By Bradley Olson
Hess Corp. has emerged as the best-performing U.S. oil company this year. The reasons have little to do with the American fracking boom.
Instead, Hess's popularity with investors is rooted in a small South American nation. The New York-based company holds a 30% stake in an immense offshore oil field being developed by Exxon Mobil Corp. in Guyana that appears poised to become one of the most lucrative megaprojects in years. The company's shares have surged more than 50% in 2019, the biggest increase of any major U.S. oil operator, excluding companies acquired in deals.
It is a peculiar scenario for Hess, one of the largest shale producers in North Dakota: Shareholders are excited about a prized asset it has an interest in, but doesn't control. Hess acquired its stake in Guyana from Royal Dutch Shell PLC in 2014 for an undisclosed price. The company initially estimated the resource total at about 500 million barrels of oil. Now it appears to be at least 12 times that amount, making it one of the most significant discoveries in decades.
Other companies have seen their value surge due to holdings in coveted entities, including Yahoo Inc. which had a stake in e-commerce giant Alibaba Group Holding Ltd. that for a time accounted for a large portion of its value, and South African media company Naspers Ltd., whose worth has been wildly boosted by an early investment in China's Tencent Holdings Ltd.
Market enthusiasm for Hess shows how investor attitudes to oil-and-gas companies have evolved. A few years ago, companies of Hess's size faced pressure to sell off assets and focus almost entirely on U.S. drilling opportunities, which were characterized as akin to predictable manufacturing businesses with reliable profit margins.
Although shale operators have helped push U.S. oil output to a record of more than 12 million barrels a day, consistent shale profits have yet to materialize. From 2014 to 2018, the 43 biggest stand-alone U.S. oil companies lost more than $90 billion, prompting an investor exodus from oil and gas.
Hess lost more than $11 billion in that time. Founded by Leon Hess, the former owner of the New York Jets professional football team, Hess once operated a number of refineries and oil-and-gas properties in numerous countries all over the world. It is also widely known for its sale of toy trucks around Christmas.
John Hess, the son of Leon Hess and the company's chief executive since 1995, has sold off far-flung assets in recent years and developed a simpler strategy that features Guyana. The company also has bought back more than $1 billion in shares.
"They have this very valuable asset, but as a small operator, there is an advantage because they don't have to build up their own organization, " said Espen Erlingsen, a partner at analytics firm Rystad Energy. "There is huge upside in the country for this company."
A group of companies led by Exxon announced a sizable discovery in Guyana in 2015. Since then, the partners, which include Hess and China's Cnooc Ltd., have made 12 additional discoveries, together holding 6 billion barrels of oil and gas.
The initial two projects -- Liza 1 and Liza 2 -- are expected to generate about $22 billion in excess cash for the companies after tax, according to analytics firm GlobalData, thanks in part to generous royalty terms the producers struck with the government. Some critics have said the terms are too generous, and have argued that Guyana should renegotiate them.
One challenge for Hess will be keeping up with the spending that Guyana's abundance will require. The first two of what are likely to be numerous offshore production facilities are expected to cost more than $11 billion over the next 10 years, according to GlobalData. As additional projects ramp up, Hess's 30% share could grow quite expensive. The company has held excess cash in recent years to assure that it will be prepared to pay those costs.
Hess is using cash-generating assets in the Gulf of Mexico and the Gulf of Thailand to fund growth opportunities in Guyana and North Dakota. Hess's production is set to be at the upper end of its guidance at the end of this year and spending below it, a spokeswoman said.
Some investors see buying shares in Hess as a proxy bet on the future of Guyana's oil industry. Support for Hess's Guyana prospects helped the company fend off a serious challenge in late 2017 and 2018 by activist hedge fund Elliott Management Corp. The two parties avoided a fight after Mr. Hess agreed to buy back $1 billion in shares.
Shareholder excitement over Guyana was a key factor in helping Mr. Hess remain at the company he has run for more than two decades, according to more than a dozen investors The Wall Street Journal spoke with at the time. A spokeswoman for Elliott declined to comment.
Some other companies that have potentially lucrative opportunities outside of shale have also done well. Noble Energy Inc., which operates giant natural-gas producing assets off the coast of Israel, has seen its shares rise about 18% this year, slightly better than the increase in the S&P 500. An index of U.S. oil and gas producers has fallen by 16% in that time, according to FactSet.
"The utopia is to find an asset that really separates you from the rest of the pack," said Norm MacDonald, vice president and portfolio manager at Invesco Ltd., which has assets under management of about $1.2 trillion. Hess and Noble have both done that, he said.
Write to Bradley Olson at Bradley.Olson@wsj.com
Corrections & Amplifications Hess Corp. is on track to produce at the upper end of its 2019 production guidance. A previous version of this article incorrectly quoted a company spokeswoman as saying the company was set to produce above its guidance. (Aug. 20)