This article was originally published by TheStreet on November 6, 2014
By Sarfaraz A. Khan. Research Asst: Daniel L.
NEW YORK (TheStreet) -- Oil prices have fallen to multi-year lows of around $80 a barrel, but that is not going to stop oil producers like Hess (HES) from spending billions to develop their deep-water properties in the Gulf of Mexico.
Like its peers, Hess is also worried about the slump in oil prices. Last week, during the company's third-quarter conference call, CFO John Rielly predicted that every $1 drop in crude prices will impact Hess' fourth-quarter net income by around $8 million. So far, no other oil producer has given such guidance, in terms of dollars, that directly links net income with the changes in crude prices.
But last week, Hess also said that it is going to spend $1.5 billion to develop Stampede, in spite of the weakness in oil prices. Stampede is a deep-water oil and gas field that holds up to 350 million barrels of oil equivalent at the Gulf of Mexico. Hess is the operator and holds a 25% stake in the project while the remainder is owned by Chevron (CVX) , Statoil (STO) and Canadian oil and gas company Nexen.
In an email, Hess representative Lorrie Hecker said offshore, or sea-based, projects such as Stampede offer "robust economics even in the current price environment." Moreover, Hecker said the company has the "balance sheet strength and financial flexibility to fund these projects, which will deliver cash generative growth and value for our shareholders."
Brian Youngberg, senior energy analyst at Edward Jones agrees. In an email, Youngberg wrote that Hess' decision is positive for the long term and the company's share of capital "should be manageable, barring a long sustained drop in oil prices."
Youngberg further explained that Hess' decision to proceed with the development of Stampede is not based on the assumption of an increase in oil prices in the future. Rather, energy companies "tend to model prices lower than today" Youngberg said.
In Stampede's case, Youngberg said the project will be profitable even if oil prices fall to $60 a barrel, significantly lower than the current level of $78 a barrel. "Hess cash flow should be more than adequate to help fund it," Youngberg said.
With economics like these, it is not surprising that Hess' partners Chevron, Statoil and Nexen are willing to invest a total of $4.5 billion of their share of capital on Stampede. And it's not just this project.
Hess is also expecting first production from Tubular Bells Field at the Gulf of Mexico, in which Hess is the operator with a majority interest, as early as this week. Meanwhile, three oil giants have recently announced two "significant" oil discoveries in the Gulf of Mexico.
Chevron and BP (BP) have recently encountered the black gold, while Spain's Repsol (REPYY)has also made a major oil discovery in the deep waters of the Gulf of Mexico. Clearly, the oil giants are not slowing down their exploration and production work despite lower prices.
That is because Gulf of Mexico is still profitable if oil stays at around $80 a barrel, Youngberg said. Further, the oil companies consider the Gulf of Mexico a lower-risk offshore investment compared to other regions of the world. Additionally, there is potential for new large oil fields to be found, particularly in the ultradeep waters, Youngberg said. The oil companies will continue to drill and will pursue new projects until there is another "significant and sustained drop" in oil prices.
Hess' shares are largely flat so far this year and were trading down 40 cents, or 0.5%, at $82.77 early Thursday. Youngberg currently has a hold rating on the stock.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
