10-Q: Hess Corporation Reports Third Quarter 2024 Results Amidst Chevron Merger and Arbitration

Hess Corporation announced its third quarter 2024 financial results, showing a slight decrease in net income compared to the same period last year, while also navigating a pending merger with Chevron and related arbitration.

Summary

• Hess Corporation's net income for the third quarter of 2024 was $498 million, slightly down from $504 million in the third quarter of 2023.
• Adjusted net income for the third quarter of 2024 was $660 million, an increase compared to the prior year, primarily due to higher production volumes.
• Total net production averaged 461,000 barrels of oil equivalent per day (boepd) in the third quarter of 2024, up from 395,000 boepd in the third quarter of 2023.
• The average realized crude oil selling price was $77.06 per barrel in the third quarter of 2024, compared to $81.53 per barrel in the third quarter of 2023.
• Hess Midstream LP completed a public equity offering and repurchased Class B units, with Hess Corporation receiving $38 million from the unit repurchase.
• The company is currently in arbitration regarding the applicability of a right of first refusal related to its merger with Chevron, with a hearing scheduled for May 2025.
• Hess's E&P capital and exploratory expenditures are forecast to be approximately $4.9 billion for 2024, increased from previous guidance of $4.2 billion due to the accelerated purchase of FPSOs.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While net income is down, adjusted net income is up, and production volumes are increasing. The pending merger and arbitration introduce uncertainty, but the company's financial position remains strong.

Positives

• Adjusted net income increased due to higher production volumes.
• Total net production increased to 461,000 boepd in the third quarter of 2024.
• Hess Midstream LP completed a public equity offering and repurchased Class B units, generating proceeds for Hess.
• The company increased its third quarter 2024 dividend on common stock by 14% to $0.50 per share.
• Hess has $1.9 billion in cash and cash equivalents, excluding Midstream, and total liquidity of approximately $5.2 billion.

Negatives

• Net income decreased slightly compared to the same quarter last year.
• The average realized crude oil selling price decreased to $77.06 per barrel in the third quarter of 2024.
• Hess is involved in arbitration regarding the applicability of a right of first refusal related to the Chevron merger, creating uncertainty.
• The company recorded a pre-tax charge of $92 million to fully impair the net book value of its interests in Conger.
• The company recorded a pre-tax charge of $40 million resulting from revisions to estimated abandonment liabilities for uneconomic properties.

Risks

• The merger with Chevron is subject to conditions beyond Hess's control, including the outcome of the arbitration.
• The arbitration merits hearing about the applicability of the Stabroek ROFR to the Merger has been scheduled for May 2025, with a decision expected in the following three months.
• The company is exposed to commodity price risks, interest rate risks, and foreign currency risks.
• There are ongoing legal proceedings related to MTBE and climate change that could result in liabilities.
• The company may be exposed to future decommissioning liabilities for divested assets.

Future Outlook

Hess forecasts net production to be in the range of 475,000 to 485,000 boepd in the fourth quarter of 2024. E&P income tax expense is expected to be in the range of $250 million to $260 million in the fourth quarter of 2024. Midstream net income is estimated to be in the range of $70 million to $75 million in the fourth quarter of 2024. Corporate and other expenses are expected to be approximately $25 million, and net interest expense is expected to be in the range of $40 million to $45 million in the fourth 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 uses net cash provided by 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 report reflects the ongoing volatility in the oil and gas industry, with fluctuating prices and production levels impacting financial results. The pending merger with Chevron and the related arbitration highlight the complex strategic decisions and legal challenges faced by companies in this sector. The increased capital expenditure forecast reflects the industry's focus on long-term growth and development projects.

Comparison to Industry Standards

• Hess's production growth in Guyana, particularly with the start-up of the Payara project, is a positive sign compared to other companies that may be facing production declines or stagnation.
• The company's realized crude oil price of $77.06 per barrel is within the range of what other oil and gas companies are reporting, but the decrease from the previous year highlights the impact of market volatility.
• The increase in capital expenditures to $4.9 billion for 2024 is significant and indicates a strong commitment to future growth, which is comparable to other companies investing heavily in new projects.
• The ongoing arbitration related to the Chevron merger is a unique situation, and its outcome will be closely watched by the industry as it could set a precedent for similar transactions.
• Hess's debt-to-capitalization ratio of 28.9% is within acceptable limits compared to other companies in the sector, indicating a healthy financial position.

Legal Proceedings

• Hess is involved in ongoing legal proceedings related to MTBE and climate change.
• Two lawsuits were filed challenging the sufficiency of the disclosures made in connection with the Merger Agreement, but both have been voluntarily dismissed.
• Hess is currently in arbitration regarding the applicability of the Stabroek ROFR to the Merger.

Related Party Transactions

• Hess Midstream LP repurchased Class B units held by affiliates of Hess Corporation and GIP.

Stakeholder Impact

• Shareholders will be impacted by the pending merger with Chevron and the related arbitration.
• Employees may experience uncertainty due to the merger.
• Customers will continue to receive oil and gas products from Hess.
• Suppliers will continue to provide services to Hess.
• Creditors will be impacted by the company's debt levels and financial performance.

Next Steps

• The company will continue to operate four drilling rigs in the Bakken in the fourth quarter of 2024.
• The company expects to sell 15 cargos of crude oil from Guyana in the fourth quarter of 2024.
• The company will continue to drill the exploration well at the Vancouver prospect in the Gulf of Mexico, with results anticipated in the fourth quarter of 2024.
• The company will continue to drill the Redmouth-1 exploration well at the Stabroek Block, with results anticipated in the fourth quarter of 2024.
• The arbitration merits hearing about the applicability of the Stabroek ROFR to the Merger has been scheduled for May 2025.

Key Dates

Keywords

Hess Corporation, Chevron, Merger, Arbitration, Oil and Gas, Production, Financial Results, Exploration, Midstream, Stabroek Block, Guyana, Bakken, Gulf of Mexico