Top Five Large-Cap Stocks: Hess, Apache

Hess, Noble Corp., Apache, Questar and Diamond Offshore are all on top.
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Each business day, TheStreet.com Ratings compiles a list of the top five stocks in five categories -- fast-growth, all-around value, large-cap, mid-cap and small-cap -- and publishes these lists in the Ratings section of our Web site.

This list is based on data from the close of the previous trading session. Today, large-cap stocks are in the spotlight. These are stocks of companies with market capitalizations of over $10 billion that rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 62 factors. In addition, the stocks must be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. The stocks are ordered by their potential to appreciate.

Note that no provision is made for off-balance-sheet assets such as unrealized appreciation/depreciation of investments, market value of real estate or contingent liabilities that might affect book value. This could be material for some companies with large underfunded pension plans.

Hess

(HES) - Get Report

is a global independent energy company that explores for, produces, purchases, transports and sells crude oil and natural gas. The company conducts exploration and production in the U.S., the U.K., Norway, Denmark, Equatorial Guinea, Gabon, Azerbaijan, Thailand and Indonesia. The company also manufactures, purchases, trades and markets refined petroleum and other energy products. Hess operates approximately 1,250 retail facilities in the eastern U.S., along with a convenience store network.

We have rated Hess a buy since August 2004 due to a variety of strengths. Propelled by price increases for natural gas, natural gas liquids and oil, total revenue and non-operating income for the first quarter of fiscal 2008 rose 45% year over year. An increase in average daily production of natural gas and crude oil also contributed to the improvement. Hess also announced that its first-quarter income surged to $759 million from $370 million a year ago, again due to higher crude oil prices and increased production. Additionally, net operating income increased significantly in the first quarter, rising 84% from the year-ago period.

While oil prices are currently trading at record levels, these prices are also highly volatile and cyclical in nature. Because Hess generates a significant portion of its income from the production of oil and gas, any significant unexpected downturn in oil prices could negatively impact earnings. Such a downturn could occur if high oil prices generate higher demand for low-cost alternatives or if the slowdown in the U.S. economy and weakness in the U.S. labor market put further pressure on the demand for oil and gas products.

Noble Corp.

(NE) - Get Report

is an offshore drilling contractor for the oil and gas industry. It provides contract drilling services using a fleet of 62 mobile offshore drilling units. These units are deployed in key markets worldwide, including the Middle East, Mexico, the North Sea, the Gulf of Mexico, Brazil, West Africa and India. The company also provides labor contract drilling services, well site and project management services, engineering services, and value-added drilling related products and services. Noble strives to expand international and offshore deepwater capabilities through acquisitions, rig upgrades and modifications, as well as redeploying assets in important geographical areas.

Our buy rating for Noble has not changed since June 2004. Revenue surged 33% year over year to $861.4 million in the first quarter of fiscal 2008. Record-high energy prices and a strong demand for the company's offshore drilling fleet drove earnings up 54% year over year to $384.2 million, or $1.43 a share. During the quarter, the company secured commitments on eight deepwater rigs for multiyear terms commencing as late as fiscal 2010, and had about 83% of its total rig operating days committed for fiscal 2008 as of March 31. Additionally, about 50% of its total rig operating days were already committed for fiscal 2009.

Management feels that Noble continues to deliver excellent results, as demonstrated by a fifth consecutive quarter of record earnings. Bear in mind, however, that Noble's performance is dependent on the number of rigs operational in the market, which is in turn determined by the quantum of drilling activities. These activities are cyclical in nature. Additionally, lower demand for energy products caused by weakness in the U.S. economy could ultimately impact drilling-related activities.

Apache

(APA) - Get Report

is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. The company has interests in Argentina, Australia, Canada, Egypt, the U.K. and the U.S. Apache is also beginning exploration activities in Chile.

The stock has been rated a buy since January 2003 due to such strengths as revenue and net-income growth, solid stock-price performance and an impressive record of EPS improvement. Management reported strong financial results for the first quarter of fiscal 2008, with revenue increasing 57% year over year and net income doubling to $1.02 billion. Earnings per share climbed to $3.03 from $1.47 a year ago. The company's strong earnings growth helped drive Apache's stock price, which is already up by 81% in the past year. Despite this nice gain, we feel that the stock should continue to move higher. Finally, the company recently declared a dividend of 15 cents per share, payable on Aug. 22.

