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Hess Changes Not Enough, Says Shareholder
Hess Corp. last week marked the culmination of its multi-year strategic makeover into becoming a pure-play exploration and production (E&P) company by announcing it would be “fully exiting” the downstream and selling its retail, energy marketing and energy trading businesses. It also plans to install six new independent directors. However, the actions are not enough, a dissident shareholder said.
“By 2014, Hess will be a pure play E&P company with a tremendous portfolio comprised of higher growth, lower risk assets,” said CEO John Hess. “We believe we will have the financial flexibility to pursue this growth at the same time that we increase current returns to shareholders and generate significant future value.”
To keep its exploration projects more focused, Hess plans to “monetize” its Bakken Shale midstream properties, which include the Tioga natural gas processing plant and a crude oil rail system, by 2015. It also wants to prune some of its international portfolio and plans to return more capital directly to shareholders.
The announcement is part of a multi-year strategy that Hess launched in 2010, the CEO told analysts during a conference call. “Our board and management team have been pursuing a multi-year strategy to transform Hess into a focused E&P company,” he said. “The initiatives… represent the culmination of this process.”
Elliott Associates LP, the hedge fund that has been pushing for changes at Hess, is “on board” with the makeover, Hess said. Elliott, which owns a 4% stake in the New York City-based producer, has been urging shareholders to elect new board members and had called on the company to purge some of its businesses, as well as spin off assets in the Bakken, Eagle Ford and Utica shales (see NGI, Feb. 4).
During the conference call, the CEO was asked why the turnaround was so long in the making. Other analysts also quizzed the management team about Elliott’s demands. The CEO said the transformation had begun long before Elliott.
“It predominantly began when we started to build in the Bakken in 2010,” he said. “It’s not just something that happened overnight and as a response of an activist. Elliott got on the train before it left the station…It’s a natural culmination…” Once the sales are completed, the producer expects to achieve a five-year compound average annual production growth rate of 5-8%, based off of proforma 2012 production, “with aggregate mid-teens production growth between proforma 2012 and 2014, while increasing returns to shareholders.”
Among other things Hess plans to divest Indonesia and Thailand properties; monetize Bakken Shale midstream assets by 2015; exit the downstream; return capital to shareholders by increasing the annual dividend 150% ($1.00/share) beginning in 3Q2013; and buy back up to $4 billion in shares.
“Starting in 2010, we began taking decisive actions to grow the value of our world-class asset base by focusing on the exploration and development of our most promising lower risk, higher growth, oil linked E&P assets,” said the CEO. The company laid out the makeover in a letter to shareholders.
“In the first phase of our transformation, we invested significantly in our most promising assets, substantially increasing our leadership in the Bakken oil shale, and entering the Utica Shale, while acquiring an additional ownership stake in the Valhall Field (Norway),” the letter stated. The first phase included closing a joint venture refinery project in the U.S. Virgin Islands and paring its portfolio in Europe and Indonesia.
The second phase of the transformation was launched last summer, the CEO told analysts. Since July, he noted that Hess had sold about $1.5 billion in noncore assets around the world and is planning to sell its Russian subsidiary and its Eagle Ford Shale properties in South Texas. Hess also is selling its terminal network, and it has exited the refinery business with the closure if its Port Reading, NJ, facility.
For 2013 Hess chopped 17% of its upstream capital expenditures (capex) and reduced exploration spending by 29% from 2012 levels. More capex cuts are planned in 2014, said the CEO. “These actions have positioned the company well to enter this third phase of our transformation…, which will create a pure-play E&P.”
Elliott had recommended five nominees the the 14-member Hess board, but Hess disregarded all of the suggestions. Instead, the company said five board members plan to step down: Nicholas F. Brady, Thomas H. Kean, Frank A. Olson, Sam Nunn and Gregory P. Hill. Board member F. Borden Walker retired effective March 1.
“They have been outstanding directors who have served with distinction, and they deserve significant credit for helping to transform Hess,” said the CEO. “The fact that we now possess some of the most attractive oil assets in our industry is, in large part, due to their strategic leadership and commitment to our transformation.” The annual meeting and election is scheduled for May 16.
Hess recommended six independent faces to join the board, including General Electric (GE) executive John Krenicki Jr., who is CEO of GE Energy. Also recommended are Kevin Meyers, ConocoPhillips’ former senior vice president for E&P for the Americas; former Deloitte CEO James H. Quigley; former CBS Corp. CFO Fredric Reynolds; former TNK-BP COO William Schrader; and Mark Williams, former executive committee member of Royal Dutch Shell plc. Because he would take Borden’s position, Quigley would stand for reelection in 2014, according to Hess.
Following the Hess announcement, Elliott said the changes didn’t go far enough. “For a company that has hidden, for 17 years, behind an entrenched board, unfocused strategy, opaque disclosure, and flagrant disregard for its obligations to shareholders, [the] promises are neither credible nor sufficient,” the fund said in a statement. It also challenged the Hess funding model, arguing that the producer had squandered income from conventional assets and it would have access to credit markets if it were more streamlined by spinning off the expensive and poorly developed Bakken portfolio.
“Hess’s conventional portfolio did not fund the development of the Bakken, rather, it funded $4.5 billion of exploration failure and over $4 billion of acquisitions of conventional assets and downstream investments,” Elliott said.
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