Hess Corp. (NYSE:HES)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) experienced considerable volatility, moving from US$159 million in 2018 to a substantial loss of US$2,506 million in 2020, before recovering to US$3,165 million in 2022. This variability directly impacts the calculation of economic profit.

Economic Profit Trend

Economic profit consistently remained negative throughout the analyzed period, indicating that the company’s returns did not exceed its cost of capital. The magnitude of the negative economic profit peaked in 2020 at US$5,421 million, coinciding with the lowest NOPAT value. While the negative economic profit lessened in subsequent years, reaching US$631 million in 2022, it remained substantial.

The cost of capital exhibited an increasing trend over the five-year period, rising from 18.70% in 2018 to 21.02% in 2022. This increase in the cost of capital presents a growing challenge to achieving positive economic profit, as a higher return is required to cover the cost of invested capital.

Invested Capital

Invested capital decreased from US$19,028 million in 2018 to US$16,448 million in 2020, then showed a modest increase to US$18,062 million by 2022. The reduction in invested capital during 2019 and 2020 may reflect strategic divestitures or reduced capital expenditure, but did not sufficiently offset the impact of lower NOPAT on economic profit during those years.

The interplay between NOPAT, cost of capital, and invested capital reveals a challenging financial performance. The recovery in NOPAT during 2021 and 2022 contributed to a reduction in the magnitude of the negative economic profit, but the increasing cost of capital continues to pose a significant hurdle. Continued monitoring of these factors is crucial for assessing future financial performance.

The financial data over the five-year period exhibits significant volatility in key profitability measures for the company.

Net income (loss) attributable to Hess Corporation

The net income shows a negative trend from 2018 through 2020, with losses deepening each year and peaking at a substantial loss in 2020. Specifically, the company recorded losses of $282 million, $408 million, and $3,093 million respectively in those years. However, a marked recovery occurred in 2021, with net income turning positive to $559 million, followed by a further substantial increase to $2,096 million in 2022. This indicates a strong rebound in profitability after a difficult period culminating in 2020.

Net operating profit after taxes (NOPAT)

Similar to net income, NOPAT declined sharply from 2018 to 2020, moving from a profit of $159 million in 2018 to a significant loss of $2,506 million in 2020. Notably, the decline in NOPAT was steeper than for net income, which may suggest operational challenges or non-operating factors affecting net income differently. From 2021 onwards, NOPAT exhibits a strong recovery, reaching $1,404 million in 2021 and rising to $3,165 million in 2022, surpassing pre-2018 levels. This recovery highlights a substantial improvement in operational profitability and tax efficiency.

Overall, the data demonstrates the company's transition from significant losses during the 2018-2020 period to robust profitability in 2021 and 2022. The peak losses in 2020 may reflect extraordinary circumstances or operational setbacks, followed by a significant turnaround. Both net income and NOPAT reflect this trend, with NOPAT showing a more pronounced recovery in 2022, indicating enhanced core operating performance relative to net income gains.

Provision (benefit) for income taxes

The provision for income taxes exhibits significant volatility over the five-year period. Starting at 335 million USD in 2018, it rose substantially to 461 million USD in 2019. In 2020, the figure turned negative to -11 million USD, indicating a tax benefit rather than a provision. The trend reversed sharply in 2021, with the provision increasing dramatically to 600 million USD, followed by a further increase to 1,099 million USD in 2022. This suggests an increasing tax expense or liability in the most recent years, possibly due to higher pre-tax earnings or changes in tax regulations.

Cash operating taxes

Cash operating taxes showed a relatively stable but fluctuating pattern. The amount increased slightly from 504 million USD in 2018 to 547 million USD in 2019, then dropped substantially to 146 million USD in 2020. This decrease corresponds with the sharp drop in the provision for income taxes in 2020, reflecting lower tax payments during that year. In 2021, cash operating taxes rebounded to 586 million USD and further increased significantly to 904 million USD in 2022. This rise mirrors the increased tax provision, indicating higher cash outflows related to tax payments in the latter years.

Analysis of the financial data reveals several key trends in the debt, equity, and invested capital of the company over the five-year period ending December 31, 2022.

Total reported debt & leases

The total reported debt and leases increased steadily from $7,434 million in 2018 to $9,150 million in 2022. This represents a gradual accumulation of liabilities over the five years, indicating a strategic move towards higher leverage or increased financing requirements. The rate of increase slowed notably between 2020 and 2022, suggesting a stabilization in borrowing or lease commitments.

