Company Reports

Chevron's first-quarter reported adjusted earnings of $5.4 billion compared with $6.7 billion the year before, meeting market expectations. The earnings decline was largely attributable to weaker refining margins, which weighed on downstream results. Production increased to 3,346 thousand barrels of oil equivalent per day from 2,979 mboe/d the year before due largely to the acquisition of PDC Energy and continued growth in the Permian, which offset weaker natural gas realizations to increase upstream earnings year over year.

Narrow-moat Hess reported a solid first quarter, with net income nearly tripling over the prior year, $972 million versus $346 million, driven by the volume increases primarily in Guyana and, to a lesser extent, the Bakken. With debottlenecking and additional stages waiting in the wings, we see volumes increasing to more than 550 thousand barrels of oil equivalent a day (mboe/d) in 2025 from the 474 mboe/d just reported. With no change in our fair value estimate of Chevron, we see the shares as somewhat undervalued at $180. The difference in our view and the market is likely down to the perceived risk in the acquisition closing as it is still under challenge by ExxonMobil regarding the Guyana assets.

Hess' track record for efficiently allocating capital and generating value has been steadily improving. The company has deftly streamlined its portfolio by jettisoning less competitive and riskier positions in Equatorial Guinea, the Danish North Sea, and Libya, and by shifting the focus to more-lucrative oil and gas assets. Today the firm has two major growth assets: its 30% working interest in the Exxon-operated Stabroek block in offshore Guyana, and its acreage in the Bakken Shale play, which is US onshore. Cash flows from its legacy operations in the US Gulf of Mexico and Southeast Asia support Hess' ongoing investment in these regions.

Chevron's fourth-quarter adjusted earnings of $6.5 billion fell from $7.9 billion a year before but modestly exceeded market expectations. Adjusted earnings exclude a previously announced $1.8 billion upstream impairment charge, mainly in California, and $1.9 billion in decommissioning obligations from previously sold assets in the Gulf of Mexico. The earnings decline was largely attributable to lower oil and natural gas prices that offset an increase in production volumes to 3,392 thousand barrels of oil equivalent per day from 3,011 mboe/d the year before due largely to the acquisition of PDC Energy and continued growth in the Permian. Both also lead to a record annual production of 3,120 mboed. Management expects volume growth of 4%-7% in 2024 thanks to a full year of PDC volumes and 10% Permian growth that should offset divestments. The continued volume growth demonstrates Chevron’s hydrocarbon-focused strategy.

Our fair value estimate for Hess is unchanged at $176 due to the pending merger with Chevron. We also maintain our narrow moat rating. We still believe that this offers a great value to shareholders, representing a significant premium to our premerger valuation of $118. There remains a risk, namely the Federal Trade Commission investigation, which may end up postponing the close of the deal. At this point, we see little likelihood the deal would not close eventually given the limited risks to competition as the crown jewel, Guyana, is a nonoperated minority stake. Hess' Bakken operations would elevate Chevron to a top producer in the basin, but we don't see a change in the competitive environment in the basin as a result of the deal, so we don't think the investigation will force any changes. Despite the announced investigation, there has been no change to management's estimated first half of 2024 close.

Chevron's third-quarter earnings not only fell below market expectations, but management also announced a further delay and cost increase to its two major projects at its TCO asset in Kazakhstan. Both the Wellhead Pressure Management Project and Future Growth Project will start about six months later than previously expected, in first-half 2024 and first-half 2025, respectively, while the projects’ total costs will be 3%-5% higher than expected. Production in 2024 will be lower than in 2023 because of heavier turnarounds as well. Finally, TCO cash flow will be about $1 billion lower in 2025 than previous guidance, given lower volumes from the project delays. The combined news of weaker-than-expected earnings and delays to Chevron’s major projects sent shares lower. However, we think the selloff (about $17 billion in lost market cap) is short-sighted and largely an overreaction.

