This Year’s Top U.S. Oil Stock Has No Stake in the Permian Basin

(Bloomberg) -- One of this year’s top-performing U.S. oil producers doesn’t have any operations in the world’s fastest-growing shale play.

New York-based Hess Corp. has climbed about 62% this year in New York. The S&P 500 Energy Index, meanwhile, is up just 11% over the same period. Hess is leading the pack with the exception of Anadarko Petroleum Corp., which is being bought by Occidental Petroleum Corp. following a bidding war with Chevron Corp.

Unlike a long list of other oil drillers, Hess isn’t staking its name on the prolific Permian Basin, which has seen shale output nearly double in two years. Instead, the company is tapping a massive discovery more than 3,000 miles (4,800 kilometers) away in Guyana and tinkering with techniques to improve results in North Dakota.

“There’s value in portfolio diversity,” said Devin McDermott, an analyst at Morgan Stanley who has a buy rating on the stock. “Hess has an attractive balance of short-cycle shale, which can be flexed up and down with the oil price, and this very attractive longer-cycle development in offshore Guyana.”

What Bloomberg Intelligence Says

Crude oil prices could be on a less-secure trajectory as concerns of a global economic slowdown temper expectations, yet 10% production gains over last year are reasonable for Hess in 2019.
--Vincent G. Piazza and Evan Lee, analysts
Click here to read the research

Last year’s top performing oil stock was ConocoPhillips, which has operations all over the globe, including some assets in the Permian and several other U.S. basins.

Because Hess still outspends cash flow, the producer’s stock price tends to be fairly sensitive, McDermott said.

At the end of last year, the company saw its shares tumble the most in almost three years, hitting a low of $36.43 on Christmas Eve after work on its Guyana development was halted by a Venezuelan blockade.

But since the company and partner Exxon Mobil Corp. sanctioned the second phase of Guyana development earlier this month, investors have been less concerned about political uncertainty, said McDermott. Now, the project is ahead of schedule, with first oil expected by the end of the year.

Plug And Perf

“Execution’s been excellent,” McDermott said.

Things are looking up in the U.S., as well. Earlier this year, Chief Executive Officer John Hess said the switch to a new technique for fracking wells -- called “plug and perf” -- would increase the net present value of the company’s Bakken assets by about $1 billion.

“I know investors have been frustrated with shale,” Hess said in December.

The company now expects production in the Bakken to grow by roughly 20% a year to 200,000 barrels of oil equivalent per day by 2021. If oil prices stay around $60 a barrel, that means about $1 billion a year in free cash flow post-2020, according to Hess.

©2019 Bloomberg L.P.