More Potential Upside for This E&P Business
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since the beginning of the year, Hess (NYSE: HES) has experienced a significant rise in the market, up 39.6%, handily beating the S&P 500’s return of only 18.6%. Elliott Management, a 4.5% stake owner in the company, thought that Hess should be worth as much as $126 per share. Michael Price, the famous value investor, also commented that the company could receive an $80 to $90 bid. At the time of writing, Hess is trading at nearly $74 per share. Is Hess a good buy for investors now? Let’s take a closer look and find out.
What does Hess have?
Hess owns some great oil and gas assets with the total proved reserves of more than about 1.6 billion BOE (barrels of oil equivalent). The company owns around 900,000 net acres in the Bakken shale oil in North Dakota, with the highest per acre value. According to the leading petroleum engineering company, the total value of Hess’ Bakken acreage is equivalent to the total value of more than 1.1 million net acres of Continental Resources’ Bakken area.
In addition, Hess is also the owner of Eagle Ford and Utica acreage, and has interests in several “crown jewel” long-life assets in several regions, including Southeast Asia, the Gulf of Mexico and the North Sea.
According to Elliott Management, Hess should take three steps to unlock the company's potential hidden asset value, including (1) spinning off Bakken, Eagle Ford and Utica assets, (2) divesting the downstream business and monetizing the midstream assets, and (3) streamlining the international portfolio. Interestingly, Elliott Management estimates that step one would create more than $28 per share for the company; step two would produce an additional $11 per share; and step three would deliver an additional value of $36 per share.
Hess has been restructuring its business to become a pure exploration and production (E&P) play after it divests the retail business, energy marketing business and energy trading (Hetco) business.
$4 billion potential share repurchases
Since the beginning of the year, the company has divested as much as $3.4 billion worth of assets, on the way to reach a targeted $9.7 billion in asset sales. Then it might use $2.5 billion for debt reduction, $1 billion for cash positions, $1 billion for a deficit fund and as much as $4 billion to repurchase its shares. As Hess was recently trading at $74 per share, with a total market cap of $25.1 billion, a $4 billion share buyback would represent a high repurchase yield at 15.9% for shareholders.
At the current trading price, Hess is also valued quite cheaply. The market values Hess at only 4.2 times its trailing EBITDA. Hess offers investors quite a low dividend yield at only 0.6%. However, its payout ratio is extremely low as well, at only 5%.
The cheapest among its peers
Compared to its bigger peers, including ConocoPhillips (NYSE: COP) and ExxonMobil (NYSE: XOM), Hess is the cheapest valued among the three companies. ConocoPhillips was recently trading at $66 per share. It has a total market cap of $80.7 billion. The market values ConocoPhillips at 4.6 times its trailing EBITDA.
ConocoPhillips has also restructured its business, selling its lower margin downstream business to focus on its core E&P activities. It could be considered the biggest independent E&P company in the world, with the total proved reserves of around 8.6 billion.
ConocoPhillips is also one of the big players in the Eagle Ford, Bakken and Permian area, with production growth of as high as 42% in the first quarter 2013. For full-year 2013, the company expects its production from continuing operations to stay be around 1,485 to 1,520 MBOED (millions barrels of oil equivalent a day).
Looking forward, the company expects to realize around $8.5 billion in cash from the divestment of its offshore operations in several countries including Algeria, Nigeria and Kazakhstan. Investors might like ConocoPhillips due to its juicy dividend yield at 4.2%.
ExxonMobil has the highest valuation among the three. It is trading at around $95.20 per share, with the total market cap of $423.2 billion. The market values ExxonMobil at around 6 times its trailing EBITDA. ExxonMobil has much higher proved reserves than the other two companies, at more than 25 billion BOE.
It is also considered the largest natural-gas company in the U.S., with 74 trillion cubic feet equivalent of natural gas in its proved reserves. ConocoPhillip has around 21.7 trillion cubic feet equivalent in its gas proved reserves. ExxonMobil offers investors a much lower dividend yield at only 2.7%. However, its payout ratio is only 23%, much lower than the payout ratio of ConocoPhillips at 43%.
ExxonMobil has been quite excited with the Kearl oil sands project, with around 4.6 billion BOE in its proved reserves. The project could be considered the first oil- sands operation without an up-grader. The president of ExxonMobil development company, Neil Duffin, said that Kearl’s reserves could “meet energy needs for the next 40 years.”
My Foolish take
Personally, I think Hess could deliver a sweet return to shareholders due to its relatively low valuation, extremely low payout ratio, and the upcoming potential asset divestment activities. With more proceeds from asset sales, Hess could focus on its core business, strengthen its balance sheet and return more cash to its shareholders.
Anh HOANG has a position in Hess. 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!