News Column

Fitch Rates Hess Corp.'s Unsecured Debt Offering 'BBB'

June 19, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB' rating to Hess Corporation's (Hess; NYSE: HES) senior unsecured notes. The notes will be issued in two tranches due 2017 and 2024. Proceeds from the issuance will be used to refinance debt, including the repayment of $250 million in 7% notes that matured in February 2014, the repayment of various lease obligations, as well as for working capital and other general corporate purposes.

Fitch currently rates Hess as follows:

--Long-term Issuer Default Rating (IDR) 'BBB';

--Senior unsecured notes/debentures 'BBB';

--Senior unsecured bank facility 'BBB'.

The Rating Outlook is Stable.

Key Ratings Drivers

Hess' ratings are supported by the company's strong operational metrics, including high exposure to liquids in the upstream (approximately 72% of 2013 production and 77% of reserves); decent size and scale as an independent (1.437 billion boe reserves at YE 2013, with core regions in the U.S. [GoM, onshore Bakken and Utica], North Sea, Asia-Pacific, and West Africa); robust full-cycle netbacks; and respectable reserve replacement (three-year organic reserve replacement of RR 136%).

As calculated by Fitch, Hess' most recent three-year Finding, Development & Acquisition (FD&A) costs rose to $38.29/boe. However, these costs were elevated due to the company's infrastructure spending in the Bakken, which raises long-term profitability of produced barrels but does not necessarily increase current-year reserves. Fitch expects FD&A/boe metrics will trend significantly lower as these investments wind down, and as increased drilling efficiencies continue to be realized in the Bakken. The company has also repaid a significant amount of debt with asset sales proceeds, with debt at March 31, 2014 falling to $5.58 billion versus a high-water mark of $8.11 billion at YE 2012.

Ratings downsides for Hess include the loss of diversification benefits associated with the downstream and retail assets; some loss of size primarily through upstream asset sales (pro forma production excluding Libya and assets held for sale was 297,000 boepd in 1Q'14 vs. 406,000 boepd in 2012); and the tail risk of further activist shareholder pressure for the company, particularly if Hess were to encounter a period of sustained low oil prices or weak execution in key plays.

Less Negative FCF Trend

Hess' free cash flow (FCF) status has improved as it nears the end of a multi-year investment in shale plays. LTM FCF at March 31, 2014 was -$845 million, a reduction from the -$1.21 billion in FCF seen in 2013. Main drivers of the improvement include moderation in capex and improving funds from operations (FFO). Further improvements are expected over the year as shale production continues to ramp up, the company completes one-time infrastructure spending in the Bakken, and capex associated with sold assets rolls off. Hess has reasonable capex flexibility in its exploration program of the Utica shale given that its joint venture partner CONSOL holds all of its acreage by production.

Bakken Performance Improving

After an earlier period of flat performance, Bakken metrics have begun to improve. The company has now largely exited its leasehold drilling program and has been doing higher efficiency pad drilling. Strong operational performance in the Bakken is especially important as it would tend to put to rest operational complaints made by shareholder activists in the most recent proxy season.

Financial Performance

Hess' latest financial performance has been good, driven by robust oil prices and margin increases driven by portfolio high grading. At March 31, 2014, Hess generated EBITDA of $6.5 billion, and total debt was $5.58 billion, resulting in debt/EBITDA of 0.86x, while EBITDA/gross interest stood at 14.5x. The company bought back approximately $2.54 billion in shares over the LTM period, funded by asset sales proceeds.

Liquidity

Hess maintains liquidity through a $4 billion committed bank facility maturing in 2016; approximately $1.44 billion in other committed lines; $258 million in uncommitted lines; and $1.28 billion in cash and equivalents. At March 31, 2014, total liquidity across all of Hess' facilities including cash was approximately $6.6 billion. Hess' main financial covenant is a maximum debt-to-capitalization ratio of 62.5% contained in its revolver, vs. an actual ratio of 18.7% at March 31. There are no financial covenants beyond the debt-to-cap covenant contained in the revolver. Other non-financial covenants contained in the bond indentures include restrictions on mergers and asset sales, limitations on sale leasebacks, and cross-default provisions. Hess' maturity schedule is manageable. The company has no major maturities due until 2019.

Other Obligations

Hess' other obligations are manageable. The company's pension was overfunded by $188 million at YE 2013 versus underfunded by $347 million at YE 2012. Hess has historically carried a large letter of credit (LOC) position primarily linked to its energy marketing arm ($389 million outstanding at March 31, 2014). None of the LOCs were drawn from the company's main revolver. This requirement has been declining as Hess completes its exit from the downstream and energy marketing. At March 31, 2014, if the company were to be downgraded below investment grade, it would be required to post an additional $104 million in collateral to satisfy existing derivative positions. Hess' Asset Retirement Obligation (ARO) stood at $2.2 billion at March 31, 2014, vs. $2.25 billion at YE 2013.

Ratings Sensitivities

Positive: Future developments that could lead to positive rating actions include:

--Increased size, scale and diversification of Hess' upstream portfolio, accompanied by a managerial commitment to maintaining lower debt levels relative to reserves and production. Positive rating actions are unlikely in the current period given the high capex and restrained reserve and production growth associated with Hess' portfolio repositioning.

Negative: Future developments that could lead to negative rating action include:

--Failure of stated asset sales to close as expected;

--A prolonged period of weak operational performance or low oil prices;

--The sale or spin-off of assets beyond levels originally outlined, without offsetting adjustments;

--A major negative reserve revision, or loss at the company's energy trading operations.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014);

--Global Impact of US Shale Oil -- Rising Production Tempers World Prices (Feb. 10, 2014);

--Cash Flow Trends in the U.S. Energy Sector-Shareholder Activism Having an Impact (Feb. 4, 2014);

--Scenario Analysis: Lifting the U.S. Crude Export Ban (Jan. 27, 2014);

--Investor FAQs--Recent Questions on E&P, Refining, and Drilling and Services Sectors (Aug 12, 2013);

--Updating Fitch's Oil & Gas Price Deck (July 29, 2013);

--Energy Handbook--Upstream Oil & Gas (June 28, 2013).

Applicable Criteria and Related Research:

Energy Handbook - Upstream Oil & Gas

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706481

Updating Fitch's Oil and Gas Price Deck

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714596

Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and Services Sectors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715859

Scenario Analysis: Lifting the Crude Export Ban (Overall Credit Impact Limited but Varies by Industry)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732055

Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=733556

Global Impact of U.S. Shale Oil (Rising Production Tempers World Prices)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735415

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835464

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Mark C. Sadeghian, CFA

Senior Director

+1-312-368-2090

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

Sean T. Sexton, CFA

Managing Director

+1-312-368-3130

or

Committee Chairperson

Stephen Brown

Senior Director

+1-312-368-3139

or

Media Relations

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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