As we’ve highlighted before, the integrated oil majors are truly in a league of their own. The group is responsible for the bulk of the world’s energy production and includes some of the largest and most profitable corporations on the planet. Their sheer scale and global reach makes them ideal investments in the sector, especially as we continue to crave more and more energy. Still, that doesn’t mean there aren’t plenty of other successful energy firms in the sea.
Some of the most exciting opportunities for investors actually lie with some of the slightly smaller independent oil and natural gas producers. Like their major brethren, many of these firms feature just the right combination of exploration & production assets, midstream operations and some downstream marketing or refining capabilities to make them immensely profitable.
At the same time, the bulk of their revenues stem from production at the wellhead, which is key as it makes the independents highly sensitive to long-term rising oil and natural gas prices. Plus, their size does offer some advantages as well. Like Goldilocks, these slightly smaller firms are just the right size to be attractive buy-out targets for the majors or other state-owned oil companies, and to also have plenty of room for growth if those buy-outs never occur.
Overall, looking beyond the majors could provide some of the best long term ways to play our growing energy needs. Take a look at these three E&P buys that are outside of the majors:
While most of us think of those collectible toy trucks from our youth when we think of Hess (NYSE:HES), the firm is a actually a globally integrated machine with a hand in exploration, transportation and refinery assets. Like its larger integrated sisters, Hess is benefiting from several broad trends affecting the energy industry.
First, the company is tied mostly to oil production, which represents roughly two-thirds of its energy mix. That’s important given how depressed natural gas prices have been lately. Plus, a huge area for growth within those oil assets has been Hess’s exposure to the shale-oil rich Bakken field in North Dakota. Hess operates on more than 800,000 acres in the region and plans to operate an average of 16 rigs here throughout 2012.
The company’s goal is to ramp up production to reach 120,000 BOE per day from its properties by 2015 and recently began shipping roughly 50,000 barrels a day of Bakken crude oil by rail during the second quarter. Likewise, the firm’s robust holdings across the Eagle Ford Shale and the Utica Shale will contribute to its growth long term.
Hess also seems to be smartly divesting assets — such as its 2.72% interest in the Chirag, Azeri, and Guneshli Fields in Azerbaijan — and plowing those profits back into high-impact exploration areas will continue to lift its earnings, cash flow and stock valuation.
Speaking of valuation, Hess currently can be yours for a forward P/E for around 8.5 — cheaper than its much larger integrated rivals. Exxon Mobil (NYSE:XOM) is currently trading for a forward P/E of more than 11, for example. All in all, for investors looking for a cheap integrated play with growth potential, Hess can fit the bill.