Hess Corp. (NYSE: HES) plans to sell its 90% stake in Samara-Nafta, the Russian subsidiary which produces about 49,000 barrels of oil equivalent (BOE) per day from the Volga-Urals region.
A brief statement from Hess gave no reason behind the proposed sale or when it might occur. The stake in Samara Nafta, could net Hess between $1.25 and $1.5 billion, according to a study from Global Hunter Securities.
Russia accounts for 7% of Hess’ total reserves at yearend 2011, or 110 million BOE, a majority of which is oil. The new wells drilled in the first half of 2012 in Russia will be sold in a competitive bid process.
Global Hunter Securities has reduced its expected outlook for 2012 growth in production based on a more conservative outlook in the Bakken, but maintains Hess as a buy. Its target price for Hess shares remains unchanged at $65, which implies a 3.6 multiple for enterprise value to Ebitda (earnings before interest, taxes, depreciation and amortization). Its current price is just above $50 per share.
The sale will mean that Hess’s production will fall, but global Hunter said they were low margin production. Russian crude captured only 40% to 50% of the value of Brent crude, according to Global Hunter Securities. Annual capital expenditures for Russia have been around $250 million per year, higher than the average for the company as a whole.
Global Hunter said it recent deals in Russia value Samara-Nafta’s assets as much as $1.5 billion, based on the region’s daily production, although political factors could pull that valuation down. “The current Russian political climate and the fact that Hess needs the sale may pressure offers down, but we expect over $1.2 billion is reasonable. As for potential buyers, we believe that western majors may be reluctant to move into Russia given low margins and political issues,” the report stated.
Rosneft may be a potential buyer, Global Hunter stated. “Rosneft's laying out $55B for TNK-BP shows the Russian giant has an appetite for growth; another $1B-$1.5B to boost its control over domestic Russian production may not be too daunting,” according to the report.
Hess has retained Goldman Sachs to advise it about the potential sale.
In addition to the sale of its Russian assets, Hess is looking to sell production in the Eagle Ford. The sale of those assets has prompted Global Hunter Securities has reduced Hess’ projected production by an additional 4,000 BOE per day. That sale is expected to occur by the middle of 2013, and could net the company $650 million, Global Hunter reported.
Total production for the company is expected to fall 4.8% given the two expected asset sales. “Given the low margins in Russia, this is still a welcome development,” the report stated.
Both sales are expected to be accretive as Hess sees little value for either, Global Hunter reported.
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