Hess Boosts 2011 Capex - Analyst Blog

The U.S. oil production and refining company, Hess Corporation ( ">HES ),  boosted its 2011 capital and exploratory budget to $5.6 billion, representing a 44% increase from plans to spend $3.9 billion in 2010. The company's capital and exploratory budget for the year constitutes $3.1 billion for production, $1.6 million for developments and $900 million for exploration.

In comparison, Hess' 2010 capital program included $2.4 billion for production, $600 million for developments as well as $850 million for exploration. Hence, the $1.0 billion hike in the development capex is reflective of the mounting crude oil prices. Crude oil traded on the New York Mercantile Exchange increased to a 27-month high last week, rising above $90 per barrel.

Hess' capital outlay of $3.1 billion for production focuses mainly on the Bakken oil shale in North Dakota, deepwater Gulf of Mexico (GoM) and Equatorial Guinea. In its Bakken acreage, the company intends to operate 15 rigs. Additionally, Hess expects to drill production and water injection wells at Valhall and Shenzi in the deepwater GoM. Other production activities also include well workover and completion at the Ceiba and Okume Complex in Equatorial Guinea.

The developmental capex is mainly intended for the enhancement of Bakken, Valhall, and Gulf of Mexico projects. It includes expansion of gas processing and export rail facilities in the Bakken and redevelopment of the Valhall field, along with the progression of the Pony and Tubular Bells projects in the deepwater GoM.

The company's $900 million exploration funds will be concentrated on conventional deepwater drilling in Egypt, Ghana, Indonesia and Brunei, as well as unconventional onshore drilling in the Eagle Ford Basin in Texas and the Paris Basin in France.

Companies like Hess are shifting their focus to crude production primarily driven by the growing discrepancy between oil and natural gas prices. Additionally, excessive supplies from shale production are likely to keep U.S. natural gas prices under pressure.

Last week, Chesapeake Energy Corp. (CHK) intended to cut long-term debt by 25% through disinvestments and cutting back on lease acquisition. Consequently, it will likely reduce the company's planned two-year production growth rate to 25% from its previous guidance of 30–40%.

Hess management also reiterated its long-term production growth target of 3% per annum and has pointed out that it will fund its capital program with internally generated cash. We continue to see an upstream momentum on the back of the company's large inventory of exploration and production (E&P) projects. Hess' improving fundamentals, commodity price leverage and exposure to areas with high resource potential have improved its prospects.

Although there is significant resource potential from new discoveries, the E&P business is inherently risky, often with an equal share of successes and failures. While future projects have the potential to add value to share price, we feel the risk/reward trade-off does not favor the company.

Our Neutral recommendation for the stock remains unchanged at this stage and the company holds a Zacks #3 Rank (short-term Hold rating).

 
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