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Tickers in this Article: HES, RDS.A
Integrated oil company Hess Corporation (HES) reported adjusted third quarter 2012 earnings of $1.46 per share, ahead of the Zacks Consensus Estimate of $1.19 and the adjusted year-earlier earnings of $1.11, mainly on account of higher oil production.

Total revenue increased 10.2% year over year to $9,619 million in the quarter from $8,726 and also surpassed the Zacks Consensus Estimate of $9,422 million.
 
Operational Performance
 
Exploration and Production (E&P): The segment posted profits of $608 million in the third quarter, up 44.1% from the year-earlier profit of $422 million.
 
Quarterly hydrocarbon production was 402 thousand barrels of oil equivalent per day (MBOE/d), up 16.9% year over year.
 
Crude oil production was 281 thousand barrels per day (up from 224 thousand barrels per day in the year-ago quarter), natural gas liquids production totaled 19 thousand barrels (up from 17 thousand barrels) while natural gas output was 614 thousand cubic feet (Mcf) (down from 615 Mcf).
 
Worldwide crude oil realization per barrel of $86.69 (including the impact of hedging) inched up 1% year over year. Worldwide natural gas prices (including the impact of hedging) upped 2.4% year over year to $5.88 per Mcf.
 
Marketing and Refining: The segment posted earnings of $53 million in the third quarter, improving significantly from a loss of $23 million in the year-earlier period.
 
Refinery operations generated an income of $18 million compared with a loss of $38 million in the year-ago quarter. However, Marketing earnings were $17 million, down from the year-ago earnings of $41 million. Trading activities generated $18 million in revenues versus a loss of $26 million in the year-ago period.
 
Financials
 
Quarterly net cash flow from operations was $1,862 million. Hess' capital expenditures totaled $2,287 million in the reported quarter, of which approximately $2,260 million were expended toward E&P.
 
As of September 30, 2012, the company had approximately $528 million in cash and $7,841 million in long-term debt (including current maturities). Hess' debt-to-capitalization ratio at the end of the quarter was 26.9% versus 27.4% in the preceding quarter.
 
Outlook
 
We have maintained our Neutral recommendation on New York-based Hess Corporation, an integrated energy company engaged in oil and gas exploration, production and refining as well as marketing.
 
The quarterly production grew on an annualized basis and we believe that Hess has a competitive advantage over its peers from its improving fundamentals, commodity price leverage and exposure to areas with high resource potential like Brazil, Ghana, Libya and offshore Australia.
 
Recently, Hess has agreed to the sale terms of its stake in the Beryl area fields and the Scottish Area Gas Evacuation System with Royal Dutch Shell Plc (RDS.A). This is in sync with its strategy to balance high risk; high return offshore exploration with the expected lower risk and long reserve life, liquids-rich alternative resource plays onshore U.S.

We believe that the company's strong exploration upside in Ghana and continued improvement in Bakken productivity hold a lot of promise.

However, Hess' sensitivity to gas/oil price volatility, as well as drilling results, costs, geo-political risks and project delays limit the upside potential of its shares.

We are maintaining our long-term Neutral recommendation on the stock. Hess retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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