Hess Corp (HES) finally pulled the trigger on a strategic move that activists have been advocated for some time. The company announced it will pursue the sale of its terminal network in the United States. The terminal network is located along the U.S. East Coast and has a total of 28 million barrels of storage capacity in 19 terminals, 12 of which have deep water access. Hess also announced that it will complete its exit from the refining business by closing its Port Reading, New Jersey refinery. I would look for the stock to react positively given similar reactions when ConocoPhillips and Marathon Oil made their moves to divest themselves of their refining assets.
Positives from the divestiture:
- The stock will be awarded a higher price multiple in the stock as it will be a more pure E&P play.
- The move will free $1 billion of working capital for redeployment to fund Hess' future growth opportunities.
- By closing the Port Reading refining facility, the company is getting rid of a headache that lost money for two of the last three years and requires substantial and costly upgrades to meet new environmental regulations.
Hess Corp. will now be an independent exploration & production concern which also has over 1300 retail gas stations.
4 reasons HES has upside from $60 a share:
- The stock was upgraded earlier in the month at Credit Suisse from "Neutral" to "Outperform". TheStreet reiterated its "Buy" rating as well last week.
- The company has crushed earnings estimates each of the last two quarters and the stock sells at a reasonable forward PE of under 9.5.
- HES has had some nice discoveries recently in Ghana. It also basically doubled oil production Y/Y from the Bakken in 2012 to 62,000 BOE/D.
- HES is cheap at just 97% of book value and it sells near the bottom of its five year valuation based on P/E, P/S and P/CF. I would also look for the company to eventually to spin off its gas stations which will provide another positive catalyst to the stock.
Disclosure: I am long HES.