Hess Corporation

Elliott Associates, the hedge fund, managed by Paul Singer acquired a 4 percent stake in Hess Corp. (NYSE:HES) and became the largest independent shareholder in the company.

Yesterday, the hedge fund announced its intention to purchase more than $800 million shares of Hess Corp after the energy company revealed its plan to sell is oil storage terminal network and exit its refining business to redeploy additional capital to fund its future growth opportunities.

After purchasing its 4 percent stake in the energy company, Elliott Associates sent a letter to its fellow shareholders encouraging them to support its five nominees to serve as independent  directors to the board of Hess Corp. (NYSE:HES) during the 2013 annual meeting of the company.

In its letter to shareholders, Elliott Associates wrote, “After extensive study and analysis, we are convinced that tremendous value is trapped inside the company as a result of poor oversight by a board of directors lacking both the experience and independence to set a clear, shareholder-focused, value creating strategy.”

According to the activist hedge fund, its nominees for the board of directors have substantial experience, and they were selected specially because of their capability to potentially unlock the enormous potential of Hess Corp.

In addition, Elliott Associates requested the company conduct a full strategic and operational review to consider all options to maximize shareholder value including the potential divestiture of its Bakken assets to refocus its portfolio, improve operations and accountability, as well as better allocation of capital.

Elliott Associates also emphasized that its initial equity investment in the energy company is the largest in the hedge fund’s history, which reflects its confidence that Hess Corp. (NYSE:HES) has a tremendous value with proper oversight and guidance from shareholder nominees.

Furthermore, Elliott Associates pointed out that Hess has deeper problem that needs to be resolved instead of restructuring a minor business and it needs new directors to implement real change. The hedge fund stated, “By seeking to restructure a minor business rather than address the larger problem, Hess is highlighting its inability, on its own, to fix a 17-year history of unrelenting underperformance.”

The hedge fund believed that the stock price of Hess Corp should be more than $126 per share, a 150% increase. Elliott Associates estimated that the company’s market  should be approximately $26 billion.

Along with the disclosure of the Elliott position in the company’s stock yesterday, Hess management initiated the sale of its refined products terminal network in the U.S. and the Caribbean. The company stated that it expects to recover approximately $1b of working capital through these initiatives, but did not provide an estimate of the value of the terminals. While making a valuation estimate is difficult, given the lack of financial transparency for those assets, many analysts believe the terminal assets will receive a high degree of interest from MLPs and others.

Analysts at Bank of America Merrill Lynch (BAML) note that given the strategic and financial uncertainty introduced by the actions of Elliott, they believe that it is hard to value the company’s bonds at this point, but  will work through a scenario analysis in coming days. It is also worth noting that Hess’ existing bonds have minimal covenant protections, with a typical IG package including limits on secured debt, sale leaseback and mergers/ asset sales.

Analysts at Credit Suisse  believe that the increased upstream focus should improve organic operational performance. However, (1) internationally, HES does not have enough acreage for critical mass in the emerging hotspots (nor historically the exploration track record) and hence “International Remainco” may trade on a low multiple (2) while the Bakken has value and pure plays like CLR have an equity bid, other US liquid shale plays are more efficient. (3) the acreage grab in North America is in its 7th innings, reducing longer term reserve replacement opportunities for a smaller US pure play other than via M&A. (4) NAV maths works on paper but many large cap E&P’s trade at a discount to NAV (e.g. APC, MRO).

The shares of Hess Corp. (NYSE:HES) increased by nearly 9 percent to $67.85 a share as of this writing.