Dear Mr. Berko: In early 2007, I bought 150 shares of Hess Corp. at $76 and a month later wrote to you about buying another 50 shares. But you told me to sell the stock. I was surprised by your answer and didn't buy 50 more shares or sell my 150 shares. Then, a few months later, it went up to $140, and I sent you a nasty email because I was really angry that I had missed that rise in value. But six months later, it went straight down to $40. I hope it's not too late to apologize, because Hess is now $69, and I hope you will be gentlemanly enough to advise me again. I still have a loss in the stock, and my husband and I need to know whether we should buy 50 more shares or sell the 150 shares we have.
LS, Moline, Ill.
Dear LS: I recall your blisteringly colorful nastygram quite well, but I didn't take offense. Had I been wearing your moccasins, I might have responded with similar rage — but without your skillful use of those nouns, verbs and adjectives.
Most folks don't know that Hess (HES-$69) is an integrated, international $40 billion-revenue oil company with reserves of 1.8 billion barrels of crude oil and liquid natural gas and an average daily production in 2012 of 400,000 barrels of oil equivalent. HES' exploration and production division is the company's driving engine. This is where HES may shift its focus. And a huge chunk of production derives from far, far away, in the high-risk, unfriendly fields of Algeria, Egypt, Brunei, Peru, Equatorial Guinea, Ghana, Indonesia, Malaysia, Libya, Azerbaijan and Iraq.
However, its leading position in the Bakken shale formation now provides a substantial low-risk source of production growth going forward. HES has prime acreage in the Bakken, which is likely to become a major source of production in the coming few years.
The marketing and refining division produces refined petroleum products, which HES markets along with natural gas and electricity. M & R also serves the motoring public, through its 1,417 green-and-white Hess gasoline stations, located mostly in the Northeast.
These service stations do a brisk (but not profitable enough) business pushing sodas, beer, pizza, sandwiches, doughnuts and calorie-rich snacks guaranteed to add inches to Americans' bulging waistlines and billions to their health care bills. Some influential and unhappy shareholders want HES to concentrate on exploration and spin off its service stations.
I didn't like the company in 2007, because I believed that management was weak and wobbly and unproductive. Little has changed. HES' consistently low 5 percent net profit margins (the litmus test of management skills) were then and continue to be among the worst in the industry. The net profit margins of Exxon Mobil, Imperial Oil, Occidental Petroleum, Petrobras and Chevron are nearly twice as high.
Low profit margins also explain why the shares trade near book value, which is $68, whereas Exxon Mobil, Chevron and others trade at premiums to book. And HES' debt, at 45 percent of capital, is substantially higher than that of Exxon Mobil, Imperial, Oxy, Chevron or Royal Dutch Shell. Now management has begun the process of selling noncore assets, which should reduce debt by 25 percent. Unfortunately, heavy near-term spending, a symptom of poor management, has turned cash flow negative. Fortunately, HES has an easily accessible $4 billion line of credit. I'm unimpressed!
Earnings for 2013 are expected at $6.30, from $5.83, and rumors suggest that the dividend, which has glued at 40 cents a share since 2002, may be increased this year. The Street's consensus points to a $75 price target; however, a small gaggle of evil-eyed hedge fund gargoyles believe that HES could trade at higher than $125, providing the Federal Reserve continues flooding the market with 85 billion new dollars every month. Don't add to your position. Keep those shares for four to six months, and watch the trading volume as HES peaks above the $75 mark. If HES fails to move convincingly above $75, sell it.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.