Hess Corporation

The Hess Corporation said high oil prices were the result of oil companies choosing not to invest in production for the past five years

The Hess Corporation blamed oil prices on the fact that “oil supply has been struggling to keep up with demand, predominantly as a result of more than 5 years of industry under investment.” “John Hess – CEO: In terms of global oil demand, there has been a V-shaped recovery due to various government financial stimulus programs and accommodative monetary policies. Global oil demand has returned to pre-COVID levels of approximately 100 million barrels per day. On the other hand, global oil supply has seen more of a U-shaped recovery. Global oil supply has been struggling to keep up with demand, predominantly as a result of more than 5 years of industry under investment. As a consequence, we have seen 7 consecutive quarters of draws on global oil inventories so much so that global oil inventories today are approximately 400 million barrels less than pre-COVID levels.” (Hess Corporation Earnings Call Q2 2022, 7/27/2022)

Hess Corporation: There is very little spare capacity left in the world.” “John Hess – CEO: As we look to the second half of the year, we expect global oil demand to increase by 1 million to 1.5 million barrels per day as a result of China’s economy reopening after COVID lockdowns and increasing air travel. In terms of global oil supply, while shale producers have enabled the U.S. to grow oil production by approximately 1 million barrels per day over the year — in the last year. There is very little spare capacity left in the world. With demand growing, supply lagging and the potential for further sanctions on Russian oil exports, we expect a tight global oil market to get even tighter over the balance of the year.” (Hess Corporation Earnings Call Q2 2022, 7/27/2022)

Hess Corporation executives said they planned to exploit high oil prices to funnel more to investors

The Hess Corporation said the company planned to use their cash flow to “to increase the return of capital to our shareholders through further dividend increases and share repurchases.”“John Hess – CEO In summary, we continue to successfully execute our strategy to deliver industry-leading cash flow growth and financial returns to our shareholders, while safely and responsibly producing oil and gas to help meet the world’s growing energy needs. We increased our regular quarterly dividend by 50% in March and during the second quarter, commenced a share repurchase program, reflecting the financial strength of our business and our commitments to shareholders. As our portfolio becomes increasingly free cash flow positive, we will continue both to invest to grow our company’s intrinsic value and to increase the return of capital to our shareholders through further dividend increases and share repurchases.” (Hess Corporation Earnings Call Q2 2022, 7/27/2022)

Hess Corporation said it funneled over $300 million to shareholders in the second quarter alone.“John Rielly – CFO: In the second quarter, we commenced common stock share repurchases with the purchase of approximately 1.8 million shares for $190 million under our existing $650 million board-authorized stock repurchase program. We intend to utilize the remaining amount under the stock repurchase program by the end of this year. Total cash returned to shareholders in the second quarter amounted to $306 million, including dividends. Net cash provided by operating activities before changes in working capital was $1.46 billion in the second quarter compared with $952 million in the first quarter primarily due to higher realized selling prices and sales volumes.” (Hess Corporation Earnings Call Q2 2022, 7/27/2022)

Hess Corporation’s CFO said the company was committed to funneling 75% of cash flow to shareholders and going even farther than that in 2022 and 2023 thanks to “this favorable commodity prices environment.”“John Rielly – CFO: Yes. Thanks, Arun. So just to remind you what our — the capital return framework is our framework is set up on an annual basis. So we look at our annual free cash flow and we are planning to return — and we are committed to return up to 75% of that free cash flow. And that free cash flow is reduced for debt reductions, which we did have that $500 million in the first quarter. So as we said, with our $650 million authorized in the $190 million done in the second quarter, you can expect the remainder to be done throughout the rest of this year, and it’s actually going to be above the 75% framework because of where commodity prices are, our discussions with the Board our favorable balance sheet position and look with Guyana ramping up and Bakken ramping up our free cash flow is improving, as you see from our second quarter results, so that we can give more than 75% this year with this favorable commodity price environment. And so then coming to 2023, you really should think about, look, we just are starting capital return program. This is just the beginning, and we plan to continue it. So as we move into 2023, we are committed to that 75% framework. Again, if commodity prices are favorable, we can do more than that next year. But you should begin to think this is going to be a continued program.” (Hess Corporation Earnings Call Q2 2022, 7/27/2022)

