Hess (HES) has announced plans to sell its terminal and refining business, and that triggered a big rally in the shares this morning. But more important is what this says about the oil majors, and what Hess' move says about where to find better values in the integrated space.
Hess has an enormous refining business with 20 storage terminals, including its Port Reading, N.J., refinery. On Monday the company said it's putting it all up for sale, having appointed Goldman Sachs (GS) as its agent for these transactions -- and the Street likes it. Shares climbed 6.5% in opening trading, continuing a big run that began in early December that, in all, has launched shares by more than 22%. Elliot Associates, the hedge fund of super investor Paul Singer, sent a letter to the Hess board announcing that he'd like to purchase a further $800 million worth of shares.
Still, all of this isn't a call for investing in Hess right now. No, what's made the difference is the plan that Hess is executing. Other oil companies are using the same strategy, but they still haven't run as far and as fast as Hess has done -- and they represent better values.
The trend in big integrated oil is splitting out the downstream businesses. That's despite the fact that refining performed better in 2012 than it has in years, and is poised to do similarly well in 2013. ConocoPhillips (COP) dropped its refining business into Phillips 66 (PSX), as did Marathon (MRO) into Marathon Petroleum (MPC). Both spinoffs have enjoyed fantastic share run-ups.
But the parent companies don't seem to care. They've been happy to see their progeny do well, just as long as they've been able to free up capital in order to continue investing in new growth prospects for volume in crude oil. These companies are well aware of the fickle nature of the refining business -- it tends to cycle between good and bad periods -- but they are convinced of the always-solid profits to be gained from volume growth. They want, in short, to cease being integrated oil-and-gas companies and concentrate on becoming dedicated exploration-and-production companies.
This is a thesis I've come back to throughout 2012, and in 2013, and it's the key to investing in the space. You need to find the strongest volume growers with the strongest potential crude reserves -- and find those whose share prices haven't fully realized that volume growth. Hess is doing that in the Bakken, Eagle Ford and in Russia. But others have equally strong volume growth.
One that I've recommended in the past is Noble Energy (NBL), with its growing volumes in the Niobrara and Bakken. Anadarko (APC) and EOG Resources (EOG) also have strong growth profiles -- ones that I think can be met and sustained, yet haven't been fully realized by the Street.
The lesson from Hess is clear -- move from downstream fickle businesses and into upstream E&P. Those that execute that plan the best will be the best performers of 2013 -- and Noble, Anadarko and EOG represent three of the best I see.