Hess dodges Shale Decline, Leads S&P 500 via ‘Fairy Tale’ Guyana Find
Hess rose above the carnage in shale stocks with a more traditional approach to oil exploration – partnering in a massive offshore discovery in a frontier nation.
Investors flocked to New York-based Hess in 2019 to participate in Exxon Mobil Corp.’s gigantic Guyana oil find, and avoid cash-burning shale specialists. Hess, which holds a 30% stake in the Guyanese discovery that’s turned into the world’s biggest new deepwater oil prospect, climbed 65% last year, leading gains in the S&P 500 Energy Index.
“Most of the outperformance is attributable to the company’s continued success offshore Guyana,” Muhammed Ghulam, a Houston-based analyst at Raymond James & Associates, said by email. The rally in Hess shares is poised to carry on “if it continues to see success” from drilling in Guyana and neighboring Suriname.
Hess outperformed every other stock in the S&P 500 Energy Index of 28 companies last year. That was in stark contrast to index peers such as Occidental Petroleum Corp., which posted it steepest decline in two decades after the ill-received acquisition of Anadarko Petroleum Corp., and Cabot Oil & Gas Corp., which tumbled more than 20%.
For Hess, it was a remarkable turnaround from 2018 when the company led by Chief Executive Officer John Hess was targeted by activist investor Elliott Management Corp. for pursuing high-cost shale projects in the Bakken region of North Dakota.
“Hess has been on fire,” Paul Sankey, a New York-based analyst at Mizuho Securities USA, said in a note to clients. While much of the success in Guyana already is reflected in Hess’ stock price, the company could see further uplift when cash from the development begins to flow in, he said.
The genesis for Hess’ success was in 2014, when crashing oil prices spurred Royal Dutch Shell Plc to pull out of its 50-50 partnership with Exxon in Guyana. That left the American supermajor in need of a new partner in its high-risk, wildcat drilling campaign in a region that had never before produced any oil.
Hess stepped in, as did China’s CNOOC Ltd., which bought a 25% stake.
It turned out to be one of the best bets of the century, with Exxon uncovering an oil deposit so massive that its boundaries have yet to be discerned. Exxon Senior Vice President Neil Chapman characterized the discovery as a “fairly tale” during a 2018 conference call.
In subsequent years, Exxon and its partners have made 14 more finds totaling more than 6 billion barrels. Commercial production began in late December even as exploratory drilling continues.
“At this point, we think production from Guyana developments over the next five or so years are in expectations,” Sankey said. “We would need to see more connection of Guyana operational success back to cash return growth to drive re-rating higher.”