Dew, I assume you've seen this?
WSJ
t has been quite a year for Hess. The oil mini-major's stock, for years a laggard, have risen 49% in 2013 to date, trouncing both its sector and the S&P 500.
Roughly a third of that gain, however, came in just two trading sessions in January. That is when it became public that activist fund Elliott Management had taken a stake and was pressing for radical change. With the company having given some ground on governance and strategy in a compromise agreement announced in May, Hess's stock has kept rising. After that initial pop, though, it has merely kept pace with the market.
But Hess could offer investors more in 2014. Superficially, it looks like Hess has surpassed its peers on valuation. It began 2013 trading at just 8.3 times forward earnings, a one-third discount to the S&P 500. Today, Hess's multiple is 13.7 times, a discount of less than 10%.
But earnings metrics can be misleading in the capital-intensive oil business. For example, most of the third-quarter earnings miss that hit Hess's stock in October concerned accelerated depreciation on a Norwegian oil field, a noncash charge. Cash flow is a better metric. Hess's enterprise value, including net debt, is 4.6 times earnings before interest, tax, depreciation and amortization on a consensus basis—about average among its peers.
But that likely overstates the true figure. Net debt was $5.9 billion at the end of the third quarter. At that time, according to CreditSights, there was $2.8 billion worth of divestitures awaiting completion and another $3 billion being marketed. As Hess continues selling noncore assets, its cash flow relative to its shrinking asset base should rise, implying a lower multiple. Notably, while earnings forecasts have fallen since September, cash flow forecasts have risen.
Moreover, restructuring offers a hedge for the stock at a time when the risk of weaker oil prices is rising. Peers such as ConocoPhillips and Marathon Oil have undergone radical change, splitting into more focused companies and paying more cash to shareholders. Both have roundly beaten the market and the sector over the past four years.
If oil prices weigh on Hess's stock next year, expect Elliott and others to press for more change.
Write to Liam Denning at liam.denning@wsj.com
