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, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.