Hess to Restructure, Calls Elliott Proposal ‘Seriously Flawed’

Hess to Restructure, Calls Elliott Proposal ‘Seriously Flawed’
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In a press release and public letter to shareholders, Hess Corp. (NYSE:HES) announced a series of additional restructuring and capital allocation steps including: (1) plans to divest E&P assets in Indonesia and Thailand; (2) pursuing monetization of Bakken midstream assets, expected in 2015; (3) fully exiting downstream businesses, including retail, energy marketing, and energy trading; (4) raising its dividend to $1/share from $0.40/share; (5) repurchasing $4 billion of stock; and (6) naming six new directors to its board, replacing six departing directors. Management also responded to a proposal from Paul Singer’s Elliott Management describing it as “seriously flawed”.

Hess to Restructure, Calls Elliott Proposal 'Seriously Flawed'

Hess Corp. (NYSE:HES) plans for fairly large-scale changes to its portfolio as it looks to divest its Indonesia and Thailand E&P portfolio (while retaining its JDA and North Malay Basin assets), pursue a monetization of its Bakken midstream assets in 2015, and fully exit its downstream businesses. Based off of proforma 2012 production of 289 kboepd, Hess expects a 5-8% production CAGR in 2012-2017E.

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Additionally, Hess plans to boost its cash returns to shareholders via an increase to its annual dividend of 150%, to $1.00/share, in 3Q13E and a $4 bn buyback program, representing ~18% of the Hess’ current market cap, tied to the timing of expected asset sales. The company also announced the expected departure of six members of its Board of Directors while also putting forth six new independent nominees.

Although this addresses Elliott Associates’ prior concern over the lack of independence at HES’s Board, there is no overlap between the slate of candidates proposed by Hess Corp. (NYSE:HES) with that of Elliott’s.

The move to fully exit the downstream business was somewhat anticipated by investors, today’s E&P related announcements appear to be a more subtle way (relative to Elliott’s recent proposal) of restructuring the current Hess E&P portfolio as the company retains a mix of the cash-generating businesses and the high-growth assets in the portfolio.

Analysts from BAML note that “While Elliott will no doubt claim victory over proposed changes to the board, their role has been key to waking the market up to the underlying value embedded in the stock. Initial reaction is likely positive but the value proposition is now confirmed in our view.”

The news that it is looking to divest its retail marketing business and streamline its Asia E&P operations, in particular, is consistent with steps many have thought would be strategically sound. While Hess continues to indicate it will maintain a global E&P strategy (rather than focus solely on US “shale”),

The company plans to boost its annual dividend by 150% to $1.00/share in 3Q13E; at current share prices, the implied dividend yield is ~1.5%. Hess Corp. (NYSE:HES) also announced a share repurchase program of $4 bn (~18% of market cap), with the pace of activity tied to the timing of asset sales.

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