Looking ahead, management expects production to accelerate in the second half of fiscal 2008. It expects the increased activity to occur in the U.S., Argentina and Canada. The company also forecasts long-term production growth to be fueled by the first quarter's exploration successes and the new wells that are planned for drilling in 2008. However, Apache's future performance also depends on its ability to achieve positive results from previous acquisitions. Additionally, the company currently faces challenges from its increasing debt levels and comparatively low shareholder returns.

Questar

(STR)

is a natural gas-focused energy company. The company has four major lines of business: gas and oil exploration and production, midstream field services, interstate gas transportation and retail gas distribution. These businesses are conducted through three main subsidiaries: Questar Market Resources, Questar Pipeline Company and Questar Gas Company. The company operates in the Rocky Mountain and Midcontinent regions of the U.S. These regions include parts of Wyoming, Utah, Colorado, Oklahoma, Texas and Louisiana.

We have rated Questar a buy since October 2002. Strengths such as revenue growth and improvement in earnings have contributed to this rating. For the first quarter of fiscal 2008, Questar reported a 23% surge in net earnings, boosted by higher natural gas and oil production. Increased prices also contributed to the rise. Net income rose to $185.8 million, or $1.05 per share, from $151.1 million, or 86 cents a share, in the first quarter of fiscal 2007. Total revenue grew 20% to $1.05 billion, compared with $872.1 million a year ago. Additionally, Questar Exploration and Production Company, a subsidiary of Questar Market Resources, completed the purchase of two producing properties in northwest Louisiana during the first quarter.

Looking ahead to the rest of fiscal 2008, Questar increased its EPS forecast to a range of $3.25 to $3.40 a share from previous guidance of $3.05 to $3.20 a share. The company also raised its production forecasts for the full year. However, any significant decline in natural gas and oil prices could affect the company's business severely, as could any unfavorable regulatory actions.

Diamond Offshore

(DO) - Get Report

engages in the contract drilling of oil and gas wells. The company's fleet of 30 submersibles enables it to offer a range of services in markets worldwide, including the deep water, harsh environment, and conventional semisubmersible markets. Diamond also owns 13 jack-up rigs, which are mobile, self-elevating drilling platforms equipped with legs that are lowered to the ocean floor until a foundation can be built to support the platform.

We have rated Diamond a buy since June 2005. Boosted by its Contract Drilling segment, Diamond's revenue surged 29% year over year to $666.7 million for the first quarter. Earnings rose 30%, fueled by a rise in daily rates for the company's deepwater rigs. Net income for the quarter increased to $290.6 million, or $2.09 a share, from $224.2 million, or $1.64 a share, in the year-ago quarter. In keeping with its policy of considering the payment of special cash dividends on a quarterly basis, the Board of Directors recently declared a special cash dividend of $1.25 per share of common stock in addition to a regular cash dividend of $0.125 per share of common stock. Both dividends are payable in June 2008. Finally, Diamond's debt-to-equity ratio is very low at 0.17, implying successful management of debt levels.

While lower than a year ago, Diamond's gross profit margin remains high at 62%. However, the company's net profit margin of 37% significantly outperforms the industry. Furthermore, Diamond has demonstrated a pattern of positive EPS growth over the past two years, and we feel that this trend could continue. We feel that the slowdown in the U.S. economy and weak job data pose larger risks as they may put pressure on the demand for oil and gas. This could in turn disturb activities related to exploration and production, affecting the number of rigs that are operational in the market.

Our quantitative rating is based on a variety of historical fundamental and pricing data and represents our opinion of a stock's risk-adjusted performance relative to other stocks.

However, the rating does not incorporate all of the factors that can alter a stock's performance. For example, it doesn't always factor in recent corporate or industry events that could affect the stock price, nor does it include recent technology developments and competitive dynamics that may affect the company.

For those reasons, we believe a rating alone cannot tell the whole story and should be part of an investor's overall research.

This article was written by a staff member of TheStreet.com Ratings.