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WIKI ANALYSIS
Hess Corporation is an oil and gas company that extracts oil and gas through drilling and processes it into a variety of products, including gasoline, lubricants and heating oil. The company sales its products to other distributors and directly to consumers through its own gas stations.
Rapid demand growth in emerging economies like China and India coupled with limited oil supply have placed significant upward pressure on oil prices in recent years. As oil prices have risen, more difficult ways of extracting oil (such as deep sea drilling, oil sands etc. have become economically feasible. Hess’ focus on deep-water projects positions the company to be a leader in this critical transition period. Hess has also benefited from the critical shortage of refining capacity within the U.S. where strict environmental regulations and “not in my back yard” mentality have prevented the construction of new refineries since 1976.
Current government initiatives encourage the development and consumption of alternative energies such as Ethanol, biofuels, wind and solar may curb future oil demand growth in the future. Additional challenges for the industry include higher equipment and labor costs as oil service companies and drillers raise rates for contracted services.
Historic Investor Mistrust
Their have been doubts regarding the ability of HES' management team to create value given the company's dubious acquisitions in the early 2000's. E&P companies tend to use acquisitions to boost their oil and Gas reserves without undertaking significant drilling risks. However, Hess' acquisitions, including Triton in 2001, have been less than profitable and may even lead to a class action lawsuit against senior management.[1]
New Direction
Hess' management is attempting to establish trust and improve performance by instituting transparent strategic initiatives with clear goals; grow reserves by 5-8% and production by 3-5% annually.[2] In addition, more stringent project approval criteria are in place to ensure that the company's resources are allocated efficiently and employed judiciously.
Business Financials
When analyzing energy company’s financials, it is more common to look at the Cash Flow from Operation rather than Net Income. Since energy companies require tremendous amounts of capital run their businesses, their depreciation schedules can mask their true financial performance on the income statement. Thus, it is best to look at the actual cash generated by a business by referring to the Cash Flows.
Hess has demonstrated strong average cash flow growth year over year.[3] This has been aided by strong appreciation in the average selling price for oil which more than doubled in the 2004-2006 time range. With the price of oil in the $70-$100 range, projects that were once too costly to undertake become economical.
Net Income by Segment
Hess’ income by segment reflects the increasing proportion of earnings by exploration and production. Although oil production grew by about 7% from 2005 to 2006[7], E&Ps share of net income swelled nearly 16% [8]coinciding with the large average selling price increase for crude oil. Thus, Hess’ profitability it fundamentally tied to the price of crude oil and the success of its E&P segment.
Key Trends/Forces
Fluctuating oil prices
Higher oil prices translate into higher profits for Hess, but market fluctuations make it difficult to know for certain what the oil outlook will be like.
The market price for oil depends largely on world oil supply, so the actions of the Organization of the Petroleum Exporting Countries (OPEC) have a huge impact on oil prices. OPEC accounts for approximately 40% of the world's crude oil supply and can increase or decrease the amount of oil on the market to maintain attractive oil prices for its member countries. However, OPEC has been increasingly losing control over the oil market--oversupply from non-OPEC production has cut away at OPEC's influence.
Oil prices may also be hurt the recent spike in interest towards alternative fuels like ethanol (see below, Alternative Energy). Together with oversupply and loss of OPEC control, competing alternative fuels could force a downturn in oil prices. A slowdown in economic growth could also reduce demand for energy and lower oil prices.
Environmental Concerns
Fossil fuels, though highly cost-efficient forms of energy, are heavy polluters when burned. Increasing environmental concern over environmental degradation and global climate change is fueling a consumer-driven push away from dirty forms of energy toward cleaner forms like wind energy and solar power. These concerns are also causing political movements, which are leading to increased regulation in the fossil fuels market. Government regulations like emissions caps, renewable energy subsidies, and carbon trading schemes all facilitate transitions away from dirty, nonrenewable fuels. Natural gas is being touted by a number of sources (few of them environmental advocates) as "the" alternative to oil and coal . While natural gas does burn more cleanly than either oil or coal, and releases fewer greenhouse gases than either, natural gas is still a carbon-emitter. The current international focus on slowing carbon emissions is could slow the market for both oil and natural gas, hurting Hess's business immensely.
Alternative energy threat
There is an increasing effort to make alternative energy economically feasible. Alternative energy is still some years off from widespread adoption; alternative energy challenges like low production volume, low of production efficiency, and lack of infrastructure (some new fuels require distribution infrastructure separate from existing oil pipelines) all have yet to be overcome. However, if energy sources such as ethanol, solar or wind end up taking off, the negative impact on the oil and gas industry could be huge.
Competition
Companies in the oil and energy sector operate and compete with each other in different areas, such as chemicals, refining, oil exploration, etc. Hess faces direct competition from companies, such as BP, Chevron, ConocoPhillips, Marathon Oil (MRO), Motiva Enterprises, Sunoco etc.
| Company | Proved Reserves 2006YE (MM boe) | Reserve Life (Reserves/Production) | Oil & Gas Production (1000s boe/d) 2006 | Oil & Gas Production Growth (%) 2006 |
| Hess[9] | 1,243 | 7.9 | 359 | 7.0 |
| Marathon[10] | 857 | 6.2 | 377 | 9.0 |
| ChevronTexaco[11] | 11,620 | 10.9 | 2,667 | 6.1 |
| ExxonMobil[12] | 23,406 | 23.14 | 2,771 | (1.7) |
| ConocoPhillips[13] | 7,881 | 11.8 | 1,818 | 28.0 |
References
- ↑ Hess' Company History
- ↑ Hess' Q3 2006 Earnings Conference Call
- ↑ HES' 2006 Annual Report (Page 6)
- ↑ HES' 2006 Annual Report (Page 6)
- ↑ HES’ 2006 Annual Report (Page 46)
- ↑ HES’ 2006 Annual Report (Page 46)
- ↑ HES’ 2006 Annual Report (Page 2)
- ↑ HES’ 2006 Annual Report (Page 46)
- ↑ Hess' 2006 Annual Report (Page 3)
- ↑ Marathon Oil's 2006 Annual Report (Page 8)
- ↑ CVX's 2006 Annual Report (Page 5)
- ↑ XOM's 2006 Annual Report (Page 90)
- ↑ COP's 2006 Annual Report (Page 186)
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