Hess Corp. (HES) Buy: Adding to Americas Buy List on oil leverage, exploration optionality - Goldman Sachs - May 06, 2008
Source of opportunity
We are adding shares of Hess to the Americas Buy List in conjunction with our updated commodity price deck and view that oil prices have material upside risk over next 6-24 months (see our 5/5/08 report, “$100 oil reality, part 2: Has the super-spike end game begun?”). Given the company’s favorable oil leverage and highly prospective exploration program we believe Hess shares will continue to outperform in an environment of high and rising oil prices. We see 23% upside to our unchanged $130, 12-month target price and believe the possibility that shares trade closer to our $150, “high-end” trading range is increasingly likely.
Catalyst
We believe the combination of high and rising crude oil prices and an enticing exploration program could drive Hess shares meaningfully higher in the near-term. Having missed the recent rally in shares from the low $90s to around $110, we had previously been waiting for a pullback to once again recommend the stock. However, given our increasingly bullish crude oil view and updated asset value and risk/reward analyses, we believe the chances for a meaningful pullback have decreased. In addition, anticipation of news and actual results from several high-potential wells over the next few quarters should provide additional support. In an environment in which oil prices continue to rally on supply concerns, we believe investors will gravitate towards Hess shares, as it is one of the few companies with material upside exploration optionality. We are updating our FY2008-2012 estimates based on our new commodity price deck.
Valuation
We see 23% upside to our unchanged, $130 12-month target price, which is based on asset value, P/E and cash flow valuation analyses.
Key risks
Key risk is lower commodity prices. |
