1 Well-Priced Energy Stock Unaffected by the Libyan Revolution

With a geographically diverse pile of oil and gas reserves, New York-based Hess Corp. (NYSE: HES  ) is standing tall right now. Perhaps that's why Hess is unfazed these days as a number of its peers grow increasingly uncomfortable with the prospect of severe production cutbacks in Libya.

Story so far
Past performance for the company has been generally solid. However, what's worth noticing this year is a rise in the company's EBITDA margin. At 19.6%, it is at its highest in five years.

Operating income, or EBIT, has seen compounded annual growth of 10% over the past five years. This figure is quite impressive compared to that of peers Occidental Petroleum (NYSE: OXY  ) at 3.5% and Marathon Oil (NYSE: MRO  ) at 0.9%. Investors should want to see a growth in operating income since it's a major driving factor of stock prices.

In fact, the five-year total shareholder return on the company's common stock, assuming reinvestment of dividends, stands at 87%. That's not bad compared with the S&P 500 index, which has returned a lousy 12%, and the AMEX Oil Index with 41% during the corresponding period.

The ace up the sleeve
I'm particularly impressed by the geographical diversity of the company's reserves. With major chunks of proven reserves spread across the U.S., Norway, Russia, Libya, the United Kingdom, Equatorial Guinea, Malaysia, Indonesia, and Thailand, Hess looks truly global and might thus be fairly insulated from national and regional disruption thanks to heavy ongoing pressure in the Middle East.

By not concentrating on any particular region, Hess has been able to hedge itself against geopolitical disturbances remarkably well. In the first quarter of this year, Libyan production averaged 14,000 barrels of oil equivalent per day (Boe/d) -- a fall from 23,000 Boe/d in 2010. This drop in production is a relatively insignificant 2% when compared to total production, which averaged 418,000 Boe/d last year.

What's there for investors?
It's important to get a feel for the relative value of the stock right now. Present value of future net cash flows (in terms of the company's oil reserves), at the end of 2010, stands at $15.7 billion, using standardized measures of discounting at 10% per annum. This 38% increase from the previous year's value is mainly because of acquisitions and higher price realization for future production.

Price-to-tangible book value stands at 2.0, while for Occidental it stands at 2.61 and for Marathon it is at 1.69. Hess' return on equity stands at a healthy 15.8%, while Marathon's stands at 13.2% and Occidental's is at 15.5%. However, a word of caution here -- the ratio has fallen over the past five years. Yet the improvement in ROE over the past couple of years makes me optimistic about the company's future prospects.

Foolish bottom line
Hess has the ability to grow further in the long run. The recent acquisitions and investment of $1.8 billion in the Bakken shale reserves underline management's desire to exploit well-known reserves. It's also worth mentioning that following acquisitions in 2010, Norway currently accounts for 22% of the company's total reserves and 30% of its proven undeveloped Norwegian reserves look exciting for future growth.

In general, this stock is not a screaming bargain, but it's also not overpriced. If you believe this company is well-run and if you believe that oil prices will be higher in five years than they are today, Hess is likely to perform well and is doubly likely to beat the market in doing so. It's definitely not a bad bet.

Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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