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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 (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 (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.

4) Its Ghana and Australian leases are just starting to be drilled and explored. Early results are encouraging. These properties could be game changers. Credit Suisse has stated if these assets prove successful, HES could go from just over 400K BOE per day currently to 700K BOE by 2017.
5) HES is underpriced on a historical basis. It is selling in the bottom third of its five year valuation range based on P/S, P/B and P/CF.
6) It looks like has a good short technical support level at around $70

(Click chart to enlarge)

7) Hess is selling at less than 10 times this year’s projected earnings and just over 9 times 2012’s consensus EPS.
8) Revenue growth is projected to average in the mid single digits for both 2011 and 2012. An investor is not paying much for that growth given HES’ five year projected PEG of 1.
9) On an operating cash flow basis, HES is dirt cheap as it is selling at 6 times operating cash flow.
10) Analysts’ have price targets on HES significantly above its current price of $73. S&P is at $96 and Credit Suisse is all the way up at $115 a share. My own price target range is 11-12 times 2012’s projected earnings of $8 a share or $88 to $96. This could prove very conservative if Hess decides to split off its refining business and/or its Ghana and Australian properties develop favorably. It's a Strong Buy.

Disclosure: I am long HES, COP.

Source: Hess: An Oil Company With Major Upside