Will Big Oil Discovery In Guyana Boost Growth At Exxon Mobil And Hess?

Exxon Mobil Corp. (NYSE:XOM) and Hess Corp. released some good news Thursday, Jan. 12, saying they had booked positive results from their Payara-1 well on the Stabroek block off the coast of Guyana. While neither company would say how much oil they think the discovery may contain, they estimated that a deeper reservoir directly below their previously discovered Liza Field on the block could hold 100 million to 150 million barrels of oil equivalent. At today's oil prices, that would be worth around $7 billion.

“While further appraisal is required, we believe that the resources recently discovered are significant and will be accretive to the more than 1 billion barrels of oil equivalent already confirmed at the Liza discovery," Hess CEO John Hess said in a statement.

Exxon Mobil owns 45% of the oil block while Hess holds 30% and China's Cnooc Ltd. has 25%.

The markets yawned on the news. Exxon Mobil's stock was trading relatively flat at $86.40 per share while Hess' shares were actually down almost 6% at one point to $58.22. What gives?

Given Exxon Mobil's size, there are concerns that the discovery won't mean much in the way of profits for the oil giant once the costs of building an offshore structure in such a remote location are figured in and its 45% stake. And Hess also released some underwhelming news on the same day, including a spending budget for this year of $2.25 billion, 18% more than last year -- but less than some analysts expected -- and $4.6 billion in charges in the fourth quarter, including a non-cash $3.8 billion to establish valuation allowances against net deferred tax assets.

Analysts at Tudor, Pickering, Holt & Co. Securities still think the news is positive for both companies. They estimated in a report in early January that the Payara-1 well is targeting 750 million barrels of oil equivalent. And given the latest news, they are now estimating the Liza find to contain 1.2 billion barrels. So in total, the Guyana discovery could reach 2 billion barrels -- which would be worth $100 billion at $50 oil.

Exxon Mobil can't seem to shake its slow growth rap. Analysts at Simmons & Co. International estimated in a report in December that the oil giant's production would increase only 1.2% this year and actually begin sliding next year and for each of the two years after that. They had a neutral rating on the stock with a price target of $73 per share, which would be a 15% drop over today's trading.

The prospect probably means more to a company like Hess, which is much smaller than Exxon Mobil and is exploring for oil in fewer areas, so the impact of a gusher would be far greater.

If further tests bear out the new discovery's potential (with a final investment decision expected by late this year), development drilling could begin in 2019, according to Tudor, Pickering, Holt. In the meantime, Exxon Mobil has the lowest break-even oil price requirements and a more advantaged balance sheet than some of its integrated peers, Simmons notes, which will keep it solid through any ups-and-downs of oil pricing this year.

As for Hess, Simmons has an overweight rating on the stock with a price target of $71 per share (including $9 per share for the Liza discovery), up 20% over its previous estimate of $59. Some -- including renowned hedge fund manager Leon Cooperman of Omega Advisors and analysts at Merrill Lynch and Goldman Sachs -- think investors don't fully appreciate the company's exploration prospects. Was today's slump in Hess' shares a buying opportunity? Quite possibly. For Exxon Mobil, it's not so clear.