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We reaffirmed our Neutral recommendation on Hess Corporation (HES - Analyst Report) on Dec 4, 2013. We appreciate Hess’ emphasis on creating shareholder value through operational excellence, strong project execution and dividend payout. However, the company’s growth and returns remain highly dependent on major asset sales. Hess carries a Zacks Rank #3 (Hold).

Why Maintained?

Hess is executing a transition from an integrated oil and gas company to a predominantly E&P entity, thereby shifting its growth approach from high-impact exploration to lower-risk unconventionals and a smaller, deeper focused exploration portfolio.

The company announced the closure of its Port Reading, New Jersey refinery, which marked its complete exit from the refining business. Hess also aims to shed assets in Indonesia and Thailand as well as its terminals, retail, energy marketing and trading businesses. The company also announced a share repurchase plan of up to $4 billion and a boost in its annual dividend to $1 a share starting third quarter that has more than doubled its quarterly dividend. In view of the global economic slowdown and new refining capacity entering the world market, these aforesaid decisions will help boost Hess’ shareholder value.

In an attempt to better manage its portfolio with respect to resource availability, project development and intricacy, Hess intends to arrive at a 50:50 ratio between unconventional and conventional assets by 2013 from its existing ratio of 80:20. The new lease in the Bakken and augmentation of Utica acreage are in sync with its new strategy. For 2013, Hess expects pro forma production of 340–355 MBoe/d compared to 289 MBoe/d in 2012. A five-year compounded annual growth rate of 5–8% is expected to be achieved through 2017, driven by the company’s lower risk assets.

Hess’ smaller exposures to the Eagle Ford and Utica shales as well as several global development projects (such as Ghana, Brunei, North Sea, Gulf of Mexico, Southeast Asia and Kurdistan) are likely to be the growth drivers beyond 2013.

Although there is significant resource potential from new discoveries, the E&P business is inherently risky, often with an equal share of successes and failures. While future projects have the potential to add value to the share price, we do not expect the risk/reward trade-off to favor the company.

Stocks That Warrant a Look

While we expect Hess to perform in line with its peers and industry levels in the coming months and advise investors to wait for a better entry point before accumulating shares, one can look at Zacks Ranked #2 (Buy) stocks – Helmerich & Payne Inc. (HP - Analyst Report), Enbridge Energy Management LLC (EEQ - Snapshot Report) and Matador Resources Company (MTDR - Snapshot Report), as good buying opportunities for the short term.

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