Insiders and Smart Money Are Betting on This Energy Stock
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
According to a Form 4 filed with the SEC John Mullin III, a member of Hess' (NYSE: HES) Board of Directors, directly purchased 10,000 shares of the company’s stock on June 21 at an average price of $63.01 per share. Insiders already have an economic connection to the company, and so theory suggests that they should be reluctant to buy more shares, thereby increasing company-specific risk, unless they are particularly confident in the stock’s prospects. Studies do in fact show a small outperformance effect for stocks bought by insiders, and so we like to at least briefly review large insider purchases so that investors can do further research on any interesting names.
Hess recently announced that it plans to divest its midstream and downstream assets within the next couple years in order to focus on exploration and production. Some activist investors had been pressuring the oil and gas company to do so. We track quarterly 13F filings from hedge funds as part of our work developing investment strategies and can see that billionaire Paul Singer’s Elliott Management, for example, had bought up 15 million shares of stock by the end of the first quarter of 2013. At that time that stake was worth over $1 billion. Paulson & Co., managed by billionaire John Paulson, initiated a position of 2.7 million shares, and billionaire David Einhorn’s Greenlight Capital was buying the stock as well.
As it currently stands, Hess’ business has been going fairly well. In the first quarter of 2013, operating revenues grew by 20% versus a year earlier. Pretax income was up significantly as well, even if we subtract out a large gain on asset sales from this year. Many investors like to invest in companies spinning off parts of their business on the thesis that management will become more able to focus on core operations with those assets under a different company entirely, so in theory Hess could grow its earnings per share along those lines as well. At its current valuation, the forward P/E is only 11.
Other Oil Majors
We would note that this earnings multiple, while low in absolute terms, is actually on the high side of the range where we find larger oil and gas companies. Hess trades evenly with supermajor Exxon Mobil (NYSE: XOM) on a forward basis; we suppose that it has been doing better than its larger peers, as Exxon recorded a 13% decline in revenue last quarter compared to the first quarter of 2012. Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP) carry forward P/Es in the 9-10 range, and each of these peers saw weaker results on both top and bottom lines during Q1. We’d note that ConocoPhillips does pay a dividend yield of 4.4% at current prices. Among the cheapest large oil companies in terms of forward earnings estimates, as well as one of the highest-yielding at 5.2%, is BP. The forward P/E of 7 is certainly quite cheap, suggesting that the company still faces poor sentiment in the market (as well as, we suppose, continued legal risks).
As a result we’d say that Hess does have to realize considerable efficiencies from the aftermath of its divestments in order to justify where it is valued compared to larger (and, possibly, more stable) oil companies. We wouldn’t rule out this outcome, but potential investors in Hess should know that they are depending on it. We’d also suggest that investors take a closer look at BP and how much special risks remain at the company given its sizable discount to its peers on a forward earnings basis and its superior dividend yield.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in COP. The Motley Fool recommends Chevron. 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!