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By Roger Choudhury, Lead Editor

A month ago, the host of Mad Money on CNBC (M-F at 6pm EST), Jim Cramer, recommended Hess (HES) on his April 26 and 27 shows. Since the April 26 close, HES is down by 4%. He then reiterated the buy on May 16. Without the bells and whistles, we thought that we would break this one down for you.

On April 27, Hess reported Q1 2011 results with non-GAAP EPS coming in at $1.82, excluding proceeds from selling natural gas-producing assets in the U.K. portion of the North Sea. This was +22.14% from Q1 2010's $1.49. This also beat the consensus estimate of $1.85, ex-items. Revenues rose to $10.515 B (+14.04%), and exceeded Street forecasts of $10.03 B. Oil and gas production was 399,000 barrels per day (b/d), compared with 423,000 in Q1 2010 due to the shedding of the North Sea assets and temporary shutdown of operations in Libya. For Q2 2011, the Street expects to see $2.16 in non-GAAP EPS (+87.82%) alongside revenues of $9.3 B (+20.08%). In 2010, GAAP EPS surged by 185.02% to $6.47 with revenues of $34.613 B (+17.06%).

We expect Hess to continue to benefit from higher crude oil prices. We have consistently stated that the U.S. will grow at a stagnant rate, and the market is starting to price this in. The Chicago Fed's National Activity Index fell -0.45 in April, after rising +0.32 in March. Moreover, the Philadelphia Fed's Business Outlook dropped to 3.9 in May from 18.5 in April. The Richmond Fed also released its Manufacturing Index, which came in at -6. The consensus was +9. In April, it was +10. Yet, WTI Crude remains near $100. In Q1 2010, Hess' average worldwide crude oil selling price, including the effect of hedging, was $87.22 per barrel, an increase from $63.62 per barrel in Q1 2010. As of May, the U.S. Energy Information Administration (EIA) estimated that global oil demand expanded by 2.4 M b/d in 2010, to 86.7 M b/d, and sees demand growth of 1.4 M b/d in 2011, to 88.08 M b/d, and 1.58 M b/d in 2012, to 89.66 M b/d. With new OPEC capacity additions, the EIA estimated that global oil supply increased by 2.47 M b/d in 2010, to 86.81 M b/d, and projected supply growth of 1.0 M b/d in 2011 and 1.5 M b/d in 2012.

For 2011, analysts expect non-GAAP EPS to be $7.64 (+48.34%) with revenues of $32.9 B (-4.94%). The forward 2011 P/E is 10.1. After studying the forward 4 quarters and trailing 4 quarters P/E ratios, we believe that a P/E of 12 is fair. This would imply a price target of $92. Note that our price target is well below the Reuters Research Average of $100. We attribute this to our more humble and reasonable expectations of global oil demand growth due to a slowing, but growing global economy. Going forward for 2012, analysts project non-GAAP EPS of $8.31 (+8.76%) and revenues of $37.0 B (+12.46%). This gives a forward 2012 P/E of 9.3. We believe that a fair P/E is 11.5, and we place a price target of $96. You are looking at a return of over 20% within a period of 22 to 24 months. However, you are also looking at a return of over 18% within a period of 10 to 12 months. Currently trading under $75, this is a buy for investors looking to ride the relatively high oil prices for the next year or so. We are not ready to put out a long-term buy as we need to wait and see how the 2012 estimates are adjusted over time. HES also has a dividend yield of 0.5%.

Source: Cramer Is Right About Hess