Shares of Hess slipped Wednesday afternoon after a UBS Investment Research analyst downgraded the oil and gas producer, saying investors have been too enthusiastic about the company's stake in an oil prospect offshore Brazil.
The integrated oil company's shares fell $2.96, or 2.9 percent, to $97.90 after William Featherston lowered his rating to "Neutral" from "Buy", saying its stock is overvalued. Its shares rose $34.33, or 51.6 percent, over the calendar fourth quarter to close at $100.86 on Monday. By comparison, the Amex Oil and Natural Gas Index rose 9.3 percent over the same period.
Featherston said investors have too much faith in Hess' potential gains from exploration of reserves at the Sugar Loaf area in Brazil. Hess and other companies own a stake in Sugar Loaf, which is part of the Santos Basin.
Brazil's national oil company, Petroleo Brasileiro, said in late December that as much as 8 billion barrels of light crude could lie in the Tupi Field, which is also in the Santos Basin. While that announcement may have buoyed investors' expectations for Hess' Santos assets, Featherston noted that its test results for the prospect won't be available until mid-2009 and assessing the size of reserves may take additional years.
Hess' share price reflects "attractive growth" from existing discoveries as well as half the potential value of Sugar Loaf, Featherston said.
Citigroup analyst Doug Leggate estimated in a Dec. 21 note that Hess "could reasonably be sitting on something north of 2 billion barrels of oil equivalent of net reserves" at Sugar Loaf. He noted that Hess' proved reserves at the end of 2006 stood at 1.2 billion barrels.
But, he added, "it is simply too early to suggest how big Sugar Loaf may be."