Friday Integrated Wrap-Up: Questionable HES Call; SUN Loses CEO Pre-Earnings
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Integrated oil stocks underperformed the S&P 500 index +0.87% to +1.46% in today's session. Industry leaders included Hess Corp. (NYSE: HES) and Occidental Petroleum (NYSE: OXY). These stocks rose 4.43% and 4.21% on volumes of 6.00M and 3.65M, respectively. Industry laggards included Sunoco Inc. (NYSE: SUN), which is about to report earnings, and Petroleo Brasileiro (NYSE: PBR). These securities wavered +0.58% and +0.34% on volumes of 8.14M and 16.51M, respectively.
Sector-wide news included crude rising on upbeat jobs data; continued problems for Chevron as one of its rigs off Nigeria continued to burn; and Argentine President Cristina Fernandez de Kirchner ending ending a three-year program that provided about 10 billion pesos ($2.3 billion) of incentives to oil companies.
Hess Corp. saw its shares rocket in today's session on account of its number one placement in JPMorgan's 10 stocks to rise in 2012. JPMorgan analysts placed an $89 price target on the security resulting in what was, at the time of their writing, a 58% upside. Apparently JPMorgan announced their projections before today's news of Hess closing their Port Reading refinery was released. This refinery is responsible for the generation of 70,000 barrels of high grade fuels daily and its untimely repair closure is coinciding with a rise in the crack spread. Overall, the refinery's closure could have some negative impact on Hess's Q1 bottom line.
Aside from Hess's refinery closure, the company's recent earnings miss and the overall health of its balance sheets bring me to question the methodology behind JPMorgan's projections. Perhaps my Buffettologist philosophy of searching for a company with a durable competitive advantage is not in line with their methods. In my opinion, the company's massive and increasing debt load ($6.06B), minimal cash on hand ($351M), and sporadic annual diluted EPS (2007: $5.74; 2008: $7.24; 2009: $2.27; 2010: $6.47; 2011: $5.01) make it altogether too risky of a buy. This is further substantiated when one considers that Hess operates in an industry that offers consistent annual earnings increases and superior financial health in other companies such as ConocoPhillips and ExxonMobil.
Also, Hess's P/E (12.04), PEG (1.02), and P/S (0.50) are worse than industry averages.
Everything considered, I would urge interested investors to sort through Hess's financial statements themselves before they accept JPMorgan's 58% upside call.
Sunoco Inc. saw its shares squeak out a gain ahead of its earnings announcement. Investors appear to be cautious with concerns to the company's repositioning and the loss of its CEO earlier today. I would exercise caution with the purchase of this company's shares as well. Its lack of several key valuation metrics due to its recent spin-off results in substantial uncertainty regarding future projections.
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