Hess (HES) Downgraded To Sell On Escalating Debt & Weak Oil

On Jun 21, upstream energy player Hess Corporation (NYSE:HES) was downgraded to a Zacks Rank #4 (Sell).

Key Factors

Since the beginning of 2014, the debt load has been rising at an exponential rate for Hess with no sign of reduction. Moreover, during Feb 2016, both Standard and Poor’s Ratings Services (S&P) & Moody’s Investors Service (Moody’s) slashed the company’s debt rating below investment grade. It is a matter of serious concern as the company is not being able to raise debt capital in favorable terms for financing growth projects.

On top of that, it has become increasingly difficult for the energy explorer to fund growth projects out of its own operations as it reported loss in 2016 and expects further losses this year.

Also, the business scenario has not been favorable for the company, thanks to persistently weak oil prices. Many analysts believe that if crude slips below $40 a barrel, many oil exploration and production players in the U.S. like Hess will be at a risk of halting production growth.

Moreover, Hess expects production levels in 2017 to fall below the prior year’s output. Hence, the combination of weak oil prices along with lower production will likely hurt Hess’s cashflows.

Over the last 60 days, the Zacks Consensus Estimate for the company’s second-quarter bottom line has been revised down to a loss of $1.02 per share from a loss of 95 cents. Also, for 2017, the Zacks Consensus Estimate has been cut to a loss of $3.69 from a loss of $3.43 over the same period.

These weaknesses got reflected in the company’s stock price movement over the last one year. During the period, Hess lost 32.5% as compared with the Zacks categorized Oil & Gas-U.S Exploration & Production industry’s 27.4% fall.

Stocks to Consider

Better-ranked players in the energy sector include Canadian Natural Resources Limited (TO:CNQ) , McDermott International Inc. (NYSE:MDR) and W&T Offshore Inc. (NYSE:WTI) . Canadian Natural and McDermott sport a Zacks Rank #1 (Strong Buy), while W&T Offshore carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

We expect year-over-year earnings growth for Canadian Natural of almost 725% for 2017.

McDermott beat the Zacks Consensus Estimate in each of the trailing four quarters, the average positive surprise being 387.50%.

W&T Offshore had an average positive earnings surprise of 69.21% for the last four quarters.

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