HES – Base Case CDS 123bps, Base Case iCDS 51bps, Negative Case iCDS 70bps, 2027 4.300% Bond YTW of 5.577%, iYTW of 4.481%, Baa3 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need
November 17, 2022
- Credit markets are overstating credit risk with a YTW of 5.577% relative to an Intrinsic YTW of 4.481%, while CDS markets are slightly overstating HES’ credit risk with a CDS of 123bps relative to an Intrinsic CDS of 51bps. 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 higher cash flows available 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 new fourth oil development Yellowtail will be the largest development to date on the Stabroek Block and that their production beat reflects strong performance across the portfolio. Moreover, they are confident that, in line with their capital return program, they are committed to return the remainder of their free cash flow up to 75% to shareholders, and that they plan to maintain a similar level of hedge protection going forward.
