Hess Corporation: Another Platform Begins Operations Soon (Rating Upgrade)

Hess Corporation's valuation, and therefore its pending merger with Chevron, is complicated by the imminent operation of a fourth platform in the Guyana project, operated by Exxon Mobil, potentially increasing Hess's cash flow and value beyond the original merger agreement terms. An arbitration hearing is set for late May to address Exxon Mobil's claims, with a decision expected a few months later, which will determine if Exxon Mobil's contract clause is activated; the outcome will resolve the current uncertainty, though a second shareholder vote remains uncertain. Despite declining oil prices impacting overall earnings, the Guyana project's low breakeven prices ensure continued profitability for Hess, primarily driving the company's value and overshadowing less profitable US operations.

Analysis

Hess Corporation's valuation is currently at a significant inflection point, primarily driven by the anticipated operational commencement of the fourth platform in the Guyana project later this fiscal year, a development also confirmed by the project operator, Exxon Mobil. This expansion is expected to substantially augment Hess's cash flow, thereby potentially increasing its intrinsic value above the terms established in the year-old merger agreement with Chevron. A critical determinant will be the outcome of an arbitration hearing scheduled for late May, instigated by Exxon Mobil, which asserts its contractual rights were activated by the Chevron-Hess transaction; a ruling is anticipated a few months subsequently. This arbitration could lead to a revaluation of Hess, incorporating the enhanced cash flow from the new platform, potentially resulting in a figure that surpasses Chevron's initial offer. Although Hess's overall earnings have decreased from fiscal year 2022 levels due to declining oil prices, the Guyana project's remarkably low breakeven costs are projected to sustain profitability and drive strong near-term earnings growth comparisons as additional platforms, including the fourth, become operational. The high-margin Guyana output, which constitutes the bulk of Hess's corporate value and cash generation, significantly overshadows the less profitable United States operations, even with comparable production volumes from areas like North Dakota.

Key Decisions for Investors

• Investors should closely monitor the outcome of the late May arbitration hearing involving Exxon Mobil, as this will be a pivotal factor for Hess's valuation and the likelihood of the Chevron merger proceeding under existing or potentially revised terms.
• It is advisable to evaluate Hess stock considering two primary scenarios: as an M&A arbitrage opportunity currently influenced by Chevron's stock performance, or as a standalone entity with considerable growth prospects fueled by the highly profitable Guyana assets, should the acquisition by Chevron not materialize.
• Consider the impact of the fourth Guyana platform's impending launch, which bolsters Hess's standalone valuation and negotiating leverage, while also remaining cognizant of risks such as sustained weakness in oil prices potentially tempering valuation upside, or the possibility of legal disputes extending beyond the initial arbitration resolution.