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Hess Corp. (HES): More Potential Upside for This E&P Business

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Since the beginning of the year, Hess Corp. (NYSE:HES) as experienced a significant rise in the market, up 39.6%, handily beating the S&P 500’s return of only 18.6%. Elliott Management, a 4.5% stake owner in the company, thought that Hess should be worth as much as $126 per share. Michael Price, the famous value investor, also commented that the company could receive an $80 to $90 bid. At the time of writing, Hess is trading at nearly $74 per share. Is Hess a good buy for investors now? Let’s take a closer look and find out.

What does Hess have?

Earnings Analysis: Hess Corp. (NYSE: HES)Hess Corp. (NYSE:HES) owns some great oil and gas assets with the total proved reserves of more than about 1.6 billion BOE (barrels of oil equivalent). The company owns around 900,000 net acres in the Bakken shale oil in North Dakota, with the highest per acre value. According to the leading petroleum engineering company, the total value of Hess’ Bakken acreage is equivalent to the total value of more than 1.1 million net acres of Continental Resources, Inc. (NYSE:CLR)Bakken area.

In addition, Hess Corp. (NYSE:HES) is also the owner of Eagle Ford and Utica acreage, and has interests in several “crown jewel” long-life assets in several regions, including Southeast Asia, the Gulf of Mexico and the North Sea.

According to Elliott Management, Hess Corp. (NYSE:HES) should take three steps to unlock the company’s potential hidden asset value, including (1) spinning off Bakken, Eagle Ford and Utica assets, (2) divesting the downstream business and monetizing the midstream assets, and (3) streamlining the international portfolio. Interestingly, Elliott Management estimates that step one would create more than $28 per share for the company; step two would produce an additional $11 per share; and step three would deliver an additional value of $36 per share.

Hess Corp. (NYSE:HES) has been restructuring its business to become a pure exploration and production (E&P) play after it divests the retail business, energy marketing business and energy trading (Hetco) business.

$4 billion potential share repurchases

Since the beginning of the year, the company has divested as much as $3.4 billion worth of assets, on the way to reach a targeted $9.7 billion in asset sales. Then it might use $2.5 billion for debt reduction, $1 billion for cash positions, $1 billion for a deficit fund and as much as $4 billion to repurchase its shares. As Hess Corp. (NYSE:HES) was recently trading at $74 per share, with a total market cap of $25.1 billion, a $4 billion share buyback would represent a high repurchase yield at 15.9% for shareholders.

At the current trading price, Hess Corp. (NYSE:HES) is also valued quite cheaply. The market values Hess at only 4.2 times its trailing EBITDA. Hess offers investors quite a low dividend yield at only 0.6%. However, its payout ratio is extremely low as well, at only 5%.

The cheapest among its peers

Compared to its bigger peers, including ConocoPhillips (NYSE:COP) and Exxon Mobil Corporation (NYSE:XOM), Hess Corp. (NYSE:HES) is the cheapest valued among the three companies. ConocoPhillips was recently trading at $66 per share. It has a total market cap of $80.7 billion. The market values ConocoPhillips at 4.6 times its trailing EBITDA.

ConocoPhillips (NYSE:COP) has also restructured its business, selling its lower margin downstream business to focus on its core E&P activities. It could be considered the biggest independent E&P company in the world, with the total proved reserves of around 8.6 billion.

ConocoPhillips (NYSE:COP) is also one of the big players in the Eagle Ford, Bakken and Permian area, with production growth of as high as 42% in the first quarter 2013. For full-year 2013, the company expects its production from continuing operations to stay be around 1,485 to 1,520 MBOED (millions barrels of oil equivalent a day).

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