In the disaster that continues for independent shale oil producers, some brief moments of sunlight peek through. And right now, one of those moments is shining on Hess (HES), one of the first and most committed to the Bakken shale play, a particular play gaining some interim relief from the oil bust.
It has been clear to me that the down cycle for independent exploration and production companies here in the U.S. was not going to be a short one. I outline all the reasons for this and my projected timing in my new book "Shale Boom, Shale Bust," now available everywhere. But where rig counts have been decimated, there has been some small indications of production also leveling off a lot quicker than most analysts (and I) thought might happen -- particularly in the Bakken.
I suppose the Bakken is the most likely place to see a quick turnaround from rig numbers going down to a translation on supply numbers. After all, it is the most mature of the shale plays, even though it is only seven years old. But the players there, or at least the strong ones, are far better established than in other shale plays around the country; they include Continental Resources (CLR), ConocoPhilips (COP), Whiting Petroleum (WLL), Apache (APA), EOG Resources (EOG) and Hess, to name just a few of the big ones.
The Bakken also is where the most speculative players went first to drill the outer reaches of the core areas that the big boys already had staked out and are clearly on their way to tossing in the towel during this oil downturn; among them are American Eagle Energy (AMZG), Triangle Petroleum (TPLM) and Emerald Oil (EOX). There are others I could name, but the point is that the rigs from those marginal companies are probably offline for good.
This has resulted in a major collapse of the basis price discount that many of the Bakken players have labored under even during good times. When oil was more than $100 a barrel, they often saw discounts of $12 to $15 to West Texas Intermediate crude, which itself was laboring under a discount of $5 to $10 to global grades. So, with oil rallying from $45 to $60 a barrel, WTI discounts to Brent moving under $5 a barrel and steadying and Bakken discounts dropping to near parity with WTI, Bakken independents quietly have broken out the party hats, at least for the time being. At $100 Brent oil, some Bakken producers actually would realize closer to $70 a barrel for crude; here at $60 a barrel for WTI, they're getting almost the full $60 ¿ not so bad.
The question now is how long all this is going to last, but for our purposes, that may not really matter. I have been of the opinion that easy capital has continued to buoy the shale players, slowing the necessary consolidation needed in the sector. Yet the valuations on at least some of these Bakken players are getting relatively good in spite of this, at least compared to the Eagle Ford and Permian specialists I tend to prefer.
All of which circles me back to Hess. One of the few pluses for Hess outside of this lucky break on basis market changes has been its consolidation plan and the very deliberate way it has been putting that plan into motion. One outcome of this has been today's $2.675 billion joint venture deal to sell 50% of its Bakken midstream assets to Global Infrastructure Partners. It's hard to minimize the value released every time Hess can manage one of these deals -- it costs some debt, but will release five or six times the accretive value -- and it's not the only one Hess can do.
It's been a tough year for Hess. The company sold off its status as an "integrated" oil company, which would have saved Hess from the share price disaster it has endured; it was a $100 stock last year and hit its 52-week low last week at $65. But with the turnaround in Bakken oil discounts and the value release of more midstream assets today, I'm willing to believe Hess can find a better stock price going forward. This isn't a long-term play, but one that takes advantage of two positives at a great discounted stock price. I recommend Hess at $69.
