On Apr 6, 2016, we issued an updated research report on a global exploration and production (E&P) company, Hess Corporation HES.

To support its multi-year transformation program and capital expenditures through 2016, the company continues to be highly dependent on major asset sales. Hence, the company’s growth and returns picture will likely be hindered by asset sale programs in the near term. Moreover, in 2015, Hess registered a fall in its reserves. As of year-end 2015, Hess’ proved reserves tally was 1.09 billion oil equivalent barrels, down 24.1% from the 2014-end level. The current scenario continues to be gloomy and depicts lower reserve and production in 2016.

Hess has reduced its 2016 capital expenditure by 40% to $2.4 billion from $4 billion spent in 2015. Therefore, production levels are also expected to decrease and are estimated to range between 330 thousand barrels of oil equivalent per day (mboed) and 350 mboed. The drastic fall in oil prices has affected all oil majors and the impact can be witnessed in the reduced level of operations and cost cuts.

The weak price environment has reduced Hess’ ability to generate cash flow and consequently, production and reserve growth. The company’s results now depend on the strength of refining margins in the U.S.

However, Hess has transformed to a predominantly E&P entity, thereby shifting its focus from high-impact exploration to low-risk unconventionals, and a smaller, more focused exploration portfolio. Keeping with its latest growth approach, company divested its downstream businesses, including energy marketing, terminals, retail marketing and refining operations. In view of the global economic slowdown and new refining capacity entering the world market, the aforesaid decisions will help enhance Hess’ shareholder value.

Moreover, Hess’ priority remains investment in the future growth with a balanced approach between unconventional, exploitation and exploration. Recently, the company divested several assets and is in the process of shedding others. The amount raised through asset sales is expected to help fund E&P investments. However, the company will continue to look at all opportunities to enhance long-term shareholder value.

We expect unconventional oil (including sources like oil shales, coal-based liquid supplies to name a few) and gas extraction (using non-traditional techniques) to play important roles in the world energy mix in the long run. Following the build-up of position in the North American Bakken oil field for unconventional oil, Hess is pursuing unconventional gas in the Marcellus Shale play. Hess’ exposures to Eagle Ford and Utica shales as well as several global development projects (such as Ghana, Brunei, North Sea, Gulf of Mexico, Southeast Asia and Kurdistan) are likely to be growth drivers for 2016 and beyond.