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Stock Strategist

This Stock's Strategy Is Riskier Than the Market Thinks

The growth of light crude output could put further pressure on U.S. (and especially North Dakota) oil prices in 2014-15, hindering near-term growth for this firm.

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With almost 60% of oil production now U.S.-based (up from 26% in 2010) and almost all near-term growth coming from the Bakken,  Hess (HES) has become increasingly leveraged to the U.S. crude market. With West Texas Intermediate and Louisiana Light Sweet both trading above $100/barrel and at narrow differentials to Brent, some might conclude that this exposure isn't a concern. We disagree. The potential for oversupply of light crude oil in the Gulf Coast could materially weaken all U.S. light crude oil prices relative to Brent. With pricing risks clearly skewed to the downside and with no hedges in place for its U.S. oil production, we believe Hess is more likely than not to disappoint the market's expectations for 2014-15.

U.S. Oil Pricing Dynamics and Hess' Position in the Bakken: A Brief Overview
To summarize U.S. crude oil supply/demand dynamics during the past 12 months, rapidly growing U.S. light oil production from shale plays such as the Bakken led to light crude supply exceeding demand in the Mid-Continent, depressing the price of WTI oil relative to both global (Brent) and U.S. Gulf Coast benchmarks (LLS). WTI pricing is set in Oklahoma, and that's a lot closer to demand centers than the Bakken (North Dakota) is. Consequently, Bakken pricing has been even more depressed than WTI, since it is the most geographically disadvantaged light crude in the lower 48 (at least with respect to major oilfields). During 2013 and thus far this year, Bakken light oil was discounted by more than $20/barrel versus Brent for much of the year.

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Stephen Simko does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.