Fitch Ratings has affirmed Hess Corporation's (NYSE: HES) Long-Term Issuer Default Rating (IDR) and senior unsecured ratings at 'BBB-'.
The Rating Outlook remains Positive.
The Positive Outlook reflects Fitch's expectation of increasingly positive FCF as low-cost Guyana phases are completed and improve the company's cash flow profile, assuming a reasonably supportive oil price environment. Successful ramp up of additional Guyana production could resolve the outlook favorably.
Hess' ratings are supported by the company's early retirement of the 2023 term loan; manageable debt maturity profile; high liquids exposure; good upstream diversification (including Bakken, GoM, Guyana, and JDA); strong line of sight on growth and increasing FCF from additional Guyana phases; and the operational and financial flexibility provided by its midstream affiliate, HESM.
Rating concerns include the company's growth-oriented profile which will suppress near-term FCF relative to investment-grade (IG) peers; limited hedge book, and inflation concerns.
Key Rating Drivers
Guyana on Schedule: Hess' growth platform, Guyana (30% working interest, Exxon operated), remains on schedule. Earlier flash gas compressor issues at Liza Phase 1 were repaired, and optimization work boosted nameplate capacity from 120kbopd to 140kbopd. Liza Phase 2 achieved first production in February and reached nameplate capacity of 220kbopd in July. Development #3, Payara is expected to achieve first oil late 2023, followed by Yellowtail in 2025. Hess plans to have at least six floating production, storage and offloading vessels (FPSOs), with the potential for up to 10 FPSOs to develop recoverable resource base.
Slower Bakken Ramp: Hess has increased Bakken activity with higher oil prices. After cutting the Bakken to one rig during the pandemic, the company ramped up, most recently adding a fourth rig in July which should eventually benefit the credit profile by getting the company to its target 200kboepd production level. Net Bakken production dropped to just 140kboepd in 2Q due to winter weather-related shut-ins, as well as the sale of Little Knife and Murphy Creek acreage.
While Bakken production is flexible in the short term, the midstream tariffs paid to HESM (approximately $1.2 billion 2022) create incentives to maintain production in the medium term to maintain unit economics. Separately, production in the Gulf of Mexico declined to 29kboepd in 2Q22 (versus 52kboepd in 2Q21), due to field declines and unplanned downtime at Stampede and Penn State fields.
Near Term FCF Limited by Growth: Hess' growth profile differentiates it from most E&P peers. While near term FCF remains strong, and Guyana has hit a self-funding inflection point following Liza Phase 2, Hess' near-term project spending will also limit the scope of its FCF relative to peers. As calculated by Fitch, Hess' FCF in 2Q stood at $373 million.
Limited Hedging: Hess' hedge profile is modest, and includes 150kbopd of oil in 2022 (90k barrels hedged with WTI collars at a floor of $60), and 60k barrels hedged with Brent collars at a floor of $65, and no hedges extending beyond 2022. In 1Q22, the company paid $325 million to remove the ceiling on the collars for the remainder of the year to capture additional upside. A number of IG peers have also moderated their hedge exposure in the current environment, but this has mostly been done by allowing existing coverage to roll off.
Debt Repayment Complete for Now: In February, Hess repaid $500 million of the $1.0 billion term loan due March 2023, which it had taken out during the pandemic to ensure Guyana expansion capex would be funded. Looking forward, Fitch expects discretionary debt repayments at the Hess parent level will be limited, and anchored on maturities as they come due, with most of the improvement in company leverage ratios coming from the effects of a growing production base.
Increased Allocation to Shareholders: With its near-term planned debt repayments behind it, Hess has committed to sending up to 75% of FCF to shareholder returns. In March, the company announced a 50% increase to its dividend, and in June it repurchased approximately 1.8 million shares of common stock for $190 million. Fitch expects the company will use its remaining stock repurchase authorization prior to YE, and going forward, FCF allocation will continue to go to both buybacks and dividends but will skew towards buybacks given their greater flexibility.
Midstream Monetization: In April, Hess monetized approximately $346 million of its holdings in Hess Midstream LP (HESM), reducing its stake in HESM to 41%. Hess has aggressively sold down non-core assets over the past several years, which may limit the scope of future sales. Future sales could include additional liquidation of its HESM stake, or possibly Libya, although the set of buyers for the latter remains capped.