Total stockholders’ equity

Stockholders’ equity showed a different pattern, starting at $9,629 million in 2018 then declining sharply through 2020 to a low of $5,366 million. This substantial reduction, nearly halving equity value, may reflect net losses, dividends, share buybacks, or other equity-reducing activities during this period. However, from 2020 onwards, equity rebounded progressively, reaching $7,855 million by the end of 2022, indicating a recovery phase, possibly driven by improved profitability or equity financing events.

Invested capital

Invested capital decreased from $19,028 million in 2018 to $16,448 million in 2020, aligning with the decline in equity and increase in debt. From 2021 onwards, invested capital increased moderately each year, reaching $18,062 million in 2022. This suggests selective reinvestment or asset expansion after a period of contraction, reflecting a potentially cautious but constructive growth strategy.

Overall, the data illustrates a period of financial strain or restructuring between 2018 and 2020, marked by decreased equity and fluctuating capital levels alongside rising debt. Subsequent years show signs of recovery and cautious growth with equity rebuilding and stabilization in debt levels, complementing an increase in invested capital. This pattern suggests a phase of adaptation followed by strategic stabilization improving the company’s capital structure.

The economic spread ratio exhibited a volatile pattern over the five-year period. Initially, the ratio remained constant before experiencing a substantial decline, followed by a period of improvement. Economic profit consistently registered as negative values throughout the observed timeframe, though the magnitude of the losses decreased over time.

Economic Spread Ratio

The economic spread ratio was -17.86% in both 2018 and 2019, indicating a consistent underperformance relative to the cost of capital during those years. A significant deterioration occurred in 2020, with the ratio falling to -32.96%, representing the largest spread and the poorest performance of the period. The ratio improved considerably in 2021 to -11.17%, and continued to improve in 2022, reaching -3.49%. This suggests a narrowing gap between returns and the cost of capital, though the ratio remained negative.

Economic Profit

Economic profit demonstrated a pattern of negative values across all years. The largest loss was recorded in 2020 at -5,421 US$ millions. Losses decreased in 2021 to -1,886 US$ millions and further decreased in 2022 to -631 US$ millions. While still negative, the diminishing losses suggest improving profitability relative to the capital employed.

Invested Capital

Invested capital decreased from 19,028 US$ millions in 2018 to 16,448 US$ millions in 2020. A slight increase was observed in 2021 to 16,885 US$ millions, followed by a more substantial increase to 18,062 US$ millions in 2022. The fluctuations in invested capital may have influenced the economic spread ratio, particularly in conjunction with the changes in economic profit.

The convergence of the economic spread ratio towards zero, coupled with the decreasing magnitude of economic profit losses, suggests a positive trend in value creation, although the entity did not generate positive economic profit during the analyzed period. The increase in invested capital in the final year may contribute to future performance, contingent upon continued improvements in profitability.

The economic profit margin exhibited significant fluctuation over the five-year period. Initially negative, the margin demonstrated improvement towards the end of the observed timeframe, though it remained below zero.

Economic Profit Margin Trend

In 2018, the economic profit margin was -53.76%. This figure slightly improved to -51.35% in 2019. However, 2020 saw a substantial decline, with the margin reaching -116.16%, representing the most significant negative value within the period. A considerable recovery occurred in 2021, as the margin rose to -25.24%. This positive trend continued into 2022, with the margin further improving to -5.57%.

The economic profit itself also showed volatility. While negative throughout the period, the magnitude of the loss decreased from 2020 to 2022. This reduction in economic loss aligns with the observed improvement in the economic profit margin.

Relationship between Sales and Economic Profit Margin

Sales and other operating revenues decreased from 2018 to 2020, coinciding with the most substantial deterioration in the economic profit margin. Revenues then increased significantly in both 2021 and 2022. The improvement in the economic profit margin in these latter years appears to correlate with the increase in sales, suggesting a potential link between revenue generation and profitability, even though economic profit remained negative.

The substantial negative economic profit margin in 2020 warrants further investigation to understand the underlying factors contributing to this result. The subsequent improvements, while positive, indicate that the entity is still not generating returns exceeding its cost of capital, as evidenced by the consistently negative economic profit.