This Integrated Energy Company Is Still Cheap

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Hess (NYSE: HES) agreed to sell its Russian subsidiary Samara-Nafta to Lukoil for more than $2 billion. This deal is a part of ongoing business restructuring to focus on Hess’s core business of crude exploration and production. From the beginning of the year, Hess has risen significantly by nearly 33.5% to nearly $72 per share. I personally think that with the great assets that Hess owns right now, the company should be worth much more.

Significant Bakken Asset

Hess has significant oil/gas assets with around 1.57 billion BOE in total proved reserves. The company owned around 900 thousand acres in the Bakken oil shale play in North Dakota, with a higher per acre value than other players in Bakken, including Oasis (NYSE: OAS) and Continental Resources (NYSE: CLR). While Oasis had around 300 thousand acres, Continental Resources is known to be the biggest leaseholder with 1.1 million acres in the Bakken area. However, although Hess had less total acres in Bakken area than Continental Resources, Von Goten commented that the total value of Hess’s Bakken acreage was equal to the value of Continental Resources’.

It Is Still Undervalued Now

Indeed, Paul Singer of Elliott Management has been pushing Hess’s Board of Directors to pursue asset divestments. Elliott Management suggested that the company spin off its Bakken, Eagle Ford and Utica acreage, divest the downstream assets, monetize the midstream assets via MLP or REIT structure, and streamline its international oil/gas portfolio. If Hess executes what Elliott mentioned, Elliott believes that it could generate an additional value of $76 per share for the company. Michael Price, one of the most famous value investors, also thought that Hess is quite undervalued at its current price: “Hess is sitting there with trophy assets, huge position in the Bakken, Somebody could surface and just pop an $80 to $90 bid.”

Divesting its Non-core Assets

Hess has had a plan to divest a lot of its assets. At the end of Jan 2013, Hess announced that it would exit from the refining business by closing its Port Reading refinery and sell its terminal network in the U.S. John Hess, the company’s Chairman and CEO said:

By closing the Port Reading refinery and selling our terminal network, Hess will complete its transformation from an integrated oil and gas company to one that is predominantly an exploration and production company and be able to redeploy substantial additional capital to fund its future growth opportunities.

Hess targets around $9.7 billion in asset divestment; then it might use $2.5 billion to reduce its debt, $1 billion for a deficit fund, and around $4 billion for stock repurchases. From the beginning of the year, the company has sold as much as $3.4 billion in asset values. UBS analysts thought that Hess might consider selling out assets in Thailand and Indonesia for around $2.6 billion.

Quite Cheap Isn’t It?

At $72 per share, Hess is worth around $24.4 billion on the market. The market seems to value Hess cheaply at only 4.4 times EV/EBITDA. Continental Resources is a smaller company with $14.9 billion in total market cap, but it has a much higher valuation than Hess. At $81 per share, Continental Resources is valued at 9.3 times EV/EBITDA. Oasis is the smallest company of the trio, with $3.2 billion in total market cap. It also has a much higher valuation than Hess. At $35 per share, Oasis is valued at more than 8 times EV/EBITDA. Thus, if we arbitrarily put an 8x EV multiple on Hess, Hess would be worth around $130 per share. While Oasis and Continental Resources don’t pay any dividends, Hess pays its shareholders a small yield of 0.6%.

My Foolish Take

By liquidating its non-core assets, the market has recognized Hess’s potential value. Michael Price also thought that Hess could be a potential takeover target. Indeed, Hess could be a decent opportunity for investors at its current trading price.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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