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Replies to post #4995 on The Rising Influence of Rising Affluence
05/21/12 4:01 PM
Slumping oil and natural-gas prices this year have taken a bite out of nearly all energy shares, and exploration and production company Hess (HES) is no exception. Yet a good portion of the stock's recent 32% drop, to $44.60 from its 2012 high around $67, is self-inflicted. On April 25, Hess reported first-quarter net of $509 million, or $1.50 a share, down from $619 million or $1.82—a bit less than expected. (Both periods' results exclude extraordinary items.) Meanwhile, revenue at the mostly oil-producing company—its output is 70% liquids and 30% natural gas—fell 7%, to $9.75 billion.
Still, this wasn't what caused investors to dump the stock. In a conference call, Hess reduced its production expectations for its important Bakken fields in North Dakota to less than 60,000 barrels per day oil equivalent (Bpoed) from 60,000 Bpoed. Currently, it averages 47,000 there. In addition, it suggested that it might have to raise 2012 capital expenditures higher than its original $6.8 billion guidance. The market took that badly. Hess stock fell 7% that day and slid as low as $44.10 Wednesday. And analysts have been piling on, with at least six cutting their rating on the stock since mid-April.
Longer-term, Hess shares are down almost 50% from highs of 87 in February of last year, wildly underperforming crude oil itself, which is essentially flat over the same stretch. Such a sustained divergence suggests shareholders are unhappy with the company's production disruptions—as in Libya last year—and the its habit lately of missing analysts' expectations.
None of this is particularly good news for Hess, but it's possible that the market has—as it sometimes does in the short term—overreacted to Hess's challenging but ultimately solvable problems [well, yes, LOL].
The stock valuation, for example, is approaching all-time lows. Hess trades at less than seven times consensus analysts' earnings estimates of $6.40 a share this year, not much above its low of 6.4. The shares are also near all-time lows in enterprise value (stock-market capitalization plus net debt) to Ebidta, too. Hess seems like a bank; the stock is trading at just 0.8 times book value.
…Hess's balance sheet is strong and, on average, the company has returned 14% on equity over the past decade. As of Dec. 31, it had 621 million barrels of proven oil, condensate, and natural-gas liquids, plus 1.2 trillion Mcf (thousand cubic feet) of natural gas.
There are other subtle factors that suggest Hess might be at least bottoming in the mid-40s. [color=red]Insiders have started to buy significant amounts of stock in the open market. In an April 30 SEC filing, Chairman John Hess, for example, reported purchasing 48,000 shares at $52. [The $2.5M buy by John Hess in early May is in addition to his $5M buy in January (#msg-75235512) and a $900K buy by a HES director a few days ago (#msg-75705739). That’s a lot of insider buying!]
What's notable there, says Jonathan Moreland, director of research at insiderinsights.com, is that the executive previously had been a steady seller. And from a technical viewpoint, Moreland adds, the stock's decline is starting to look washed-out. The shares are near a level where they've previously found support.
It might take a while, and the shares could trade in a range for an extended period, but a patient investor might do worse than follow the leader and buy Hess stock.
AI
