Hess Earnings: Boosts Production Guidance and Purchases Liza FPSO Ahead of Chevon Deal

Hess’ HES third-quarter earnings were solid, in our view. Our fair value estimate is now dependent on our Chevron fair value estimate of $172 per share and the merger exchange ratio, so that remains unchanged at $176 per share. Our narrow moat rating is also unchanged. Hess boosted its production guidance for 2023 to be about 390,000 barrels of oil equivalent a day, at the upper end of its prior guidance. The outperformance is primarily due to the Bakken and higher levels of drilling activity and more natural gas liquids obtained via percentage of proceeds contracts. Pretax income fell to $817 million from $888 million last year, as lower realized oil and gas prices more than offset higher production.

Capital spending guidance for 2023 is now $4.1 billion compared with prior guidance of $3.7 billion due to the purchase of the Liza Unity FPSO in the fourth quarter of 2023 instead of the first quarter of 2024. Given the hugely attractive nature of Guyana, where the FPSO is stationed, we generally favor more control over the value chain and capturing better economics versus ceding them to third parties.

The deal with Chevron is an excellent outcome for Hess shareholders as the purchase price is about 50% higher than our $118 stand-alone fair value estimate at the time of the announcement. Hess shareholders should be thrilled with this outcome. The all-stock nature of the transaction will continue to let Hess participate in some Guyana upside over time. The deal should close in the first half of 2024.