HES – Base Case CDS 121bps, Base Case iCDS 70bps, Negative Case iCDS 105bps, 2027 4.300% Bond YTW of 5.526%, iYTW of 4.968%, Baa3 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need
March 15, 2023
- Credit markets are slightly overstating credit risk, with a cash bond YTW of 5.526% and CDS of 121bps relative to an Intrinsic YTW of 4.968% and an Intrinsic CDS of 70bps. Furthermore, Moody’s is overstating the firm’s fundamental credit risk, with its Baa3 credit rating two notches lower than Valens’ IG4+ (Baa1) credit rating.
- Incentives Dictate Behavior™ analysis highlights mostly positive signals for credit holders. Management’s compensation framework should drive them to focus on all three value drivers: asset efficiency, growth, and margins, which should lead to Uniform ROA improvement and increased cash flows for servicing obligations. Additionally, management members are material owners of HES equity relative to their annual compensation, indicating they may be well-aligned with shareholders for long-term value creation.
- Earnings Call Forensics™ analysis highlights that management is confident their 4-rig program in the Bakken will enable them to generate significant free cash flow and that their Payara operation will produce 60,000 barrels and $1 billion in cash flow once fully ramped.