HES – CDS 152bps, Base Case iCDS 65bps, Negative Case iCDS 80bps, 2027 4.300% Bond YTW of 4.642%, iYTW of 3.561%, Ba1 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

May 19, 2023

  • Credit markets are overstating credit risk with a YTW of 4.642% and a CDS of 152bps relative to an Intrinsic YTW of 3.561% and an Intrinsic CDS of 56bps. 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™ of HES’s Q2 2022 (7/27) earnings call highlights that management is confident their growing free cash flows will largely be distributed to shareholders through buybacks and that Midstream EBITDA topped $241 million in Q1 and Q2 of 2022. Moreover, they are confident they reduced their exploration expense guidance to $160 million to $170 million for the full year, and that their high-quality resource base has decreased their breakeven costs.

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