Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Hess fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Hess's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Hess' key statistics:


HES Total Return Price Chart

HES Total Return Price data by YCharts

Passing Criteria

Three-Year* Change

Grade

Revenue growth > 30%

0.5%

Fail

Improving profit margin

105.2%

Pass

Free cash flow growth > Net income growth

(902%) vs. 106.1%

Fail

Improving EPS

96.3%

Pass

Stock growth + 15% < EPS growth

17.3% vs. 96.3%

Pass

Source: YCharts. * Period begins at end of Q1 2010.

HES Return on Equity Chart

HES Return on Equity data by YCharts

Passing Criteria

Three-Year* Change

Grade

Improving return on equity

28.6%

Pass

Declining debt to equity

5.2%

Fail

Dividend growth > 25%

0%

Fail

Free cash flow payout ratio < 50%

Negative FCF

Fail

Source: YCharts. * Period begins at end of Q1 2010.

How we got here and where we're going
Hess doesn't quite put together a sparkling performance, as it's only mustered four out of nine passing grades. A big source of that weakness is the company's falling free cash flow, which has tumbled far into negative territory, and which may not be able to support its current dividend payouts if the trend continues. Will Hess be able to turn it around and rebound? Let's dig a little deeper to find out.

In the first quarter, Hess' Bakken Shale holdings posted a total production of 65,000 barrels of oil equivalent per day (boe/d), up 55% year over year. The company has recently completed the drilling of 30 wells, and plans to drill another 175 wells by the end of this year. It is expected that production may increase from 65,000 boe/d to 70,000 boe/d this year.

Hess continues its transition into a pure-play exploration and production company, and the plans to unload its terminal network in the U.S. continue apace. The company expects to earn about a billion dollars for its 19-terminal network along the East Coast, which includes about 28 million barrels of storage capacity. There are a lot of companies coming forward as potential purchasers of these assets, including Marathon Petroleum, Sunoco Logistics, and Buckeye Partners. In addition to this, Hess also owns interests in two terminals in the Caribbean worth another 24 million barrels of storage capacity. Hess moves about 700,000 barrels of crude oil and refined products through this system every day.

Hess has also announced a share repurchase program, which will commence in the second half of this year. The company has agreed to sell part of its business in the Eagle Ford Shale for $265 million, and its Russian subsidiary, Samara-Nafta, for $2.05 billion. These and other sales (totaling over $7 billion) will contribute $2.5 billion to repay short-term debt and $4 billion for the share repurchase program. The rest of the proceeds will be utilized for reducing debt, improving the balance sheet, increasing liquidity, and accelerating dividends. This asset sell-off program will continue through the end of next year. That might be good for shorter-term shareholders, but it doesn't necessarily provide a long-term business benefit for the cash-flow negative company. Hopefully a consolidation of assets and a tapering off of drilling programs will push Hess' numbers back to positive ground.

Putting the pieces together
Today, Hess has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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The article Is Hess Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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