Hess Corp. (HES): Inexpensive, favorably leveraged to crude, exploration heating up - Goldman Sachs - 10/31/07
What's changed
Hess reported adjusted 3Q 2007 EPS of $1.34, essentially in-line with our $1.35 forecast and the $1.36 First Call consensus. We have updated our 2007 EPS estimate to reflect actual 3Q results, updated guidance, and minor other modeling changes for 4Q 2007.
Implications
Hess shares remain Buy rated in the context of our Attractive coverage view. In our view the shares are very inexpensive trading at just 4.8X 2008E EV/DACF, well below the 5.5X domestic oil average. We think Hess shares will benefit from our bullish and above-consensus view of crude oil, especially in light of its much healthier E&P business relative to years past. In addition to continuing to deliver on its production growth, reserve replacement, and finding and development cost objectives, a pick-up in its impact exploration program is likely key to a re-rating higher for its shares. Important wells currently drilling in the deepwater Gulf of Mexico include a wildcat at the Bob North prospect and an appraisal at the Pony field, with news from both wells expected in 4Q. The company will also commence a 4-well exploration program on Australia's Northwest Shelf in a highly prospective natural gas region.
Valuation
We see 14% upside to our unchanged $78, 12-month target price. Our target price is based on asset value, P/E and cash flow valuation analyses. Our target price does not give credit for future exploration success, which could have a meaningful impact on Hess's valuation.
Key risks
Key risk is sustained lower commodity prices. |
