However, I believe that the company is not ideal for the long-term investor mainly because, unlike Hess, Continental Resources, Inc. (NYSE:CLR)’s founder Harold Hamm and his family members yield a considerable influence over the firm. Mr. Hamm owns 68% of the business. In the past, the board has made side deals with other firms controlled by the founder and his family members worth hundreds of millions of dollars in apparent conflicts of interest. This includes the $23 million the company spent in Oklahoma City to build a new office for its boss. Moreover, other analysts have identified that the high-growth strategy could create problems in the long run. Its numbers certainly present a strong case for a short-term investment but I wouldn’t recommend Continental for the long haul.
A possible takeover
In March, when Hess was engaged in the proxy battle, a WSJ report speculated that the company could be an attractive takeover target for the Norwegian oil giant Statoil ASA(ADR) (NYSE:STO). But things have changed now with a revamped board of directors whose understanding of the energy industry is far superior to their predecessors. The waning influence of John Hess also works out well. With the new developments and considering Hess’ little success in exploration – with the exception of Ghana — I believe that a takeover now looks more realistic.
I believe that Hess Corp. (NYSE:HES) is still undervalued. The company’s enterprise value is $29.8 billion, almost $7 billion more than its market cap. If a buyer, like Statoil, gives a 30% premium over the current share price, then Hess would carry a price tag of $29.4 billion, which would be closer to its enterprise value. Statoil ASA(ADR) (NYSE:STO)’s enterprise value is $77 billion and it has got cash reserves of $80 billion, more than enough to make a significant purchase like that.
Statoil itself has been looking to increase its reserve base and reduce its reliance on its home country from where it gets more than 60% of its output. Secondly, it is the oil major with the lowest proven reserves. It needs to grow and diversify its portfolio. In that sense, I believe that a Hess acquisition would give Statoil significant exposure to the lucrative Bakken Shale, Gulf of Mexico and the North Sea. Thirdly, with the acquisition of Brigham Exploration, Statoil ASA(ADR) (NYSE:STO) has clearly shown an interest in the Bakken shale.
The takeaway
Hess Corp. (NYSE:HES) has lagged behind its rivals in exploration and production but the company has immense potential. Its new strategy of renewed focus toward E&P, revamped leadership, a possible takeover and an increase in dividend makes it an attractive investment at the moment.
The article This Revamped Energy Firm Is a Buy originally appeared on Fool.com and is written by Sarfaraz Khan.
Sarfaraz Khan has no position in any stocks mentioned. The Motley Fool recommends Statoil (ADR). Sarfaraz is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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