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How Hess Corporation Could Eventually Generate FCF

Summary

Hess Corporation needs either $60 WTI or its expensive major developments to come online to start generating free cash flow.

Its outspend is largely due to well over half of its capex being weighted towards long-term projects that aren't producing cash flow yet.

Hess has a strong balance sheet to ride out the downturn, but commentary is needed around what to expect heading into 2017.

After selling off half of its Bakken midstream assets last year in a move that added $3 billion to its balance sheet on top of raising $1.6 billion by issuing out equity this year, Hess Corporation (NYSE:HES) built a balance sheet capable of weathering a pricing downturn. Even though its unconventional Bakken/Three-Forks and Utica operations aren't quite top tier, in big part due to pipeline takeaway constraints in different forms, Hess Corporation's outspend will eventually be tamed by conventional cash flow streams.

With no real risk of going bankrupt and ample liquidity levels, Hess can swiftly capitalize on a pricing recovery, albeit one that will be far slower than ideal. Looking at its balance sheet at the end of June 2016, Hess ended Q2 with $4.63 billion in current assets including just under $3.1 billion in cash. The firm had $2.14 billion in current liabilities and $5.9 billion in long-term debt (excluding Bakken Midstream debt) with a very favorable maturity schedule as you can see below. Additional access to liquidity is available through its credit lines.

Source: Hess Corporation Presentation

First, Hess's hefty outspend

Hess Corporation generated $257 million in cash flow during the second quarter of this year, $197 million when including working capital effects. Stacked against $704 million in dividend payments, upstream capex, and Bakken Midstream capex means Hess still has ways to go. On the plus side, $257 million is a big improvement versus Hess's Q1 cash flow of $148 million, especially as working capital effects took that down to negative $60 million.

Pushing Hess higher was a material increase in its average realized prices. In Q1, Hess fetched $28.50/barrel for its crude output and $7.44/barrel for its NGLs production. That rose to $41.95/barrel and $9.03/barrel, respectively, last quarter. Its realized natural gas price also climbed up from $3.42/Mcf to $3.58/Mcf. All of these prices are on a worldwide basis.

Second, getting Hess to cash flow neutral

Hess cut its 2016 upstream capex down to $2.1 billion from $2.4 billion, on top of a reduced $290 million Bakken Midstream capex budget. When oil price benchmarks are around...


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