10-Q: Hess Corporation Reports Strong Q1 2024 Results Driven by Increased Production

Hess Corporation's first quarter 2024 net income significantly increased to $972 million, primarily due to higher production volumes.

Summary

• Hess Corporation reported a net income of $972 million for the first quarter of 2024, a substantial increase from $346 million in the same period of 2023.
• The increase in earnings was mainly driven by higher production volumes, particularly from the Stabroek Block in Guyana.
• Total net production averaged 476,000 barrels of oil equivalent per day (boepd) in Q1 2024, compared to 374,000 boepd in Q1 2023.
• The average realized crude oil selling price was $80.06 per barrel in Q1 2024, compared to $74.23 per barrel in Q1 2023.
• Hess Midstream LP completed a public equity offering and a unit repurchase, impacting noncontrolling interests and deferred tax assets.
• Capital expenditures for E&P were $888 million and for Midstream were $35 million in Q1 2024.
• The company is working towards completing its merger with Chevron, but an arbitration regarding a right of first refusal may delay or prevent the transaction.

Sentiment

Score: 8

Explanation: The document presents a very positive financial performance with significant increases in production and earnings. However, the uncertainty surrounding the merger and the ongoing arbitration introduces some risk, preventing a perfect score.

Positives

• Hess experienced a significant increase in net income, driven by higher production volumes and improved crude oil prices.
• Production from the Stabroek Block in Guyana has substantially increased, with the Payara development reaching full capacity.
• The company's Bakken production also increased due to higher drilling activity and NGL and natural gas volumes.
• Hess is in compliance with all financial covenants under its credit facilities.
• The company has a strong liquidity position with $1.4 billion in cash and cash equivalents and $4.8 billion in total liquidity.

Negatives

• An arbitration regarding a right of first refusal (ROFR) related to the Stabroek Block may delay or prevent the merger with Chevron.
• Changes in operating assets and liabilities reduced cash flow from operating activities by $844 million due to an increase in accounts receivable and a decrease in accrued liabilities.
• Midstream tariffs expense increased due to higher throughput volumes.
• Exploration expenses were $42 million, including $3 million for lease impairment.
• The company is maintaining a full valuation allowance against its U.S. federal and state deferred tax assets.

Risks

• The merger with Chevron is subject to regulatory approvals and the outcome of the Stabroek ROFR arbitration, which could delay or prevent the transaction.
• The company is exposed to fluctuations in commodity prices, which could impact future revenues and profitability.
• There are ongoing legal proceedings related to the merger and environmental matters, which could result in liabilities.
• The company faces operational risks, including potential failures or delays in increasing oil and gas reserves and achieving expected production levels.
• Changes in tax laws, regulations, and governmental actions could impact the company's business.

Future Outlook

Hess expects total net production to be in the range of 465,000 to 475,000 boepd in the second quarter of 2024. The company also anticipates completing the merger with Chevron by the middle of 2024, subject to regulatory approvals and the resolution of the Stabroek ROFR arbitration. E&P income tax expense is expected to be in the range of $285 million to $295 million in the second quarter of 2024.

Management Comments

• Management believes that after-tax amounts are a preferable method of explaining variances in earnings, since they show the entire effect of a transaction rather than only the pre-tax amount.
• Management uses net cash provided by (used in) operating activities before changes in operating assets and liabilities to evaluate the Corporation's ability to internally fund capital expenditures, pay dividends and service debt.

Industry Context

The strong Q1 results for Hess reflect the broader trend of increased production and higher prices in the oil and gas industry. The company's focus on the Stabroek Block in Guyana aligns with the industry's push for new, high-potential offshore developments. The proposed merger with Chevron is part of the ongoing consolidation trend in the energy sector.

Comparison to Industry Standards

• Hess's production growth in Guyana is outpacing many of its peers, with the Payara development contributing significantly to the increase. Companies like ExxonMobil and TotalEnergies are also focusing on offshore Guyana, but Hess's 30% stake in the Stabroek Block gives it a significant advantage.
• The average realized crude oil price of $80.06 per barrel is in line with global benchmarks, but the company's ability to achieve this price while increasing production is a positive sign.
• Hess's unit costs are competitive, with cash operating costs at $10.79 per boe and total production unit costs at $22.50 per boe, which is comparable to other large E&P companies.
• The company's debt-to-capitalization ratio of 31.9% is within industry norms and demonstrates a healthy balance sheet.

Legal Proceedings

• Two lawsuits have been filed challenging the sufficiency of the disclosures made in connection with the Merger Agreement.
• Arbitration proceedings have commenced regarding the applicability of the Stabroek ROFR to the Merger.

Stakeholder Impact

• Shareholders will benefit from the increased profitability and potential merger with Chevron.
• Employees may experience changes due to the merger, but the company is working to ensure a smooth transition.
• Customers will continue to receive crude oil, natural gas liquids, and natural gas from Hess.
• Suppliers and creditors will continue to have business relationships with Hess.

Next Steps

• Hess will continue to develop the Stabroek Block, with the Whiptail project expected to add production capacity by the end of 2027.
• The company will work towards completing the merger with Chevron, subject to regulatory approvals and the resolution of the Stabroek ROFR arbitration.
• Hess plans to continue operating four drilling rigs in the Bakken in 2024.
• The company will continue to monitor and manage its financial risks, including commodity price fluctuations and foreign exchange rates.

Key Dates

Keywords

Hess Corporation, Oil and Gas, Exploration and Production, Midstream, Stabroek Block, Guyana, Bakken, Chevron Merger, Production Volumes, Financial Results