Stock of the Week
NYSE Symbol: Hes
Price as of 7/22:$74.37
Earnings season is in full swing and so far so good. The major averages are performing great thanks to better than expected earnings from the likes of IBM, Apple, Google, and finally a number of banks. Surprisingly, the financials led the rally a couple days this week thanks to earnings from Morgan Stanley and Wells Fargo. Goldman Sachs had lousy numbers, but the stock bounced smartly the next morning, hopefully signaling a bottom. The commodities continue to perform great, but yet a number of oil related stocks are off their yearly highs. Case in point, Diamond Offshore dropped 3% following disappointing earnings due to idle rigs. The oil drillers still haven't recovered from last year's oil spill. This week we'll feature a diversified oil conglomerate with plenty of new oil and gas discoveries. The featured stock of the week is Hess. Hess operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The company has been knocking the cover off the ball the last several years with a number of new oil and gas discoveries, yet the stock has not kept up. Rival, Conoco Philips made news recently announcing the split up of their two main segments to unlock shareholder value. Hess could do the same. The demand for oil will only go higher over the next several years which is good news for Hess. Analysts remain bullish on the company with price targets as high as $115 a share. With Hess trading in the mid $70 range, the stock provides long term value for investors looking for a less volatile commodity play.
Hess will report earnings next week so most investors should wait to see the report before investing in the stock. However, Hess has a lot of things going for them. It was the first company to discover the Bakken shale area, an oil-rich region that stretches from Montana to North Dakota along the Canadian border. Not only does the area have plenty of natural gas, but is projected to produce 40,000 barrels of oil a day. Hess is looking to sell non-core assets in the North Sea to focus more on growing shale and oil assets. 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. Last quarter, Hess announced a large discovery off the coast of Ghana and is just now starting to drill and explore the area. Cramer on CNBC believes the Ghana's discovery could be worth $7 a share generating 500,000 barrels a day making it and the Bakken property a game changer for Hess. Credit Suisse has stated if these assets prove successful, Hess could go from just over 400K BOE per day currently to 700K BOE by 2017. Hess also has projects in Egypt, the North Sea, Brazil, Australia and the Paris Basin, so the future is bright for Hess, but the stock remains range bound.
The valuation of Hess remains compelling. Currently the stock trades for less than 1 times sales, 10 times earnings, 9 times next years' earnings, and just 1.38 times book value of $52.38 a share. The stock also has technical support at $70 a share providing hopefully limited downside and plenty of upside. Hess also sells for 6 times operating cash flow. As mentioned, analysts remain bullish on the stock with price targets from a range of $95 a share at S&P and Argus, a $104 a share price target at Merrill Lynch, and a $115 a share target at Credit Suisse. Short term, many of the oils remain under pressure, but long term Hess is well positioned to profit and benefit from the World demand for oil.