Incremental Flexibility Adequate: Fitch believes the additional financial flexibility the company has to deal with a future leg down in prices is adequate, and the levers the company is most likely to pull include reduced shareholder returns and additional capex cuts. Fitch does not expect the company would drop to zero rigs in the Bakken for a prolonged period given its desire to preserve its lean manufacturing capabilities, as well as the previously stated need to pay midstream tariffs. In addition, Hess could lower its capex by deferring future buyouts of FPSOs.
Derivation Summary
Hess is reasonably positioned versus IG peers in the independent E&P space. In terms of size, after several years of shrinking, at 322kboepd (2Q22) it is smaller than peers such as Marathon Oil Corporation (343kboepd), Ovintiv (500.1kboepd) and Apache (384.6kboepd), but larger than Murphy Oil (173.2kboepd). Liquids exposure is above average at around 70%, and includes a high percentage of oil versus natural gas liquids. Hess' pricing realizations also benefit from its long-term, oil-linked Malaysian production sharing contracts. Diversification is above average both in terms of upstream (Bakken, GoM, Guyana, Asia), and its 41% stake in midstream entity HESM.
Cash netbacks ($47.9/boe) are in line with Apache ($53.7/boe) and above Ovintiv ($43.3/boe), but below Devon ($57.9/boe) and Marathon Oil ($60.1/boe). Fitch expects Hess' netbacks will improve as it adds low cost development phases in Guyana (which receive Brent pricing). Hess' emphasis on growth in Guyana differentiates it from most peers who have chosen to lower near-term reinvestment rates and boost FCF. Hess' reinvestment phase is set to extend over the next several years, although it should become increasingly FCF positive as new phases cumulatively enter production.
Key Assumptions
Base Case WTI oil price of $100/bbl in 2022, $81 in 2023, $62 in 2024, and $50 in 2025 and beyond;
Henry Hub natural gas prices of $6.25/mcf in 2022, $4.00 in 2023, $3.25 in 2024, and $2.75 in 2025 and beyond;
Forecast production (including Libya) of 340.1kboepd in 2022, 399.5kboepd in 2023, 460.1kboepd in 2024, and 500k in 2025;
Remaining maturities at Hess parent level repaid as they come due;
Excess FCF allocated to shareholder returns, with a focus on buybacks over dividends;
No incremental asset sales assumed.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Successful execution of additional Guyana phases, leading to sustained improvement in FCF generation;
Sustained E&P debt/EBITDA below 2.0x;
Increased size and scale.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Inability to mitigate Guyana execution risks, or additional shareholder actions leading to weakened financial flexibility;
Reduced size, scale and diversification of E&P operations below 175kboepd-200kboepd;
Sustained mid-cycle E&P debt/EBITDA above 3.0x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Good Liquidity: Hess' liquidity was good at June 30, 2022, with consolidated cash & equivalents of approximately $2.16 billion (of which $3 million was held at Hess Midstream), and $3.5 billion in unsecured revolver capacity. Subsequent to the end of Q2, Hess replaced its $3.5 billion revolver (expiry May 2024) with a new $3.25 billion unsecured revolver (expiry July 2027), for pro forma liquidity of $5.41 billion. Hess also had availability of $71 million on committed and uncommitted lines of $221 million, following LOC use of $150 million.
Fitch views the company's liquidity position as good in the context of a manageable maturity wall, with no parent maturities due until the company's 2024 $300 million 3.5% notes. Financial covenants of the new SOFR-based revolver are substantially similar to the previous revolver, and include a 65% debt to total capitalization covenant (which stood at 37.9% at June 30, 2022), and a cap on potential secured debt issuance of 15% Consolidated Net Tangible Assets.
Issuer Profile
Hess Corporation is a mid-sized global E&P with upstream operations in Guyana, the U.S. onshore (Bakken), U.S. offshore, Asia (Malaysia/Thailand Joint Development Area) and Libya. Hess also owns a 41% ownership stake in Hess Midstream LP (HESM).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Hess Corporation has an ESG Relevance Score of '4' for Waste & Hazardous Materials Management; Ecological Impacts due to its exposure to the financial risks that an offshore oil spill pose for moderate sized offshore operators, as well as higher environmental remediation costs associated with offshore platforms.
Hess Corporation has an ESG Relevance Score of '4' for Group Structure given its complex structure, which includes co-ownership of a private midstream entity and publicly traded C-Corp jointly with a private equity firm, Global Infrastructure Partners.
These factors have a negative impact on the credit profile, and are relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
HESS CORPORATION 
