Hess Corporation (HES) in New York City operates as an exploration and production company that explores, develops, produces, purchases, and sells crude oil, natural gas, and natural gas liquids (NGLs). The company operates through the two broad segments of Exploration and Production; and Midstream. In comparison, Houston, Tex.,-based Marathon Oil Corporation (MRO) is an independent exploration and production company that explores for and produces crude oil and condensate, NGL, and natural gas.
President Biden on Tuesday announced an import ban on Russian oil, gas, and energy into the United States. The ban is intended to punish Russia’s economy for the country’s invasion of Ukraine. Oil prices jumped to new highs on this news. WTI crude ended the session 3.6% higher at $123.70 per barrel, while Brent Crude stood 4.3% higher at $123.21 per barrel, having earlier reached $132.75 per barrel. Goldman Sachs Group Inc. (GS) has increased its 2022 forecast for the Brent spot price to $135 per barrel from $98 per barrel because the world is on the verge of facing the “largest energy supply shocks ever” with Russian crude struggling to make it to the market.
Both HES and MRO are well-known players in the oil and gas industry and are expected to gain substantially from the surging oil prices. MRO stock has gained 94.6% in price over the past year, while HES has gained 31% over the same period. MRO gained 46.7% year-to-date, while HES gained 30.5%. And over the past five days, MRO has gained 4%, while HES declined 5%.
But which stock is a better buy now? Let’s find out.
Latest Developments
On January 26, MRO announced a quarterly dividend of 7 cents per share on its common stock, payable to shareholders on March 10. This reflects the company’s ability to return significant amounts of cash to its shareholders. And it marks the company’s fourth consecutive dividend increase in its quarterly base dividend.
On February 11, HES announced the startup of production in the Liza Phase 2 development on the Stabroek Block offshore Guyana by utilizing the Liza Unity floating production, storage, and offloading (FPSO) vessel. The production from the Liza Unity is expected to reach 220,000 gross barrels of oil per day later this year.
Recent Financial Results
For the fiscal fourth quarter, ended December 31, MRO’s total revenues and other income increased 116.9% year-over-year to $1.80 billion. Its income from operations rose 395.6% from the prior-year quarter to $739 million. Its adjusted net income and adjusted net income per share came in at $592 million and $0.77, respectively, up 704.1% and 741.7% from the same period the prior year.
HES’ total revenues and non-operating income increased 59.1% year-over-year to $2.26 billion in the fiscal fourth quarter ended December 31. Its adjusted net income attributable came in at $265 million, up 250.6% from the prior-year quarter, while its adjusted net income per share improved 246.6% from the prior-year period to $0.85.
Past and Expected Financial Performance
MRO’s revenue has grown at an 11.9% CAGR over the past five years. Analysts expect its EPS to increase 233.3% for the quarter ending March 2022, 236.4% for the quarter ending June 2022, and 70.7% for the fiscal year 2022. The company’s revenue is expected to increase 48.1%, 39.6%, and 12.4%, respectively, over the same period.
HES’ revenue has grown at a 9.4% CAGR over the past five years. However, the Street expects its EPS to decline 22% in the quarter ending March 31, 2022, but to increase 445.8% and 146.1% for the quarter ending June 2022 and fiscal 2022, respectively. The company’s revenue is expected to decline 11.8% for the quarter ending March 31, 2022 and increase 9.2% for its fiscal year 2022.
Profitability
MRO is more profitable with gross profit, EBITDA , and net income margins of 77.55%, 58.92%, and 16.84%, respectively, compared to HES’ 72.14%, 49.79%, and 7.66%. And MRO’s levered FCF margin of 31.79% compares to HES’ 20.77%.
MRO’s 8.90%, 4.12%, and 4.65% respective ROE, ROA, and ROTC compare with HES’ 13.32%, 6.63%, and 8.26%.
Therefore, MRO is more profitable here.
Valuation
In terms of its forward P/E, HES is currently trading at 19.23x, which is 102.8% higher than MRO’s 9.48x. And HES’ 8.19 forward EV/EBITDA multiple is 65.5% higher than MRO’s 4.95.
Thus, MRO is relatively affordable here.
POWR Ratings
MRO has an overall B rating, which equates to Buy in our proprietary POWR Rating system. In comparison, HES has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
MRO has a B grade for Sentiment, which is consistent with favorable analyst expectations regarding its revenue and EPS. In contrast, HES has a Sentiment grade of C, which is in sync with its mixed consensus EPS and revenue estimates.
Both MRO and HES have a Momentum grade of A. This is justified because both stocks are trading above their 50-day and 200-day Moving Averages.
In the 86-stock Energy – Oil & Gas industry, MRO is ranked #16, while HES is ranked #76. The industry is rated B.
Beyond what we have stated above, we have also rated the stocks for Growth, Momentum, Stability, and Quality. Click here to see the additional POWR Ratings for MRO. To see the additional POWR Ratings for HES, click here.
Winner
Given the rapid surge in oil prices in recent times on the back of the Russia-Ukraine geopolitical crisis and the ban of oil imports from Russia by the United States, both HES and MRO might benefit. However, considering MRO’s higher profit margins and stable growth prospects compared to HES, we think MRO could be the better buy here.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Energy – Oil & Gas industry here.
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HES shares were trading at $95.51 per share on Wednesday afternoon, down $1.11 (-1.15%). Year-to-date, HES has gained 29.02%, versus a -10.11% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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