With oil continuing to be priced in the high nineties for WTI (West Texas Intermediate crude) and even higher for Brent, major integrated oil firms seem to have good prospects at these valuations. One of my favorites that has major upside is Hess (NYSE:HES).
Hess Corporation and its subsidiaries operate as an integrated energy company. It operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports, and sells crude oil and natural gas. This segment engages in exploration and production activities principally in Algeria, Australia, Azerbaijan, Brazil, Colombia, Denmark, Egypt, Equatorial Guinea, Gabon, Ghana, Indonesia, Libya, Malaysia, Norway, Peru, Russia, Thailand, the United Kingdom, and the United States.
10 reasons to own HES at under $73:
1) One major catalyst could be the recent decision by Conoco Phillips (NYSE:COP) to spin off its downstream refining and marketing business. HES should be pressured now by activists and shareholders to do the same. Hess gets the majority of its revenues from R&M, but gets the lion’s share of its profits from its E&P business. The market would reward this strategic move if Hess decided to do this, with a substantially higher multiple. Marathon gained approximately 30% when it announced a similar move; and I would expect HES would react positively to such a decision.
2) Hess is repositioning itself to be a major player in shale production. It has core assets in the Bakken and Eagle Ford basins and put together a joint partnership to develop the Paris basin. It has sold non-core assets in the North Sea to focus more on growing these shale assets.
3) The company’s E&P business is doing a stellar job in growing production. It replaced 176% of its 2010 production, and has replaced production by an average of 146% over the past three years.