Barclays is out with an interesting call on
Hess Corp. (
NYSE:HES) upgrading the shares to Overweight from Equal weight and maintaining their $75 price target.
According to the analyst the upgrade comes following recent sharp underperformance. As one of the most oil-levered producers within their research universe, they believe Hess is well positioned to benefit from a rising oil price environment while offering a significant exploration potential upside with no sizable upfront premium.
Firm notes that although they have long been intrigued by the company’s vast long-term resource potential in Brazil, Ghana, Libya, and Australia, they were uncomfortable about the shares’ valuation. They believed the market had prematurely awarded too much premium for its exploration potential and ignored the unavoidable underlying risks associated with such a concentrated high-interest/high-impact drilling program
(dry hole is the norm, not the exception, in the E&P business. The success rate for the worldwide-ranked wildcat exploration only averages about 15%–20%). As a result, despite their bullish medium-term outlook of the crude oil market and Hess’s status as one of the most oil-levered names within firm's research coverage, they maintained they their Equal Weight rating on HES when they upgraded SU to Overweight in mid-February. In addition, they were concerned that the stock could be negatively affected over the near term because of its lack of visible near-term production growth, poor earnings visibility, and the absence of concrete positive
exploration news flow.
So Why Now?
Recent Underperformance Created Buying Opportunity
Unsurprisingly, the stock’s recent poor relative performance has largely eliminated its once hefty exploration premium. Firm now estimates the stock may have included less than a $5 per share premium for future exploration potential, compared with an estimated premium of $18–$19 per share in late May/early June before the BM-S-22 second well bad news surfaced, providing an attractive entry point for longer-term-oriented investors, in their opinion.
In addition, reflecting the current stronger-than-expected oil price environment, they raised their 2009 and 2010 oil price assumption to $57 and $75 per barrel from $50 and $70 per barrel, respectively.
