If you want to see a bellwether for the oil and gas industry, look no further than Hess (NYSE: HES). The independent oil and gas exploration and production (E&P) company, one of the largest in the United States, reports Q3 2017 earnings before almost anyone else in the industry -- on October 25th.
Looking at Hess' third quarter is likely to give investors a sense of how the rest of the industry -- including similarly sized Apache Corporation (NYSE: APA) and big ConocoPhillips (NYSE: COP) -- will fare. Here's what you should be looking for when Hess reports.
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The breaking point
Many oil companies have been struggling to turn a profit with oil at $50 a barrel. Most companies have set that nice, round number as their target breakeven point. And in Q2, with oil prices hovering for the most part above $50, some E&Ps -- including ConocoPhillips -- were even able to turn a profit.
Unfortunately for the industry and its investors, oil prices were below $50 a barrel for the vast majority of the third quarter. West Texas International crude prices dropped as low as $44.23 in early July, and aside from a one-day blip in late July, they didn't get back above the $50 mark until the quarter was nearly over in late September.
Unlike Conoco, Hess wasn't able to turn a profit in Q1, so it seems unlikely that the company will be able to post a profit in Q3. However, investors should look at how Hess' loss compares with last year. In both Q1 and Q2 2017, operating losses were smaller than in the prior year, suggesting that the company was moving in the right direction. In Q3 2016, Hess's adjusted loss was $340 million, or $1.12 per share. An improvement over this figure would show that Hess is indeed moving in the right direction, able to improve its operations even in such a low-price environment.
Although Hess' primary operations are in the Bakken Shale of North Dakota, it does have a significant presence in the Gulf of Mexico, which means Hurricane Harvey and possibly Tropical Storm Nate could have affected its operations. I say "could have" because unlike Apache, Hess hasn't issued a press release on the subject, except to announce its admirable donation of $1 million to support Hurricane Harvey relief. Similarly, the larger ConocoPhillips has pledged $5 million but made no statement about the hurricane's effect on its operations.
But the hurricane certainly had some sort of impact on the company, which has a regional headquarters in Houston. While it's unlikely any of Hess' Gulf of Mexico rigs sustained any damage, the Bureau of Safety and Environmental Enforcement reported that 13.8% of Gulf of Mexico platforms and 50% of non-dynamic drilling rigs had to be evacuated during Harvey. About 18.5% of Gulf oil and gas activity was shut down during the storm.
Hess rival Apache has already said Harvey will have a negative impact on its Q3 production volumes, so investors should keep an eye on Hess' production numbers and be aware that the storm may have had an effect here, too. Any effect should be limited to Q3, although it could affect annual production projections for 2017 as well.
The balance sheet
Even though it's trading near a 12-year low, Hess has one of the sector's better balance sheets, at least as of the end of Q2.
Oil drillers are notorious for carrying heavy debt loads -- Conoco, for example, has $11.7 billion in net long-term debt on its balance sheet. Hess, on the other hand, has managed to keep its load manageable. It currently sports a debt-to-capital ratio of 31.9, among the lowest in its peer group. Apache's is far higher, at 57.8, and even well-capitalized Conoco's is 43.8.
As of the end of the second quarter, Hess was also sitting on $2.5 billion in cash, with only about $600 million of its debt maturing by 2019. I'll be looking to see if it's been able to keep its balance sheet in great shape, even as oil prices were down and the company's dividend yield rose to about 2.2% -- similar to best-in-class Apache's.
Although it probably won't be front and center, I'll be keeping an eye on the updated balance sheet, just to make sure there are no signs of slippage.
What to expect
Hess is one oil driller that should definitely be on investors' watch lists by virtue of its strong balance sheet, its nice dividend yield, and the long-term possibilities of its joint venture with ExxonMobil offshore in Guyana.
It's tough to say, though, what Q3 will bring, given the uncertainties surrounding the company's Gulf of Mexico operations during Harvey, and the quarter's lackluster oil prices overall. If the company outperforms expectations, the beaten-down stock could see a big jump. If it underperforms, it could set a new 12-year record low. Interested investors should probably just wait and see for now.
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