10-Q: Hess Corporation Reports Strong Second Quarter 2024 Results Amidst Chevron Merger

Hess Corporation announced a significant increase in net income for the second quarter of 2024, driven by higher production volumes and realized selling prices, while also progressing with its planned merger with Chevron.

Summary

• Hess Corporation reported a net income of $757 million for the second quarter of 2024, a substantial increase from $119 million in the same period of 2023.
• Adjusted net income for the quarter was $809 million, compared to $201 million in the prior year, primarily due to higher production volumes and realized selling prices.
• Total net production averaged 494,000 barrels of oil equivalent per day (boepd) in the second quarter of 2024, up from 387,000 boepd in the second quarter of 2023.
• The average realized crude oil selling price was $80.29 per barrel, compared to $71.13 per barrel in the second quarter of 2023.
• The company is progressing with its merger with Chevron, with a majority of Hess stockholders approving the merger on May 28, 2024.
• The merger is anticipated to conclude after regulatory reviews in the third quarter of 2024, however, an arbitration regarding a right of first refusal could impact the timing.
• Hess Midstream LP completed a public equity offering and HESM Opco issued $600 million in senior unsecured notes.

Sentiment

Score: 8

Explanation: The document presents a very positive financial performance with significant improvements in net income, production, and realized prices. The merger with Chevron is also a positive development, although the arbitration introduces some uncertainty. Overall, the sentiment is strong, reflecting a successful quarter for Hess.

Positives

• Hess experienced a substantial increase in net income and adjusted net income year-over-year.
• The company saw a significant rise in production volumes, particularly in the Bakken and Guyana.
• Realized selling prices for crude oil, natural gas liquids, and natural gas were higher compared to the previous year.
• The merger with Chevron received stockholder approval, moving the transaction closer to completion.
• Hess Midstream LP successfully completed a public equity offering and HESM Opco issued new debt, strengthening their financial position.

Negatives

• The company incurred a pre-tax charge of $48 million to write-off previously capitalized exploration wells in the JDA.
• There was a pre-tax charge of $18 million related to materials and supplies inventory in the JDA.
• Net production in the Gulf of Mexico decreased due to planned maintenance shut-downs.
• The merger with Chevron is subject to an arbitration regarding a right of first refusal, which could delay the transaction.
• Cash flow from operating activities was reduced by $543 million due to changes in operating assets and liabilities.

Risks

• The merger with Chevron is subject to regulatory approvals and the outcome of an arbitration regarding a right of first refusal, 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 other matters, which could result in financial 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, environmental regulations, and other governmental actions could adversely affect the business.

Future Outlook

Hess anticipates the merger with Chevron will conclude in the third quarter of 2024, pending regulatory reviews. The company forecasts net production to be in the range of 460,000 to 470,000 boepd in the third quarter of 2024. Midstream tariffs expense is estimated to be in the range of $340 million to $350 million in the third quarter of 2024. E&P income tax expense is expected to be in the range of $265 million to $275 million in the third quarter of 2024. Net income attributable to Hess Corporation from the Midstream segment is estimated to be in the range of $65 million to $70 million in the third quarter of 2024.

Management Comments

• Management uses adjusted net income to evaluate the Corporation's operating performance.
• Management believes that investors' understanding of our performance is enhanced by disclosing adjusted net income.
• Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings.

Industry Context

The strong financial results for Hess reflect the current favorable market conditions for oil and gas companies, with increased production and higher prices contributing to improved profitability. The merger with Chevron is part of a broader trend of consolidation in the energy sector, as companies seek to enhance their scale and efficiency. The ongoing arbitration highlights the complexities and potential risks associated with large-scale mergers in the oil and gas industry.

Comparison to Industry Standards

• Hess's production growth of 27% year-over-year is strong compared to peers such as ConocoPhillips and EOG Resources, who have seen more modest growth in the same period.
• The average realized crude oil price of $80.29 per barrel is in line with the average prices reported by other major oil producers, such as ExxonMobil and Chevron, during the same period.
• Hess's debt-to-capitalization ratio of 30.8% is within the range of industry standards, indicating a healthy balance sheet compared to companies like Occidental Petroleum, which has a higher debt load.
• The company's focus on the Stabroek Block in Guyana is a strategic move that aligns with the industry trend of investing in high-potential offshore assets, similar to projects undertaken by companies like TotalEnergies and Equinor.
• The merger with Chevron is a significant transaction, comparable to other large-scale mergers in the energy sector, such as the acquisition of Anadarko by Occidental Petroleum, which also faced regulatory and legal hurdles.

Legal Proceedings

• Two lawsuits have been filed challenging the sufficiency of the disclosures made in connection with the Merger Agreement.
• Several purported stockholders of Hess sent demand letters alleging similar deficiencies regarding the disclosures made in the proxy statement.
• An affiliate of Exxon Mobil Corporation commenced arbitration proceedings regarding the applicability of the Stabroek ROFR to the Merger.
• Hess Guyana Exploration Limited and an affiliate of China National Offshore Oil Corporation commenced parallel arbitration proceedings regarding the applicability of the Stabroek ROFR to the Merger.

Related Party Transactions

• HESM Opco repurchased approximately 2.7 million HESM Opco Class B units held by affiliates of Hess Corporation and GIP for $100 million of which Hess received proceeds of $38 million.

Stakeholder Impact

• Shareholders will benefit from the increased profitability and potential value creation from the merger with Chevron.
• Employees may experience changes due to the merger, including potential integration of operations and changes in roles.
• Customers will continue to receive oil and gas products from Hess, with potential changes in supply chains and distribution.
• Suppliers will continue to provide goods and services to Hess, with potential changes in procurement processes.
• Creditors will be impacted by the merger, with potential changes in debt structures and credit ratings.

Next Steps

• Complete the merger with Chevron, pending regulatory approvals and the resolution of the arbitration.
• Continue development activities in the Stabroek Block, including the Yellowtail, Uaru, and Whiptail projects.
• Maintain production levels in the Bakken and Gulf of Mexico.
• Monitor and manage commodity price risks.
• Continue to evaluate and potentially settle the U.K. pension plan.

Key Dates

Keywords

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