A couple of weeks ago, Hess Corp. (NYSE:HES). announced several initiatives that will morph the oil giant into a pure exploration and production (E&P) company by 2014.
The focus will be on higher growth as the company creates a lower risk portfolio of assets. This will be achieved by exiting its retail business, energy marketing and energy trading.
Hess Corp. (NYSE:HES) plans to handsomely return capital directly to shareholders through a dividend increase to $1 per share and a $4 billion share buyback program.
At the urging of activist investor Elliot Management, who has been pushing for Hess Corp. (NYSE:HES) to break up the company, Hess Corp. (NYSE:HES)announced a slate of six “highly qualified” independent directors with “the right mix of corporate leadership and financial expertise, and top level E&P experience.”
In selling non-core assets, Hess will pump more than 90% of its capital into exploration and production.
Hess Corp. (NYSE:HES)’s new goal follows similar moves by ConocoPhillips (NYSE:COP) and Marathon Oil Corporation (NYSE:MRO), which have also shed refining operations to unlock addition value.
In early March, ConocoPhillips (NYSE:COP)o reported it would divest its Canadian tar sand assets and some 37% of its interest in the Australia Pacific LNG project as it balances its holdings. It plans to focus more on unconventional U.S. plays in the South Texas Eagle Ford shale and the Bakken formation. ConocoPhillips (NYSE:COP) believes the move will boost production and margins by 3-5% annually through 2017.
Marathon Oil spun off its refining and other downstream businesses in June 2011, freeing it to concentrate on oil exploration and development opportunities. Marathon has been bulking its portfolio with a handful of mostly onshore U.S. assets. The aim is to provide 25% annual growth for the company through 2015. It too has a sizable stake and sees great potential in the Eagle Ford Shale and Bakken.
Why the rush to become pure E&P companies?
Big oil companies have the benefit of vast resources to cushion their exploration risks, which has the potential to transform relatively inexpensive properties into much more valuable production assets.
As Ed Hirs, a lecturer in energy economics at the University of Houston explained to the Houston Chronicle, “Oil companies make money when they go explore, drill and prove up. Once you have production in place, the market will pay you more for the production than for the idea. They can sell the producing assets, give some of the proceeds to shareholders and plow the rest into exploration.”
Hess is moving on that lucrative track.
The Houston based company’s latest quarterly earnings of $1.66 per share handily beat estimates by a quarter. Forward guidance was upbeat, prompting Oppenheimer to reaffirm its “outperform” rating with an $85 price target. Deutsche Bank and Credit Suisse reiterated their “buy” ratings; Credit Suisse’s target is $83.
For all of 2013, Hess Corp. (NYSE:HES) has a capital and exploratory budget of $6.8 billion. The budget is “focused on attractive investment opportunities” says Chairman and CEO John Hess. The company’s mission is growth through fresh discoveries. For shareholders, Hess could prove to be a gusher.
As oil tycoon John Paul Getty said, “The formula for success is rise early, work hard and strike oil.” Here’s betting Hess Corp. (NYSE:HES) will succeed.
The article Here’s Why Hess Is a Buy originally appeared on Fool.com.
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