Hess Balanced on Risks and Rewards
On Jun 13, 2014, we issued an updated research report on Hess Corporation (HES), an integrated energy company engaged in oil and gas exploration, production (E&P) and refining as well as marketing.
At present, Hess is undergoing a transition from an integrated oil and gas company to a predominantly E&P entity, thereby shifting its growth approach from high-impact exploration to lower-risk unconventionals and a smaller, more focused exploration portfolio. It announced the closure of its Port Reading, NJ refinery, which marked its complete exit from the refining business. Hess also sold its Indonesian assets and aims to shed assets in Thailand as well as its terminals, retail, energy marketing and trading businesses in the downstream. Moreover, the company announced a share repurchase plan of up to $4 billion and an increase in its annual dividend to $1 a share beginning from the third quarter. The latter move has more than doubled Hess’ quarterly dividend. In view of the global economic slowdown and new refining capacity entering the world market, such moves by Hess will help it to enhance shareholders’ value.
During the first quarter, the company beat the Zacks Consensus Estimate with regard to both earnings and revenues, mainly driven by better realizations. The company had also posted positive earnings surprises for two of the last four quarters, with an average beat of 3.29%.
Hess’ priority remains investment in future growth with a balanced approach between unconventional, exploitation and exploration. Such investment is expected to reap an average annual production growth of 5%–8% through 2017 and beyond. With the growing free cash flow over the years, Hess will be able to increase its share buyback and dividend as well.
For 2014, the company expects production to average 305–315 MBOE/d. Moreover, Hess garnered $7.8 billion in 2013 through asset sales. Recently, it divested the retail business. Moreover, currently, it is in the process of shedding its upstream assets in Thailand and the trading business. The amount raised through asset sale is expected to help fund E&P investments. These major changes in restructuring the company’s portfolio will likely be complete by the end of 2014. Hess also stated it would continue to consider other opportunities to enhance long-term shareholder value.
Although there is significant resource potential from new discoveries, the E&P business is inherently risky, often with an equal share of successes and failures. While future projects could possibly add value to the share price, we do not feel the risk/reward trade-off will favor the company.
Key Picks in the Sector
Hess has a Zacks Rank #3 (Hold). Currently, we prefer to remain at the periphery regarding the stock. However, better-ranked players in the energy sector like Magellan Midstream Partners LP (MMP), Ultra Petroleum Corp. (UPL) and Encana Corp. (ECA), all sporting a Zacks Rank #1 (Strong Buy), are worth reckoning.
Read the Full Research Report on HES
Read the Full Research Report on MMP
Read the Full Research Report on ECA
Read the Full Research Report on UPL
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