Hess Corporation’s CFO said the company’s goal was to use they’re growing cash flow to increase dividends to attract “income-oriented investors.” “John Rielly – CFO: Sure. So I mean John did give a good explanation on that, but that’s clearly what we’re looking to do continual increases here. And John did mention it that we’d like to get our dividend to a level that is attractive to the income-oriented investors. So I think yield is an output, but you can think about the yield that the income-oriented investors are looking at. So with our ability here, again, as I mentioned, Bakken growing to 200,000 barrels a day and then Guyana, Payara coming in late 2023 and then almost an FPSO a year here as we move out the next couple of years, we’re going to have a significant free cash flow that we’re able to continue to increase the dividend and we can kind of move that dividend as our cash flow grows. But actually, the bigger part of our return will be share repurchases because that growing free cash flow when you put that 75% against that as we — we will grow that dividend. We want to make it sustainable in a low oil price environment, but the bigger portion ultimately will be share repurchases.” (Hess Corporation Earnings Call Q2 2022, 7/27/2022)

Hess Corporation executives were explicit they weren’t planning to increase production when they could just benefit from high oil prices now 

When asked by an analyst if Hess Corporation planned to increase production in the Gulf of Mexico, the COO said the goal was to “hold it flat.” 

Ryan Todd – Piper Sandler & Co., Research Division: Maybe just a couple of quick follow-ups on other questions. On the Gulf of Mexico, as you were talking about medium-term strategy, if you were to — I know this varies on a lot of things, but if you were to do that plan a couple of wells a year. Is the general outlook that you’d probably hold production flat there over the medium term in the Gulf of Mexico that you could drive modest growth? Or how do you think about as you look out over the next few years, the trajectory of production there in the Gulf of Mexico?

John Hess – CEO: Greg?

Gregory Hill – COO: Sure. I think for the next couple of years, you could assume our objective is really to hold it flat and we’ll do that through these infills and ILX, infrastructure-led exploration wells that are quick tiebacks. Beyond that, we’re also going to be doing some hub class exploration prospects obviously, those wouldn’t feature those wouldn’t come in as growth until later in that period. So short term, hold it flat as a minimum longer-term grow it, assuming success from some of these sub-class exploration prospects.

(Hess Corporation Earnings Call Q2 2022, 7/27/2022)

Hess Corporation’s CFO said it wasn’t planning to increase shale production because “obviously, at current prices, the those returns are fantastic…it becomes this massive cash annuity for the portfolio at that 200,000 barrels a day.”“Gregory Hill – COO: No. Look, I think if you look at our portfolio, we’ve got 20 or more drilling locations that generate great returns at a $60 WTI. So obviously, at current prices, those returns are fantastic, right? And so certainly, the movement in the oil price from a return standpoint is outstripping any inflationary effects. And the 200,000 barrel a day kind of plateau rate, if you will, for the Bakken is absolutely the optimum place to be because it really fills up all the infrastructure that we have in place in the Bakken. So you need to think about future wells is almost like a tieback in the Gulf of Mexico. The infrastructure is already there. So the incremental returns are very high for those Bakken wells. So we’ll hold that with the portfolio we have, we’ll hold that for rigs and be able to hold that plateau at about 200,000 barrels a day for almost a decade, all the while, the Bakken generating significant amount of free cash flow during that period. So at $60, it generates over $1 billion of free cash flow. Obviously, at current price is much higher. So it becomes this massive cash annuity for the portfolio at that 200,000 barrels a day.” (Hess Corporation Earnings Call Q2 2022, 7/27/2022)

Hess Corporation’s CFO said that higher oil prices were more than outstripping any increase in costs from inflation 

Hess Corporations CFO said that despite inflation and supply problems increasing costs, “with the higher oil prices, obviously, we’re getting much higher returns in cash flow.” “John Rielly – CFO: Sure. So I mean we are seeing, Roger, that just like our competitors, we’re seeing upward pressure onshore and offshore with steel prices, labor costs and rig rates. So there’s no question we are seeing that. So we — as you mentioned, we talked about Guyana. So onshore, you heard Greg mentioned that the D&C cost did go from 6.2% to 6.3% this year. We are seeing inflation coming from 2023, these things continuing. So I can’t give the number. That’s why we’ll wait till the end of the year, but you should expect that 6.3% to be higher in 2023 when we get the full numbers in. Again, we’re working hard to mitigate the effects through efficiency gains, working with our suppliers, contracts and all our relationships there. And with the strength of the oil prices, like you mentioned, I still think with that tightness going into 2023, we will continue to see that. But of course, with the higher oil prices, obviously, we’re getting much higher returns in cash flow.” (Hess Corporation Earnings Call Q2 2022, 7/27/2022)