unchanged, and guidance for the second quarter is significantly higher than the full-year projection (indicating offshore facility turnarounds and associated downtime will dampen production and concentrate fixed costs across fewer barrels).

Finally, we have incorporated the recent deterioration in near-term commodity prices and raised our cost of capital estimate to 7.9% (reflecting a higher equity weight in the capital structure).