Hess, Murphy, and Mr. Market

In the face of market conditions that -- even intraday -- appear to be taking their cues from the Six Flags roller coaster, it'll be fun to tell you about a couple of successful oil companies, Hess (NYSE: HES  ) and Murphy (NYSE: MUR  ) . The good news, it seems, is that both benefited mightily from last year's run-up in crude oil prices. The bad news? When the market/roller coaster is in an eye-popping descent -- and when the stocks are already up big -- it may not matter much, at least temporarily.

But let's look in a little more detail at how these two similar (yet different) companies fared in the most recent quarter.

First, Hess
Hess managed a 42% jump in fourth-quarter net income on the basis of those steadily climbing crude prices. Its bottom line increased to $510 million, or $1.59 a share, from the year-ago comparable results of $359 million, or $1.13 per share. The inevitable one-time items for this quarter included charges totaling about $81 million, and a gain of $24 million.

The company's exploration and production -- upstream -- earnings rose more than 66%, based on the combination of a 50% jump in its average oil price realizations, a 32% improvement in the average price it received for its natural gas, and a 6.6% increase in barrels of oil equivalent (boe) production. At the same time, with the refinery spread narrowing from a year ago, refining and marketing -- downstream -- earnings dipped to $31 million, from the year-ago $67 million.

One of the key metrics in judging an exploration and production companies' relative success is its reserve replacement -- the degree to which new discoveries exceed (or fall short of) production. On that basis, Hess's 167% reserved replacement for 2007 -- the figure generally is only calculated on an annual basis -- represented a real achievement.

Hess, which admittedly concentrates its spending on the exploration and production side of its business, is involved in a host of countries, from the U.S. to the U.K. and on to Equatorial Guinea, Azerbaijan, Thailand, and Indonesia. The company also operates 1,371 retail facilities from New England to Florida, along with having a half interest in a large refinery in the United States Virgin Islands.

And then Murphy
In some respects, Murphy's quarter was a mirror image of Hess'. For instance, the company earned $206.1 million, or $1.07 per share, 133% higher on the net income line than the $88.4 million, or $0.47 a share in the same quarter a year earlier. The 2007 quarter was hit by those inevitable one-time items that reduced its profit by $40.1 million, or $0.21 a share.

On the upstream side, Murphy's efforts generated a 194% improvement in the sector's contribution to earnings. Prices for crude oil and liquids were about 65% higher in the quarter, while the average natural gas price rose about 8.3% and the company managed to squeeze higher daily production on both the oil and gas sides.

Murphy is active in exploration and production in the Gulf of Mexico, and it also operates in Alaska, Newfoundland, the U.K., Ecuador, Malaysia, and the Democratic Republic of Congo. Like Hess, it also serves as a refiner.

Conclusions
At this juncture, we can draw two key conclusions from Hess and Murphy's results:

  • While the companies both operate refining units, their results tend to be more responsive to commodities prices than those of the majors, such as ExxonMobil (NYSE: XOM  ) , ConocoPhillips (NYSE: COP  ) , Chevron (NYSE: CVX  ) , and BP (NYSE: BP  ) . That phenomenon can be good or bad, depending upon the direction of oil and gas prices.
  • Shares of both companies have moved decidedly higher during the past year: Murphy is up more than 40%, and Hess has risen more than 60%. On that basis, most of the crude price effects appear to be "in the stocks." My inclination, therefore, is to advise Fools to await a pullback before launching or adding to positions in either company.

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