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Hess Corporation (HES)

Hess Corporation has strong growth prospects going forward due to its focus on profitable areas. The company has increased its interests in shale production regions domestically and internationally. Even though the company has a lower dividend yield, we have a Positive outlook on the stock due to growth prospects and cheaper valuations when compared with its peers.

Company Overview

Founded in 1920 with its headquarters in Delaware, Hess Corporation is an integrated energy company, which operates in Exploration and Production (E&P) and Refining and Marketing (R&M) segments.

The E&P segment is involved in the discovery and production of oil and gas from new and existing oil reserves. The R&M is involved in refining the crude oil to extract different hydrocarbons, and then selling it to consumers through retail outlets

Exploration and Production Segment

The E&P segment has operations in Algeria, Australia, Azerbaijan, Brazil, Brunei, China, Denmark, Egypt, Equatorial Guinea, France, Ghana, Indonesia, the Kurdistan region of Iraq, Libya, Malaysia, Norway, Peru, Russia, Thailand, the United Kingdom and the United States.

Refining and Marketing Segment

The R&M segment is involved in the production of refined petroleum products and purchases, markets and trades refined petroleum products, natural gas, and electricity. The company operates a refinery, terminals and retail gasoline stations on the East Coast of the U.S.

Following graph shows correlation between oil prices and stock prices

Crude Oil Reserves

(click to enlarge)

Source: 10K

Financial Performance

E&P earnings, after witnessing a growth of 163% in 2010, underwent a decline of 3% in 2011. The average crude oil prices for HES were $89.99/bbl, $66.20/bbl and $51.62/bbl in 2011, 2010 and 2009. The average realized natural gas prices were $5.96/mcf, $5.63/mcf and $4.85/mcf in 2011, 2010 and 2009.

The output of the company averaged 370,000, 418,000 and 408,000 barrels of oil equivalent per day in 2011, 2010 and 2009.

The R&M segment witnessed an increase in the loss incurred in 2011, as compared to the previous years. Refining witnessed a loss of $728 million (including the impairment loss related to HOVENSA and the shutdown of the refinery in St CroiX), $445 million and $87 million in 2011, 2010 and 2009.

The refining business has been in losses due to the global challenges being faced by the company, due to capacity additions in emerging markets and competitive disadvantages compared to other refiners.

The marketing business recorded earnings of $185 million, $215 million and $168 million in 2011, 2010 and 2009. The improvement in earnings in 2010, as compared to 2009, was due to the improved margins from weak economic conditions. The decline witnessed in 2011 was due to lower sales volumes and lower margins. (click to enlarge)

Source: 10K

Cash flow and CAPEX

2011

2010

2009

Cash Flow from Operations

4,984

4,530

3,046

CAPEX

(7,006)

(5,492)

(2,918)

Source: 10K

The cash flow from operations witnessed an increase of 10% in 2011 and 48% in 2010. The CAPEX, on the other hand, witnessed an increase of 28% and 88% in 2011 and 2010.

Dividends

The company maintained its dividend payout of $0.40/share in 2011.

Production for 2011 by Region and Production Mix

(click to enlarge)

Source: Investor Presentation 2011

As can be seen above, HES' production is relatively diversified in different regions and the company is primarily an oil play.

Growth Prospects

  • The company has acquired strategic acreage in the Utica shale play in Ohio, U.S., and the Kurdistan region of Iraq in 2011.
  • The company is expected to witness growth from its production in the Bakken Shale, North Dakota.
  • The company intends to continue the appraisal of the Eagle Ford Shale, Texas.
  • The company continued investment in it Tubular bells project in the deep water Gulf of Mexico.
  • The company has made significant progress on its assets in Australia, and expects further development going forward.
  • The company announced a discovery in offshore Ghana. The discovered well is expected to have 490 net feet of oil and condensate. The company is expected to continue drilling in 2012.
  • Petronas signed three production sharing contracts with HES for its gas fields off Malaysia's East Coast.

Bakken Shale Production Lower than Targeted

The company announced in April that the production of the Bakken shale had fallen short of its initial target, due to drilling in regions with less productive areas. This shortfall in the output from the Bakken shale was followed by a decline in the stock price by more than 6%. The initial target was an average production of 60,000 barrels per day. Bakken shale is an important growth prospect in the U.S. and is expected to witness an increase in the production of HES in the future.

Shutdown of Joint Venture Refinery HOVENSA

HES shutdown its loss-making joint venture refinery HOVENSA in February, as announced by the company in January. The company had decreased its output in 2011 to 375,000 barrels per day down from its capacity of 500,000 barrels per day. The company announced that it had decided to convert the location into an oil terminal.

Outlook

HES has strong growth prospects with its increased interests in shale plays in the U.S., and internationally. With the shutdown of its loss-making joint venture, its focus on improving its retail station network with improved convenience stores, and significant oil reserves, we are of the view that the company should witness its profitability improve going forward.

HES is trading at a cheaper P/E, P/B and P/S ratio of 6.13X, 0.75X and 0.38X. It offers a dividend yield of 0.90%, which is much lower as compared to its peers. Currently, we have a Positive stance on the stock, even though we believe there are other opportunities in the Oil and Gas Industry with similar growth prospects, offering higher dividend yields (mentioned below are a few of our reports for other stocks offering higher dividend yields). However, valuations are much higher for those stocks.

HES

(OXY)

(CVX)

(XOM)

P/E

6.13

9.76

7.98

9.83

P/B

.75

1.78

1.64

2.49

P/S

.38

2.82

0.87

0.88

Dividend Yield

.90%

2.50%

3.60%

2.70%

3 month performance

-21.25%

-4.76%

3.85%

2.02%

YTD performance

-23.10%

-9.74%

-1.45%

-.45%

52 Week Performance

-41.50%

-20.42%

-.98%

2.37%

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.