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 economic profit calculations. The cost of capital generally increased over the period, rising from 18.71% in 2018 to 21.03% in 2022, placing greater pressure on generating sufficient returns to cover the cost of invested capital.

Economic Profit Trend

Economic profit consistently remained negative throughout the analyzed timeframe, indicating that the company’s returns did not exceed its cost of capital. The largest negative economic profit occurred in 2020, at US$5,423 million, coinciding with the substantial NOPAT loss. While the negative economic profit lessened in 2021 and 2022, it remained significant at US$1,888 million and US$633 million respectively. This suggests ongoing challenges in generating returns sufficient to satisfy investor expectations.

NOPAT and Economic Profit Relationship

A strong correlation exists between NOPAT and economic profit. The dramatic decline in NOPAT in 2020 directly resulted in the most substantial economic loss. The subsequent recovery in NOPAT in 2021 and 2022 led to a reduction in the magnitude of the economic loss, although it did not achieve positive economic profit. This highlights the critical importance of NOPAT generation for overall financial performance.

Cost of Capital Impact

The increasing cost of capital presents a growing challenge. As the cost of capital rose, the threshold for achieving positive economic profit became higher. Even with improved NOPAT in 2021 and 2022, the higher cost of capital contributed to continued negative economic profit. This suggests that future improvements in NOPAT will be necessary, not only to achieve profitability but also to overcome the increasing cost of funding.

Invested Capital

Invested capital decreased from US$19,028 million in 2018 to US$16,448 million in 2020, then showed a slight increase to US$18,062 million in 2022. While fluctuations occurred, the level of invested capital remained relatively stable overall. The changes in invested capital do not appear to be the primary driver of the observed economic profit trends, as NOPAT and cost of capital had more pronounced effects.

In summary, the period was characterized by inconsistent NOPAT performance, a rising cost of capital, and consistently negative economic profit. The company faced challenges in generating returns exceeding its cost of capital, and improvements in NOPAT are crucial for achieving positive economic profit in the future.

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 relatively stable before experiencing a significant decline, followed by a recovery towards more positive territory.

Economic Spread Ratio

In 2018 and 2019, the economic spread ratio was consistently negative, registering at -17.88% and -17.87% respectively. This indicates that the company’s return on invested capital was less than its cost of capital during these years.

A substantial deterioration occurred in 2020, with the economic spread ratio falling to -32.97%. This represents the largest negative spread observed within the analyzed timeframe, suggesting a considerable underperformance relative to the cost of capital.

The ratio improved considerably in 2021, reaching -11.18%, signaling a reduction in the gap between return and cost of capital. This improvement suggests enhanced operational efficiency or a more favorable economic environment.

Further improvement was noted in 2022, with the economic spread ratio reaching -3.51%. While still negative, this represents the smallest negative spread over the period, indicating a continued narrowing of the difference between returns and the cost of capital.

The economic profit consistently remained negative throughout the period, although the magnitude of the loss decreased from 2018 to 2022. This trend aligns with the observed improvements in the economic spread ratio, suggesting that while the company was still destroying economic value, the rate of destruction was slowing.

Invested capital fluctuated over the period, decreasing from 2018 to 2020, then increasing in 2021 and 2022. The changes in invested capital do not appear to have a direct, linear correlation with the economic spread ratio, but likely contribute to the overall calculation of economic profit.

The economic profit margin exhibited significant fluctuations between 2018 and 2022. Initially negative, the margin demonstrated improvement over the period, though remained in negative territory by the end of 2022. A review of the underlying figures reveals a complex relationship between economic profit and sales revenues.

Economic Profit Margin Trend

The economic profit margin began at -53.79% in 2018 and decreased to -51.38% in 2019, indicating a slight worsening in economic profitability relative to sales. A substantial decline was then observed in 2020, with the margin reaching -116.20%. This represents a significant deterioration in economic profit relative to revenue. The margin improved considerably in 2021 to -25.27%, suggesting a recovery in economic profitability. This positive trend continued into 2022, with the margin reaching -5.59%, the least negative value over the observed period.

Relationship to Sales and Economic Profit

Sales and other operating revenues generally increased over the period, with a notable decrease in 2020. Economic profit remained negative throughout the entire period, but the magnitude of the loss decreased from 2018 to 2022. The substantial decline in the economic profit margin in 2020 coincided with both a significant decrease in sales and a large increase in the absolute value of economic profit loss. The improvement in the margin in 2021 and 2022 was driven by a combination of increasing sales and a reduction in the size of the economic profit loss.

The observed trends suggest that while the company experienced consistent economic losses, its ability to generate economic profit relative to sales improved in the later years of the period. The large fluctuation in 2020 warrants further investigation to understand the underlying drivers of both the revenue decline and the increased economic loss.