Earnings Analysis: Hess Corp.

| About: Hess Corporation (HES)

Hess Corp. (NYSE:HES) reports preliminary financial results for the quarter ended 2012-09-30.

Hess Corp. recently reported its preliminary financial results based on which CapitalCube provides a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise).

Hess Corp.'s analysis versus peers uses the following peer-set: Exxon Mobil Corp. (NYSE:XOM), Chevron Corp. (NYSE:CVX), BP PLC ADS (NYSE:BP), Royal Dutch Shell PLC ADS (NYSE:RDS.B), Total S.A. ADS (NYSE:TOT), ConocoPhillips (NYSE:COP), Occidental Petroleum Corp. (NYSE:OXY), REPSOL S.A. ADR (OTCQX:REPYY), Marathon Oil Corp. (NYSE:MRO) and China Petroleum & Chemical Corp. ADS (NYSE:SNP). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.



Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 9,243.0 9,224.0 9,801.0 9,719.0 8,715.0
Revenue Growth % 0.2 (5.9) 0.8 11.5 (12.2)
Net Income 557.0 549.0 545.0 (131.0) 298.0
Net Income Growth % 1.5 0.7 N/A (144.0) (50.9)
Net Margin % 6.0 6.0 5.6 (1.3) 3.4
ROE % (Annualized) 11.0 11.3 11.6 (2.8) 6.3
ROA % (Annualized) 5.4 5.4 5.5 (1.4) 3.2
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Valuation Drivers

Hess Corp. trades at a lower Price/Book multiple (0.9) than its peer median (1.4). The market expects Hess Corp. to grow faster than the median of its chosen peers (PE of 11.8 compared to peer median of 9.5) and to improve its current ROE of 7.7% which is below its peer median of 15.3%. Thus, the market seems to expect a turnaround in Hess Corp.'s current performance.

The company's profit margins are below peer median (currently 4.0% vs. peer median of 5.9%) while its asset efficiency is about median (asset turns of 1.0x compared to peer median of 1.1x). Hess Corp.'s net margin continues to trend downward and is below (but within one standard deviation of) its five-year average net margin of 4.9%.

Economic Moat

Changes in the company's annual top line and earnings (13.5% and -19.9% respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.

Hess Corp.'s return on assets is now less than its peer median (3.8% vs. peer median 6.4%) in contrast to its returns over the past five years which were around the peer median (6.0% vs. peer median 6.9%). Recent performance suggests that the company's historical competitive advantage is slipping away.

The company's gross margin of 23.2% is around peer median suggesting that Hess Corp.'s operations do not benefit from any differentiating pricing advantage. In addition, Hess Corp.'s pre-tax margin is less than the peer median (10.0% compared to 12.9%) suggesting relatively high operating costs.

Growth & Investment Strategy

While Hess Corp.'s revenues have increased more slowly than the peer median (-2.2% vs. -0.2% respectively for the past three years), the market currently gives the company a higher than peer median PE ratio of 11.8. The stock price may be factoring in some sort of a strategic play.

Hess Corp.'s annualized rate of change in capital of 14.8% over the past three years is greater than the peer median of 11.2%. This relatively high investment has generated a less than peer median return on capital of 7.4% averaged over the same three years. The relatively high investment and low current returns lead us to believe that the company is betting heavily on the future.

Earnings Quality

Hess Corp. reported relatively weak net income margins for the last twelve months (4.0% vs. peer median of 5.9%). This weak margin performance and relatively conservative accrual policy (9.8% vs. peer median of 3.8%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

Hess Corp.'s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median -- which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts


Company Profile

Hess Corp. is engaged in the exploration of and production of crude oil and natural gas as well as in refining and marketing refined petroleum products, natural gas and electricity. It operates business through two segments: Exploration and Production and Marketing and Refining. It changed its name from Amerada Hess Corp. to Hess Corp. The company was founded by Leon Hess in 1920 and is headquartered in New York, NY.



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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. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.