Hess Creating a Focused, High-Growth and Low-Risk Portfolio
usman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Due to expanding economies and rising populations, the higher demand for energy fuels is providing the oil and gas exploration industry an opportunity to grow at a good pace. The industry is anticipated to continue its growth momentum in the next five years. Every player in the industry is striving to grab the maximum market share of this rising demand by implementing effective strategies. This article focuses on what strategies Hess (NYSE: HES) is implementing to compete against its rivals.
Hess, a crude oil and natural gas exploration and production company, has made several divestitures in 2013. These divestitures are a part of the company’s plan to exit its downstream business. The management intends to transform Hess into a pure play exploration and production company within five years to create a focused, higher growth and low risk portfolio.
In 2013, the company has entered into the last phase of this five-year plan. This also includes the additional asset sales in Indonesia and Thailand. Furthermore, this plan includes a complete exit from retail (1,361 gas stores and convenience stores), energy marketing and energy trading segments. This will enhance the production capacity of Hess at a rate of 5%-8% until 2017. Most of the proceeds from these sales will be used to return the capital directly to the shareholders. The plan also includes the aggressive cutting of capital and exploration spending. In 2013, it has reduced its capital expenditure and exploration spending by 17% and 29% respectively.
In its recent divestiture, the company sold its energy marketing business to Direct Energy, a North American subsidiary of Centrica. The total consideration agreed upon for this transaction is $1.025 billion. In April, it sold its Russian subsidiary Samara-Nafta for a total consideration of $2.05 billion. The after tax proceeds received by the company for this subsidiary were $1.8 billion. In March, Hess sold 2.72% interest in ACG Field and 2.36% interest in associated BTC pipeline for $1 billion. In January, it sold its terminal network in the US, having a total capacity of 28 million barrels of storage capacity.
All these divestitures provided a total of $4.5 billion compensation to Hess. The proceeds from the divestitures were used to repay $2.4 billion of debt and add cash to the balance sheet, strengthening its balance sheet for future growth. The remaining proceeds will be used to repurchase the shares under an existing $4 billion share repurchase plan.
Where are the competitors heading towards?
Chevron (NYSE: CVX) signed an agreement with YPF S.A. to develop shale oil and gas resources from Vaca Muerta. It will enable the company to extract more oil than its 2017 production target of 3.3 million barrels per day and will provide the company an opportunity to grow profitably.
In March, the company announced the discovery of oil in deepwater US Gulf of Mexico. Chevron has a 40% working interest in this prospect, whereas ConocoPhillips, Anadarko Petroleum and Venari Offshore have shares of 35%, 15% and 10%, respectively. Chevron is the main operator of the well, as it holds the largest share. This discovery strengthened its portfolio and provides the company with strong growth opportunities in the future. In April, Chevron discovered natural gas in Australia, which will further add to its natural gas portfolio.
Both these discoveries show the superior exploration performance of Chevron.
BP (NYSE: BP), America’s second largest oil and gas company, has expanded its portfolio by adding 17 more branded sites in Michigan’ Flint-Saginaw-Bay City. Consequently, the company will now be able to extract approximately 19 million more gallons and strengthen its brand’s presence.
The company has also announced a deal with Petroleo Brasileiro to buy its five deepwater exploration and production concessions. These five blocks together cover a total area of 3,837 square kilometers. This purchase will reduce the risks and development costs of BP, as it is purchasing already tested assets. The acquisition also helps the company in expanding its upstream portfolio and in building a strong market position in Brazil.
In the second quarter, the company's oil and gas production increased by 4.4% as compared to the same period last year, but the profits declined significantly by 25% due to the lower oil prices and unusually high underlying tax rate of 45%. By the end of this quarter, BP reduced its debt to 12.3% within its targeted net debt range of 10-20%.
Hess currently has a very strong financial position. In the second quarter, the production from Bakken oil shale increased by 16%, while the capital and exploratory expenditure was down by more than 22% year-over-year. The divestitures have enhanced the liquidity of the company and lowered its debt level. The cash and cash equivalents were up by 11%, and the debt had decreased by 28% at the end of June. The management is also planning to increase its dividends for the third quarter. The future for this company is surely very bright, so I would recommend its stock as a Buy.
Chevron’s net earnings and revenue have declined by 8.5% and 4.6% year-over-year in the the first quarter, mainly due to the lower crude oil prices. But the overall position of the company is quite stable, as its margins remain higher than the industry average. Chevron is achieving higher return on assets and equity than its peers. Its recent agreement with YPF S.A. and the two discoveries will enable it to grow profitably in the future. Its dividend is increasing at a rate of 19% over the last three years. So, I would give a Buy recommendation for the stock.
BP’s financial position compared to Hess and Chevron is not very strong as it is facing year-over-year declines in its revenue and net earnings. Its 3-year revenue growth and operating margins are also lower than the industry peers.
usman iftikhar has no position in any stocks mentioned. 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!