What has changed, that we should be taking a closer look at HME?
Over the years, HME has not focused on production growth, but rather on capital returns. Therefore, weak oil prices and volatile volume output could make the company’s growth prospects seem less interesting than other oil names. With that said, HME’s asset base is attractive and low-cost, which is expected to produce cash flow for many years, while management is committed to capital returns through various forms (special dividends, dividend increases, and buybacks). In other words, it is an oil cash cow with relatively low risk and is debt-free. For years, management has believed HME’s assets could potentially attract a strategic buyer at a much higher valuation than where the company has been trading. In addition, it is quite small and under-the-radar for most investors, which may lead to a multiple re-rate if oil prices continue to remain strong for the foreseeable future.
It is not that we do not like HME; we have simply preferred other growth-oriented names relatively. Within a basket of individual oil names, we think HME balances quite well with other higher-growth oil names.