Hess Corp. (NYSE: HES) sprang back-to-back deals to sell overseas assets this week, ending Oct. 24 with a two-day tally of $2.65 billion in proceeds.
Hess’ sales will free up cash flow, allowing it to focus on attractive growth assets such as its Guyana position as well as its Bakken assets in the Williston Basin.
On Oct. 24, Hess said it entered an agreement to sell its oil and gas interests in Norway for $2 billion. The company will also commence a process to sell its Denmark interests.
The day before, Hess said it sold its offshore Equatorial Guinea assets to Kosmos Energy Ltd. (NYSE: KOS) and Trident Energy for $650 million.
So far in 2017, the company has sold or agreed to sell assets for proceeds of $3.25 billion. In August, Hess sold its Permian Basin EOR assets to Occidental Petroleum Corp. (NYSE: OXY) for about $600 million.
In the company’s second-quarter conference call, Hess “telegraphed an enhanced willingness to monetize non-core assets, in part to mitigate looming cash shortfalls,” said Guy Baber, an analyst at Piper Jaffray & Co. “The company wasn’t kidding.”
Hess captured an attractive price for its offshore Norway fields, compared to other North Sea transactions in the past couple of years, Baber said.
“We view these developments as positive, as the strategic rationale is sound, and as the cash consideration received is attractive, especially for Norway,” Baber said in an Oct. 24 report.
On Oct. 23, company CEO John Hess said the sale of its Equatorial Guinea assets furthers its strategy to invest in higher-return assets while divesting from more costly and mature areas.
“Proceeds from asset sales, along with cash on our balance sheet, are expected to fund the development of our truly world-class investment opportunity offshore Guyana,” he said. “Our investment in Guyana will position our company to deliver a decade-plus of returns-driven growth and increasing cash generation to our shareholders.”
In Norway, Hess will sell its subsidiary Hess Norge, which owns interests in the Valhall and Hod fields to Norway’s Aker BP ASA. Hess holds a 64.05% interest in Valhall and a 62.5% in Hod.
Aker BP will also assume Hess Norge’s tax liabilities, including an after-tax loss, carry forward of $1.5 billion.
The Valhall and Hod fields produced an average of 26,000 barrels of oil equivalent per day (boe/d) net to Hess during first-half 2017.
The fields have produced 1 Bbbl as of January. Aker BP said its ambition is to produce at least another 500 MMboe from the fields.
The sale is subject to customary conditions for completion, including approval by Norway’s Ministry of Oil and Energy, Ministry of Finance and relevant competition clearance. Hess expects the sale to be complete by the end of the year.
In Denmark, Hess will begin its sale of a 61.5% interest in the South Arne Field. The company said it expects to complete a transaction in 2018. The South Arne produced an average of 11,000 boe/d net to Hess in first-half 2017.
Kosmos Energy and Trident’s deal for three blocks offshore Equatorial Guinea adds about 6,000 sq km (3,728 sq mi) to its portfolio and renewed interest in an asset that Hess had neglected.
Baber said Hess has not been actively investing capital in the assets, causing production declines. Hess sold its 85% interest in the Ceiba and Okume assets for a net price of $480 million.
“Overall, while the value extracted here is not optically impressive, it is reflective of the reality of a limited pool of buyers and that it was not going to compete for capital in the Hess portfolio,” Baber said. “The strategic rationale to exit Equatorial Guinea is sound.”
Kosmos said that, after adjustments, its net cost for the interests will total about $240 million. Trident Energy, backed by Warburg Pincus, will act as production operator while Kosmos will conduct exploration operations. The companies entered the agreement in a 50:50 joint venture.
Kosmos will gain about 13,500 barrels per day (bbl/d) of net oil production, Richard Tullis, a Capital One analyst, said.
“Deal metrics work out to an attractive $18,000 per flowing bbl/d and $5.35/bbl on company-estimated 2P remaining recoverable resource,” he said.
The transaction provides entry into Equatorial Guinea with both exploration and existing production components,” Tullis said. Kosmos plans to fund the acquisition with cash on hand and its reserve-based lending facility.
When all divestitures are complete, Hess expects to remove about $3.2 billion in future abandonment liabilities. A portion of the proceeds will also reduce the company’s debt, excluding midstream, by $500 million in 2018.
Combined with cost reductions, Hess said it expects to reduce its cash unit production costs by about 30%—to less than $10 per boe by 2020.
Phillips Johnston, an analyst at Capital One Securities, said that the sale help bridge a sizable funding gap for Hess over the next few years.
“These assets have not been competing for capital, so by monetizing them, Hess will prefund part of the development of its major Guyana discoveries and will reduce its cash cost structure in the process,” Johnston said.
Adjusting Hess’ estimated 2017 cash flow for an effective date of Jan. 1, 2017, the asset sales will generate about $2.2 billion in cash proceeds.
The deals represent about 11% of Hess’ enterprise value. Hess will also scratch off 16% of its production and 22% of its EBITDA.
“We estimate the properties generate net 12-month EBITDA of about $415 million at $50 Brent,” Johnston said.
Darren Barbee can be reached at email@example.com