Hess Adds Bakken Acreages - Analyst Blog

Hess Corporation (HES), an integrated oil company engaged in oil and gas exploration, production (E&P), has gained acreage position in the Bakken oil play by completing its acquisition of American Oil & Gas Inc. (AEZ) in an all-stock deal worth about $445 million.

The company had announced this acquisition in July and said it would issue 0.1373 shares of its common stock in exchange for each outstanding share of American Oil & Gas' common stock. The transaction will add 85,000 acres to Hess' kitty.

Management is optimistic about the company's growing acreage in the Bakken play. Hess plans to achieve a production target of 20,000 barrels of oil per day by the end of 2010. Recently, Hess acquired 167,000 net acres in Bakken from TRZ Energy LLC for $1.05 billion.

We have a positive outlook on the company's production growth strategy following management's confidence in the Bakken Shale and drilling successes, particularly in Australia and Libya.

We continue to see an upstream momentum on the back of Hess' large line-up of E&P projects. The company's improving fundamentals, commodity price leverage and exposure to areas with high resource potential have improved its prospects.

A ramp-up in activities at Bakken, Eagle Ford, and Marcellus, in the U.S. and the Paris Basin in France, accompanied by a rich portfolio of offshore drilling opportunities in the Gulf of Mexico, Brazil, West Africa and Egypt, will strengthen the company's future production growth and drive its earnings, cash flow and valuation.

However, our sustained Neutral recommendation with the Zacks #3 Rank (Hold) reflects valuation concerns. Historically, HES shares have traded at a discount to its peers based on earnings and cash flow multiples, reflecting the company's track record of underperformance in terms of upstream growth, costs, commodity-price leverage and balance sheet strength.