Hess’ third-quarter earnings were solid, in our view. Our fair value estimate is now dependent on our Chevron fair value estimate of $172 per share and the merger exchange ratio, so that remains unchanged at $176 per share. Our narrow moat rating is also unchanged. Hess boosted its production guidance for 2023 to be about 390,000 barrels of oil equivalent a day, at the upper end of its prior guidance. The outperformance is primarily due to the Bakken and higher levels of drilling activity and more natural gas liquids obtained via percentage of proceeds contracts. Pretax income fell to $817 million from $888 million last year, as lower realized oil and gas prices more than offset higher production.

Hess' track record for efficiently allocating capital and generating value has been steadily improving. The company has deftly streamlined its portfolio by jettisoning less competitive and riskier positions in Equatorial Guinea, the Danish North Sea, and Libya, and by shifting the focus to more-lucrative oil and gas assets. Today the firm has two major growth assets: its 30% working interest in the Exxon-operated Stabroek block in offshore Guyana, and its acreage in the Bakken Shale play, which is U.S. onshore. Cash flows from its legacy operations in the U.S. Gulf of Mexico and Southeast Asia support Hess' ongoing investment in these regions.

Hess' track record for efficiently allocating capital and generating value has been steadily improving. The company has deftly streamlined its portfolio by jettisoning less competitive and riskier positions in Equatorial Guinea, the Danish North Sea, and Libya, and by shifting the focus to more-lucrative oil and gas assets. Today the firm has two major growth assets: its 30% working interest in the Exxon-operated Stabroek block in offshore Guyana, and its acreage in the Bakken Shale play, which is U.S. onshore. Cash flows from its legacy operations in the U.S. Gulf of Mexico and Southeast Asia support Hess' ongoing investment in these regions.

On Oct. 23, Chevron announced its intention to acquire Hess for $171 per share, or $53 billion, in an all-equity deal (1.025 Chevron shares per Hess share) based on Chevron’s closing price on Oct. 20. With Hess, Chevron gains meaningful positions in Guyana and the Bakken, including Hess’ midstream assets, as well as smaller positions in the Gulf of Mexico and natural gas assets in Southeast Asia. Given its size and economics, Guyana is the most attractive of the group and likely the key driver of the deal, as it adds a source of long-term growth Chevron had been lacking.

We have adjusted our valuation methodology for U.S. exploration and production companies. Our multistage DCF valuation incorporates five years of explicit projections for a fixed period, typically five years. Terminal values are derived by assuming firms eventually earn their cost of capital in perpetuity. This contrasts with our previous methodology, which modeled the harvesting of all existing company assets. The change brings our E&P valuations in line with Morningstar’s standard equity research methodology.

Hess' track record for efficiently allocating capital and generating value has been steadily improving. The company has deftly streamlined its portfolio by jettisoning less competitive and riskier positions in Equatorial Guinea, the Danish North Sea, and Libya, and by shifting the focus to more-lucrative oil and gas assets. Today the firm has two major growth assets: its 30% working interest in the Exxon-operated Stabroek block in offshore Guyana, and its acreage in the Bakken Shale play, which is U.S. onshore. Cash flows from its legacy operations in the U.S. Gulf of Mexico and Southeast Asia support Hess' ongoing investment in these regions.

Oil prices and Hess shares both traded sideways in the first session after the firm announced its second-quarter financial and operating results. That’s surprising, as it shattered its own estimates for production in the period (firmwide output was 387 mboe/d, compared with guidance of 355-360 mboe/d). This was accomplished without a commensurate increase in expenses (cash costs were $13.97/boe, compared with guidance of $15.50-$16). And while the full-year budget was unchanged at $3.7 billion, management raised its 2023 production outlook by 5%. We intend to incorporate these results shortly, but after this first look our fair value and narrow moat rating are unchanged.

