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Hess Corporation (HES) $60.38
The Company:
Hess Corporation, an energy exploration, production and refining company, was established in 1933 by Leon Hess and is currently run by his son John Hess, who serves as the Chairman and CEO of the company. The company operates in two segments: exploration & production and marketing & refining. Hess Energy Marketing provides electricity, natural gas and fuel oil to about 21,000 commercial and industrial customers in its 18-state East Coast market area, as well as to utilities and other wholesale customers. It also operates as an independent gasoline storage retailer from North Hampshire to Florida. With the closing of one of its unprofitable refining facilities in the U.S. Virgin Islands, the company is now positioning itself to primarily become a exploration and production company. With operations in 23 countries, Hess Corporation is a globally diversified company that derives only 32% of its $37.87 billion in annual revenue from the United States.
The stock dropped 8.8% from $60.32 to $54.99 after the company reported a fourth quarter loss of $131 million, or 39 cents/share on revenue of $8.82 billion. While revenue was up year-over-year and was above analyst estimates of $8.5 billion, earnings were well below the $1.30/share street estimate. Q4 results were negatively impacted due to a $525 million loss associated with shutting down Hovensa LLC, a U.S Virgin Islands based refinery.
CEO John Hess picked up $5 million worth of stock at an average cost of $54.79 last week. The filing came out on Tuesday, January 31 and the stock went on to gain 9.5% over the next four trading sessions to end at $60.38 last Friday. We wrote the following about the company last September after a $10 million purchase by Mr. Hess,
“This is an interesting purchase because Hess used to show up on my radar because of the large insider sales by Mr. Hess when the stock was trading above $80 in February and March of this year as you can see from this page. The stock has been in decline since the last week of July when it reported second quarter results that were strong but still missed analyst estimates.
Earnings in the second quarter rose 61.9% to $1.78 per share on $9.81 billion in revenue, which was up 26.8% year-over-year. The company trades close to book value and has an extremely low EV/EBITDA of 3.44. Unfortunately CapEx is unusually high, generating very little free cash flow. This filing came out during regular trading hours and the stock buoyed up about 3%. We are seeing several insider purchases in the energy sector across exploration, drilling and services companies.”
That high CapEx was primarily due to exploration activities and the company increased its total debt to $6.57 billion in 2011 when compared to $5.583 billion at the end of 2010. The company plans to scale back on some of its exploration activities and expects CapEx of $6 billion in 2012, which will be funded from operating cash flow and asset sales.
Business Statistics and Financials:
The company trades for 9 times estimated 2012 earnings of $6.58/share and 7.5 times estimated 2013 earnings of $8.06. With the resolution of some production issues that plagued the company in 2011 and that are also likely to impact 2012, earnings are expected to rise in 2013. Growth is expected to increase at a rate of 4% to 7% a year through 2017.
Full year 2011 revenue increased 9.4% to $37.87 billion when compared to $34.61 billion in 2010. Net income dropped 19.85% to $1.7 billion compared to $2.12 billion in 2010. The company replaced 147% of its 2011 production through new reserves at a cost of $36/barrel and ended the year with reserves of 1,573 million barrels, representing a reserve life of 11.4 years. Hess hedged 45% of its estimated 2012 oil production at $107.7 per barrel.
Competitors:
| Stock | Symbol | Mkt Cap | EV/EBIDTA | P/B | Operating Margin |
| Hess Corporation | HES | 20.38B | 3.96 | 1.05 | 10.98% |
| Exxon Mobil Corporation | XOM | 407.04B | 4.6 | 2.57 | 16.17% |
| Chevron Corporation | CVX | 210.10B | 3.9 | 1.71 | 16.21% |
| Marathon Oil Corporation | MRO | 22.73B | 2.69 | 1.32 | 6.77% |
| ConocoPhillips | COP | 93.55B | 3.68 | 1.41 | 9.86% |
| BP p.l.c. | BP | 147.15B | 4.36 | 1.32 | 7.80% |
| Apache Corporation | APA | 38.85B | 3.82 | 1.43 | 49.31% |
| Peabody Energy Corporation | BTU | 10.26B | 7.84 | 1.83 | 20.33% |
| Chesapeake Energy Corporation | CHK | 14.27B | 6.49 | 1.07 | 21.76% |
| Devon Energy Corporation | DVN | 25.63B | 4.25 | 1.23 | 43.55% |
| Valero Energy Corporation | VLO | 13.79B | 3.42 | 0.81 | 3.48% |
| HollyFrontier Corporation | HFC | 6.75B | 4.02 | 1.3 | 11.20% |
Insider Buying:
Given below is a list of purchases by the insiders of Hess over the last six months.
| Owner | Relationship | Date | Cost | # Shares | Value($) | Total Shares |
| John B. Hess | Chairman of the Board and CEO | 1/30/2012 | $54.79 | 91,250 | 49,99,414 | 4,01,588 |
| John B. Hess | Chairman of the Board and CEO | 9/12/2011 | $57.17 | 1,74,950 | 1,00,01,891 | 4,70,334 |
| TOTAL | 2,66,200 | 1,50,01,305 | ||||
| John H. Mullin III | Director | 8/9/2011 | $54.87 | 10,000 | 5,48,700 | 24,059 |
| TOTAL | 10,000 | 5,48,700 |
Conclusion:
Hess faced a number of unexpected problems in 2011 including a fire at one of its facilities in Norway and the disruption of supply in Libya. Beyond these problems, returns from their investments in exploration were also below expectations. The company plans on scaling back some of their exploration activity and their capital expenses in 2012 and are also getting rid of unprofitable ventures like the Hovensa refinery. Despite these challenges annual revenue increased due to the tail wind of rising oil prices.
Hess appears to be a 2013 story and it might serve us well to see how the company executes in the first half of the year before we commit capital to an investment in the company, especially after the run-up last week.