International Share of the Week
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Last updated: 28 February 2012
Hess is a US based integrated Oil and Gas Company. In terms of scale, Hess’s $22bn market capitalisation is considered only middle of the pack, which is understandable only when set in the context of Exxon and Chevron. Operations are predominantly focused on US onshore as well as deep water in the Gulf of Mexico. For our purposes, there are two important things to know about Hess. First, it looks extremely cheap relative both to the competition and its own historic average valuation and second, the company is more highly leveraged to the oil price than a lot of the competition.
In the context of the rising tensions in the Middle East, the latter trait is particularly appealing to us at the moment.
Oil prices continued to rise this week as concerns about over tightening fundamentals dominated price momentum. Fears over an Israeli led pre emptive strike on Iranian Nuclear facilities or a retaliatory blockage of the Strait of Hormuz still dominate. Such fears were stoked this week after UN officials from the International Energy Atomic Agency were refused access to investigate nuclear activities at a military base. Although inspectors have been allowed access to official nuclear sites, the military bases remain off-limits. The unwillingness of Iran to cooperate with UN inspectors suggests that any further negotiations between the West and Iran may well make little progress, if any; meaning further sanctions to curb Iran’s nuclear activities could be on the cards.
In terms of other geopolitical risks, the uprising in Syria; labour strikes and pipeline sabotages in Yemen and disputes between Sudan and South Sudan, have taken nearly1.2m barrels per day out of the oil market. While this only equates to about 1.5% of global output, the ongoing tightening of the supply-side is becoming more and more of a concern as an end to these geopolitical risks is nowhere near in sight.
With the market likely remaining tight and the demand side seemingly recovering, the upside threat to oil prices is sufficient for us to retain our overweight position on the energy sector, which tends to be highly correlated with underlying moves in crude oil.
Hess’s valuation adds further attraction at the moment. After a couple of poor quarters, the market is questioning the management’s ability to generate sufficient returns. A period of heavy capital expenditure has been disappointingly rewarded with low single digits annual production growth. However, we feel that the current valuation discount to the sector undervalues the group’s assets and represents a significant opportunity for shareholders both from a deep value and geopolitical hedge perspective.
Investing in shares is not for everyone. Their value can fall and you can get back less than you invest. If you are unsure, you should seek independent advice.
