Elliott Associates LP, a hedge fund that owns a 4% stake in Hess Corp., is urging other shareholders to elect its five nominees to the company's board of directors and has called on Hess to spin off its assets in the Bakken, Eagle Ford and Utica shale plays.
In a 12-page letter to shareholders on Tuesday, the hedge fund and its parent company, Elliott International Ltd., said Hess holds "tremendous value" but it believes the current board lacks experience and focus. Elliott also said the company's stock had languished during John Hess' 17-year tenure as CEO.
"This underperformance is all the more dramatic when considering that...Hess Corp.'s asset portfolio, unlike its peers', has minimal exposure to North American natural gas, the price of which has collapsed over the past four years," Elliott said, adding that Hess' legacy position in the Bakken, dating back to the 1950s, was a huge asset.
"In light of these advantages, even shareholder returns in line with peers (which Hess most certainly did not achieve) would still have constituted inexcusably poor performance. Underperformance of this magnitude...demands change in the boardroom."
Elliott's five nominees to the Hess board are:
"Leaders of this caliber would be a welcome addition to the board of any company," Elliott said. "To Hess, they bring substantial, relevant experience in areas where the company sorely lacks counsel and oversight."
Elliott said the root of the problems at the New York City-based major was that the company lacked focus, maintaining "a laundry list of downstream (and out of any stream) distractions." Hess was also spread too thin, operating in more than 20 countries, but with a fraction of the resources as other majors such as ExxonMobil Corp. and Chevron Corp.
"By definition, if Hess spreads itself as broad as a major with a fraction of the resources, it simply does not have the wherewithal to compete," Elliott said. "[A] lack of focus leads to poor capital allocation decisions and poor execution. Hess abounds with examples of both."
Elliott said it had hired the firm W.D. Von Gonten & Co. to analyze Hess' position in the Bakken and compare it to its peers, including Continental Resources Inc. and Oasis Petroleum Inc. (see Shale Daily, Jan. 28; Jan. 22).
"Von Gonten found that Hess' Bakken asset has a higher per acre value than Continental and Oasis and that the total value of Hess' acreage is comparable to the total value of Continental's Bakken acreage," Elliott said. "In addition to its extraordinarily valuable, highly coveted Bakken play, the company has potentially valuable positions in both the Utica and the Eagle Ford."
But Elliott said Hess' current board led a failed exploration program, citing a Wood Mackenzie report that asserts the company lost $4 billion of capital over the last five years. Elliott called Hess' mismanagement in the Bakken "striking."
"In 2009, contrary to every other operator in the play, [Hess] embarked on and persisted with a program of drilling dual lateral wells, a technology ill-suited to the Bakken," Elliott said. "The subsequent well performance was substantially below industry average."
Elliott added that by 2012, well costs in the Bakken had "spiraled out of control," with drilling and completion costs $3 million higher per well than the industry average. Hess officials, for their part, acknowledged its drilling program was costly during a 1Q2012 meeting with analysts last April (see Shale Daily, April 26, 2012).
"We have heard anecdotal reports of firms that owned an interest in Hess acreage going 'nonconsent,' that is, passing on the option to participate in Hess-drilled wells. [That's] fairly remarkable given that the Bakken is one of the highest return shale plays existing today," Elliott said. "Senior executives of Bakken-focused players also noted that they consistently attempt to swap out of Hess-operated wells, even if into worse acreage, in order to avoid these return-destroying cost overruns.
"While [Hess] may insist well costs are trending down, it is not clear whether this represents improvement from a very low base or simply the migration to a much lower cost completion technique."
The solution, according to Elliott, is for Hess to spin off its unconventional assets, creating a new company called Hess Resource Co.
"Buried within Hess Corp. is one of the premier U.S. resource play focused companies," Elliott said. "Similar to Continental, Pioneer, Range [Resources Inc.], and Cabot [Oil & Gas Corp.], and based solely on its existing asset base, Hess Resource Co. would have a substantial position in a major U.S. resource play along with strong secondary positions...the Eagle Ford and Utica.
"We estimate that a spin-off of Hess Resource Co. could create [more than] $28 per share of additional value for Hess Corp. shareholders -- a nearly 60% increase in the company's stock."
Hess holds 800,000 net acres in the Bakken, making it the second-largest leaseholder in the play behind Continental's 984,000 net acres. Company reports show Hess also holds about 200,000 net acres in the Utica (see Shale Daily, Dec. 5, 2012; Aug. 16, 2012).
Elliott also called for Hess to divest itself from other businesses, including hedge funds, power generation, retail and marketing, distribution and refining. "If managed appropriately, we believe the equity value of Hess could be up to $126 per share -- a massive premium to where the shares currently trade in the market," Elliott said. "But reclaiming this shareholder value requires substantial strategic change."
Hess said Monday it plans to sell its oil terminal network in the United States and close its refinery at Port Reading, NJ, as it looks to completely exit the refining business and transform into an exploration and production (E&P) company focused on unconventional assets (see Shale Daily, Jan. 29).