Earnings Analysis: Hess Corp. (NYSE: HES)

Earnings Analysis: Hess Corp. (NYSE: HES)Hess Corp. (NYSE:HES) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

Hess Corp.’s analysis versus peers uses the following peer-set: Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), BP plc (NYSE:BP), Royal Dutch Shell plc (NYSE:RDS.B), TOTAL S.A. (NYSE:TOT), ConocoPhillips (NYSE:COP), Occidental Petroleum Corporation (NYSE:OXY), Repsol SA (PINK:REPYY), Marathon Oil Corporation (NYSE:MRO) and China Petroleum & Chemical Corp. (NYSE:SNP). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 9,243.0 9,224.0 9,801.0 9,719.0 8,715.0
Revenue Growth % 0.2 (5.9) 0.8 11.5 (12.2)
Net Income 557.0 549.0 545.0 (131.0) 298.0
Net Income Growth % 1.5 0.7 N/A (144.0) (50.9)
Net Margin % 6.0 6.0 5.6 (1.3) 3.4
ROE % (Annualized) 11.0 11.3 11.6 (2.8) 6.3
ROA % (Annualized) 5.4 5.4 5.5 (1.4) 3.2

Valuation Drivers

Hess Corp. trades at a lower Price/Book multiple (0.9) than its peer median (1.4). The market expects HES-US to grow faster than the median of its chosen peers (PE of 11.8 compared to peer median of 9.5) and to improve its current ROE of 7.7% which is below its peer median of 15.3%. Thus, the market seems to expect a turnaround in HES-US’s current performance.

The company’s profit margins are below peer median (currently 4.0% vs. peer median of 5.9%) while its asset efficiency is about median (asset turns of 1.0x compared to peer median of 1.1x). HES-US’s net margin continues to trend downward and is below (but within one standard deviation of) its five-year average net margin of 4.9%.

Economic Moat

Changes in the company’s annual top line and earnings (13.5% and -19.9% respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.

HES-US’s return on assets is now less than its peer median (3.8% vs. peer median 6.4%) in contrast to its returns over the past five years which were around the peer median (6.0% vs. peer median 6.9%). Recent performance suggests that the company’s historical competitive advantage is slipping away.

The company’s gross margin of 23.2% is around peer median suggesting that HES-US’s operations do not benefit from any differentiating pricing advantage. In addition, HES-US’s pre-tax margin is less than the peer median (10.0% compared to 12.9%) suggesting relatively high operating costs.

Growth & Investment Strategy

While HES-US’s revenues have increased more slowly than the peer median (-2.2% vs. -0.2% respectively for the past three years), the market currently gives the company a higher than peer median PE ratio of 11.8. The stock price may be factoring in some sort of a strategic play.

HES-US’s annualized rate of change in capital of 14.8% over the past three years is greater than the peer median of 11.2%. This relatively high investment has generated a less than peer median return on capital of 7.4% averaged over the same three years. The relatively high investment and low current returns lead us to believe that the company is betting heavily on the future.

Earnings Quality

HES-US reported relatively weak net income margins for the last twelve months (4.0% vs. peer median of 5.9%). This weak margin performance and relatively conservative accrual policy (9.8% vs. peer median of 3.8%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

HES-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Graph of Revenues Trend for Hess Corp. (NYSE: HES)
Graph of Revenues Trend for Hess Corp. (NYSE: HES)
Graph of Net Margin Trend for Hess Corp. (NYSE: HES)
Graph of Net Margin Trend for Hess Corp. (NYSE: HES)
Graph of Accruals Trend (% revenues, Quarterly) for Hess Corp. (NYSE: HES)
Graph of Accruals Trend (% revenues, Annual or TTM) for Hess Corp. (NYSE: HES)

Company Profile

Hess Corp. is engaged in the exploration of and production of crude oil and natural gas as well as in refining and marketing refined petroleum products, natural gas and electricity. It operates business through two segments: Exploration and Production and Marketing and Refining. The Exploration and Production segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas and these activities take place principally in Algeria, Australia, Azerbaijan, Brazil, Brunei, China, Denmark, Egypt, Equatorial Guinea, France, Ghana, Indonesia, the Kurdistan region of Iraq, Libya, Malaysia, Norway, Peru, Russia, Thailand, the United Kingdom and the United States. The Marketing and Refining segment manufactures refined petroleum products and purchases, markets and trades refined petroleum products, natural gas and electricity. It changed its name from Amerada Hess Corp. to Hess Corp. The company was founded by Leon Hess in 1920 and is headquartered in New York, NY.


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This article was originally written by abha.dawesar, and posted on CapitalCube.