We're lowering our fair value estimate for Hess to $84 per share from $93 after incorporating its first-quarter results. As we previously commented, the firm is ostensibly off to a terrific start to 2023, with both production and cash costs significantly beating quarterly guidance and putting the firm in a strong position to exceed its annual goals. But the execution, while solid, was not as spectacular as the headline numbers suggest.

Hess' track record for efficiently allocating capital and generating value has been steadily improving. The company has deftly streamlined the portfolio, jettisoning less competitive and riskier positions in Equatorial Guinea, the Danish North Sea, and Libya, and shifting the focus to more lucrative oil and gas assets. Today the firm has two major growth assets, its 30% working interest in the Exxon-operated Stabroek block (offshore Guyana) and its acreage in the Bakken Shale play (U.S. onshore). Hess' ongoing investment in these regions is supported by cash flows from its legacy operations in the U.S. Gulf of Mexico and Southeast Asia.

We intend to incorporate Hess' first-quarter results into our model shortly, but after this first look our fair value is unchanged. The firm is ostensibly off to a terrific start to 2023, with both production and cash costs significantly beating quarterly guidance and putting the firm in a strong position to exceed its annual goals, as well. Firmwide production was 374 mboe/d, handily beating the target range of 345-355 mboe/d, and giving management the confidence to raise its annual goal from 355-365 mboe/d to 365-375 mboe/d (up 3% at the midpoint). Likewise, E&P cash costs were $12.96 per boe, below the low end of guidance for both the quarter and the full year. But digging into the results reveals the execution, while solid, was not as spectacular as the headline numbers suggest.

We're raising our fair value for Hess to $93 from $88 after taking a second look at the firm's fourth-quarter financial results. But even after this increase, shares are looking extraordinarily expensive at the current level. Energy stocks have surged ahead of the broader market since the recovery from COVID-19 began in earnest at the start of 2021, and Hess has been one of the sector's strongest performers in that period (advancing roughly 27%). But we believe the rally is long overdone. Since 2020, the stock has catapulted from a 5-star rating to a 1-star rating, which is where it remains today.

Hess' track record for efficiently allocating capital and generating value has been steadily improving. The company has deftly streamlined the portfolio, jettisoning less competitive and riskier positions in Equatorial Guinea, the Danish North Sea, and Libya, and shifting the focus to more lucrative oil and gas assets. Today the firm has two major growth assets, its 30% working interest in the Exxon-operated Stabroek block (offshore Guyana) and its acreage in the Bakken Shale play (U.S. onshore). Hess' ongoing investment in these regions is supported by cash flows from its legacy operations in the U.S. Gulf of Mexico and Southeast Asia.

Hess exceeded guidance by about 2%, with its fourth-quarter firmwide production of 376 thousand barrels of oil equivalent per day, or mboe/d. That total excludes a contribution from its Libya assets, which it sold during the fourth quarter for about $150 million. This outperformance was impressive when taking into account the impact of poor weather in North Dakota, which triggered shut-ins that dragged its fourth-quarter Bakken Shale output down to 158 mboe/d, compared with guidance of 165-170 mboe/d). But better-than-expected volumes across the remainder of the portfolio more than made up for the disappointment. That includes Guyana volume of 116 mboe/d, which reflects the first quarter with the Liza-1 and Liza-2 vessels both operating at full capacity for the first time.

Hess shares surged ahead in early trading after the firm reported third quarter operational results that comfortably exceeded management estimates. Firmwide volumes, excluding Libya (where political unrest makes output too unpredictable to guide on), were 351 mboe/d. And to this, Hess' flagship assets in Guyana and the North Dakota Bakken Shale contributed 98 mboe/d and 166 mboe/d respectively. All three results exceeded the high end of guidance ranges, and the outperformance would have been even stronger if not for the impact of a 1 mmb underlift in Guyana (these volumes were extracted in the third quarter but not picked up for transport, and thus excluded from production). On the back of this strong performance the firm raised its outlook for full year output by 5 mboe/d while keeping the capital budget flat.