Hess Eyes Higher Output, Dividends, Stock Repurchases

Editor’s note: This story was last updated at 4:41 a.m. CT on July 28.

Hess Corp. plans to grow production in the second half of 2022 with the addition of a fourth rig in the Bakken and rising output offshore Guyana after reporting a nine-fold increase in its second-quarter adjusted profit on July 27.

Despite the planned increase in production, the New York-based independent oil and gas producer said that it will maintain capital spending at $2.7 billion in 2022. On the financial side, the company expects to increase its dividend and buybacks after kicking of a share repurchase program in the second quarter.

Hess’ portfolio of onshore and offshore assets in the U.S. in the Bakken and Gulf of Mexico coupled with its newly added advantaged barrels offshore Guyana in the Stabroek Block continues to offer investors low-cost low carbon barrels and for decades to come, according to the company.

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“Hess’ relative and absolute positions in the impressive and ongoing success story of exploration and nascent development in Guyana are effectively unmatched within the industry,” Wells Fargo analysts Roger D. Read and Lauren Hendrix Walker wrote July 27 in a research note to clients.

The Wells Fargo analysts forecast increased cash returns to shareholders with the start offshore Guyana of a second development (Liza Phase II) and further still with the third development (Payara).

Production Growth

Net production in the second half of the year is expected to rise compared to the first half. Production is expected to average 320,000 boe/d in 2022, excluding Libya. The main production contributions include the Bakken with between 150,000-155,000 boe/d and the Gulf of Mexico and Guyana with 30,000 boe/d and 75,000 boe/d respectively, Hess executives announced during the company’s second quarter earnings webcast.

Bakken Plateau

Bakken second quarter production was impacted by severe weather in April and May, which resulted in widespread power outages for 4-6 weeks as well as production shut-ins. Production is recovering slower than expected and 50 new wells will be brought online in the second half of 2022 compared to 32 in the first half.

The addition of a fourth rig in the play in early-July will allow the company to achieve net production of 200,000 boe/d in 2024, Hess COO Greg Hill said during the webcast. “With the portfolio we have we’ll hold that four rigs and be able to hold that plateau for almost a decade.”

Stabroek Expansion

Hess, with a 30% interest in the prolific Stabroek Block offshore Guyana, continues to progress its first five developments with partners Exxon Mobil Corp. (45%) and CNOOC (20%).

Production optimization work in the second quarter at the Liza Destiny FPSO unit tied to the Liza Phase I development allowed the unit to boost gross production to a new capacity of 140,000 bbl/d compared to 120,000 bbl/d. SBM Offshore also completed the replacement of the flash gas compressor on the FPSO as Hess and partners eye zero routine flaring.

Production from the Liza Unity tied to the Liza Phase II development commenced in February and is expected to reach its nameplate capacity of 220,000 bbl/d later this year.

At Payara, the third development, the topsides fabrication and installation on the Prosperity FPSO is underway in Singapore. The unit will have a gross production capacity of 220,000 bbl/d and first oil is expected in late 2023.

At Yellowtail, the fourth development, Hess and partners will develop 925 million barrels of oil with a breakeven Brent price of $29 per barrel. The project will use the One Guyana FPSO which will have a gross production capacity of 250,000 bbl/d and first oil is expected in 2025.

At Uaru/Mako, the fifth development, a plan of development will be submitted to the Guyana government in the fourth quarter and first oil could flow in 2026 pending government approvals and project sanctioning.

South American Exploration

Hess is eyeing the next two wells in the Stabroek Block to appraise the development potential of the inboard oil play in the southeast portion of the block. The Yarrow-1 well will test stacked Upper Campanian targets, up-dip of discoveries at Whiptail and Tilapia, while the Banjo-1 well will also target stacked Upper Campanian targets west of Barreleye and up-dip of Mako.

In neighboring Suriname in Block 42, Hess will participate in the Shell-operated Zanderij-1 offshore exploration well. Hess, Chevron Corp. and Shell Plc all have one-third working interest. The partners plan to spud the well in late August to test both Upper Campanian and deeper play stacked targets.

Rising Dividends

Hess’ cash flow is forecast to rise 25% annually between 2021-2026 based on a flat Brent oil price of $65 per barrel. The company looks to return up to 75% of its annual free cash flow to shareholders, with the remainder destined to boost its cash position or debt reduction.

“We predict a 15% increase in Hess’ dividend in 2022 followed by a similar increase in 2023,” Wells Fargo’s Read and Walker wrote in their report. “Hess management has indicated it plans to accelerate repayment of $500 million of debt in Q2 2022, thus we do not forecast meaningful free cash flow in 2022.”

In the second quarter, Hess commenced a common stock repurchase program. The company repurchased 1.8 million shares for $190 million under an existing $650 million authorized by the board and intends to repurchase the remaining amount by year-end.

“We plan to continue increasing our regular dividend to a level that is attractive to income-oriented investors, but sustainable in a low oil price environment,” CEO John Hess said. “As our free cash flow generation steadily increases, share repurchases will represent a growing proportion of our return of capital.”

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