Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

"We're holding our own in the middle of the pack."

John Hess, CEO of his namesake oil and gas company, pushed back on Wednesday morning when Paul Sankey, an analyst with Wolfe Research, suggested investors weren't that into its "mixed business model." In several ways, Hess is correct. But the analyst still had a point.

Hess Corp. missed the consensus earnings forecast for the second quarter, but did manage to meet its guidance on production. Like Anadarko Petroleum Corp., Hess is tapping the brakes on spending, reducing its budget for 2017 by $100 million.

Cheap oil has hurt Hess's stock price, though it has recently found a bottom

Yet, also like Anadarko, Hess is holding its own where it counts: U.S. shale. Production in Hess's core Bakken basin beat guidance handily, at 108,000 barrels of oil equivalent per day. That should rise to somewhere between 110,000 and 115,000 in the fourth quarter.

More important than that is how Hess is getting to those higher levels. Coming into Wednesday's call, there were concerns about Hess needing to dial back its plans. With four rigs operating in the Bakken, the company had indicated it might add another two if oil prices warranted it -- the implication being that those two might be needed in order to maintain momentum.

Hess now says that a move to more intensive fracking methods meant it could meet its targets with just four rigs. The company says its Bakken operations generate free cash flow even at today's prices and that it would require only 2.5 rigs, on average, to hold production flat, down from 3.2 rigs a year ago.

That a U.S. E&P company is holding steady at sub-$50 oil in the Bakken -- and not the red-hot Permian shale -- should cause some nervous twitching over at OPEC's offices. At $60 oil, which still wouldn't salve the economic wounds of many petrostates, it's a fair bet those other two rigs would be put to work quickly.

Less spending; rising production; continuing good news about discoveries offshore Guyana -- and a 6 percent rally in Brent crude oil prices this week. So why was Hess's stock down on Wednesday?

In part, it's because Hess is more than holding its own on valuation:

Upper Middle Class
Hess is valued higher than most "mini-major" peers like Anadarko as well as Bakken-focused rival Continental Resources
Source: Bloomberg
Note: Enterprise value as a multiple of consensus Ebitda forecasts for 2018.

In the current price environment, it is difficult to see what might push that higher. The lack of Permian exposure and a diversified model spanning the Bakken, the Gulf of Mexico, Asia and Guyana mean Hess won't get an EOG-like double-digit multiple. Meanwhile, its existing premium to the likes of Continental and the mini-majors already bakes in the blocking and tackling the company is doing in shale.

Hess has already undergone a lot of changes since activist Elliott Management lit a fire under the company in early 2013. The recent IPO of Hess Midstream Partners LP was the latest chapter in this, but the story is told clearly in what's happened to the company's production mix:

America First
Hess's upstream portfolio has pivoted sharply back home since Elliott showed up
Source: the company

The shift in emphasis toward the Bakken shale is especially striking:

Bringing It All Bakken Home
The Bakken shale is now the core of Hess's upstream portfolio
Source: Bloomberg, the company
Note: Data for 3Q and 4Q 2017 assume the mid-point of company guidance

This experience explains, to some degree, why Hess bridled at the analyst's intimation that further restructuring might be needed.

Yet there is a strong element of wait-and-see to the current model.

Hess's leverage has been rising, even as it sells assets to cover funding deficits in the current price environment.

Rising Sum
Leverage at Hess has almost doubled since bottoming out in early 2016
Source: Bloomberg

And cash flow from operations hasn't covered capital expenditure (let alone the dividend) since early 2014:

Burning Issue
Hess has burned cash consistently since mid-2014 and, indeed, for much of the past decade
Source: Bloomberg, the company
Note: Cash flow from operations less capital expenditure

There's no real danger here, especially with $6.8 billion of liquidity on hand at the end of June.

The point is that it puts the onus on Hess to keep delivering, both in the Bakken and in developing the discoveries offshore Guyana, where it is a partner but the operations are being handled by Exxon Mobil Corp.

Indeed, this is the heart of the investment case for Hess. New projects in the Gulf of Mexico and offshore Malaysia have just started up or are about to. Yet the company's capital expenditure budget will remain north of $2 billion as dollars shift toward Guyana. In short, Hess is increasingly a story of grinding out further productivity gains in the Bakken but using the cash this generates for now to fund the Guyana venture.

When those barrels start flowing from South America, Hess says, it will be able to fund its capex and dividend at $50 oil. As tempting a prospect as that is, it still presents a mixed story to investors that have, as I wrote here, tended to favor pure shale plays or truly global portfolios like Exxon's.

A sustained increase in oil prices would make that story an easier sell. The problem is, with companies like Hess holding their own when it comes to shale output, that sustained increase looks unlikely.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at

To contact the editor responsible for this story:
Mark Gongloff at