Closer Look at Hess' Guyana Stake Raises Our FVE
But while the expanded development plan is accretive to our net asset value, we still see little upside remaining.
We’ve been mostly bearish on Hess (HES) since the recent downturn in crude oil. In our view, the market has overreacted to current prices, which are unsustainable in the long run. That spells trouble for oil producers at the higher end of the cost curve, where Hess perched until recently. But after a detailed review, we see more value in the company’s much-lauded Guyana assets than we previously gave credit for. After the second quarter, management announced plans for five development phases, bringing the project’s total capacity to at least 750 thousand barrels of oil per day by 2025. That could prove conservative, as it probably shortchanges Turbot and Ranger and ignores the exploration prospects that have yet to be tested. Either way, the project is clearly a substantial growth driver for Hess, which is now expected to double its output within 10 years. This invalidates our previous (bearish) thesis and justifies the recent runup in the shares. But the remaining upside is marginal: The stock currently trades near our updated fair value estimate of $65. Additionally, we maintain conviction in our no-moat rating, as Hess is unable to earn its cost of capital until 2024 at the earliest, even with Guyana.
Guyana Will Drive Massive Growth for Hess
There’s little doubt that Hess’ entry into Guyana will be transformative. The company holds a 30% stake in the Exxon-operated Stabroek Block, which encompasses 6.6 million acres. The first discovery, Liza, was announced in 2015 and is located about 120 miles offshore. In total, 13 exploration and appraisal wells have now been drilled (including two dry holes). Based on the results, the partnership has identified at least five potential development opportunities, with combined recoverable resources exceeding 4 billion barrels of oil, making Hess’ share equivalent to almost 4 times its current proved reserves.
Dave Meats does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.