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Tickers in this Article: HES, JEF, ZAZA
Integrated oil company Hess Corporation's (HES) partnership agreement with Houston-based energy firm ZaZa Energy Corporation (ZAZA) was terminated by the latter. The pact, formed in 2010, comprised exploration and development of the Eagle Ford Shale formation in Texas and the Paris basin in France. Hess made a direct payment of $15 million to end the agreement for Eagle Ford and is liable to shell out a further $70 million in cash upon closure. The companies also plan to conclude their partnership agreement in the Paris basin. The companies expect to sign definitive agreements to this intent by June 29, with closure scheduled before August 15.

Upon termination, ZaZa's core holdings in the proved, productive regions of the oil-rich Eagle Ford would be augmented to reach 72,000 acres from its recent holding of 11,500 acres. But its conventional producing assets in the Paris basin will remain at about 24,260 acres.

ZaZa has hired Jefferies & Co. (JEF) to assist it in finding another joint venture partner for its assets in the Eagle Ford and the emerging Woodbine region. Jefferies is also responsible for assessing the strategic prospects available to ZaZa.

The new transaction would include transfer of some oil, gas and mineral interests, well bores and production in the Eagle Ford Shale and Paris basin. Per the deal terms, Hess is entitled to receive royalty payments.

We believe Hess has a competitive advantage over its peers based on improving fundamentals, commodity price leverage and exposure to areas with high resource potential (such as Brazil, Ghana, Libya and offshore Australia). We continue to see an upstream momentum on the back of the company's large inventory of exploration and development projects. The termination of one agreement is unlikely to affect its strong revenue base.

We are maintaining our long-term Neutral recommendation on the stock. Hess, which faces competition from ConocoPhillips (COP), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

 
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