On Jun 13, 2014, we issued an updated research report on
), an integrated energy company engaged in oil and gas exploration,
production (E&P) and refining as well as marketing.
At present, Hess is undergoing a transition from an integrated oil
and gas company to a predominantly E&P entity, thereby shifting
its growth approach from high-impact exploration to lower-risk
unconventionals and a smaller, more focused exploration portfolio.
It announced the closure of its Port Reading, NJ refinery, which
marked its complete exit from the refining business. Hess also sold
its Indonesian assets and aims to shed assets in Thailand as well
as its terminals, retail, energy marketing and trading businesses
in the downstream. Moreover, the company announced a share
repurchase plan of up to $4 billion and an increase in its annual
dividend to $1 a share beginning from the third quarter. The latter
move has more than doubled Hess' quarterly dividend. In view of the
global economic slowdown and new refining capacity entering the
world market, such moves by Hess will help it to enhance
During the first quarter, the company beat the Zacks Consensus
Estimate with regard to both earnings and revenues, mainly driven
by better realizations. The company had also posted positive
earnings surprises for two of the last four quarters, with an
average beat of 3.29%.
Hess' priority remains investment in future growth with a balanced
approach between unconventional, exploitation and
exploration. Such investment is expected to reap an average
annual production growth of 5%-8% through 2017 and beyond. With the
growing free cash flow over the years, Hess will be able to
increase its share buyback and dividend as well.
For 2014, the company expects production to average 305-315 MBOE/d.
Moreover, Hess garnered $7.8 billion in 2013 through asset sales.
Recently, it divested the retail business. Moreover, currently, it
is in the process of shedding its upstream assets in Thailand and
the trading business. The amount raised through asset sale is
expected to help fund E&P investments. These major changes in
restructuring the company's portfolio will likely be complete by
the end of 2014. Hess also stated it would continue to consider
other opportunities to enhance long-term shareholder value.
Although there is significant resource potential from new
discoveries, the E&P business is inherently risky, often with
an equal share of successes and failures. While future projects
could possibly add value to the share price, we do not feel the
risk/reward trade-off will favor the company.
Key Picks in the Sector
Hess has a Zacks Rank #3 (Hold). Currently, we prefer to remain at
the periphery regarding the stock. However, better-ranked players
in the energy sector like
Magellan Midstream Partners LP
Ultra Petroleum Corp.
), all sporting a Zacks Rank #1 (Strong Buy), are worth
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