Here’s How Hess Will Reward Shareholders
Hess Corp. (NYSE:HES) made a pair of announcements on Monday that sent the stock up as much as 6.4 percent in afternoon trading. First, the company announced that it would pursue the sale of its terminal network in the United States, and complete the closure of its refinery in Port Reading, New Jersey. Second, Hess reported that hedge fund Elliot Associates notified the company of its intent to purchase as much as $800 million in shares and nominate candidates for election to the board.
“The terminals sale, when complete, should release approximately $1 billion of working capital in addition to the proceeds from the transaction,” said chairman and CEO John Hess in a statement regarding the first announcement.
Hess operates a network of 19 terminals with a combined storage capacity of 28 million barrels. Once upon a time, the terminals were used to supply Hess’s retail and energy marketing business, but the availability of third-party refined products and the closure of the company’s HOVENSA refinery have made the terminal system unnecessary.
Instead, Hess will be focusing on its exploration and production business. “By closing the Port Reading refinery and selling our terminal network, Hess will complete its transformation from an integrated oil and gas company to one that is predominantly an exploration and production company and be able to redeploy substantial additional capital to fund its future growth opportunities,” said Hess, in a separate statement.
Those growth opportunities are pretty much spelled out in the company’s 2013 capital and exploratory budget, reported on January 9. Hess will have a 2013 budget of $6.8 billion, 18 percent smaller than in 2011. Approximately 40 percent of the budget, or $2.7 billion, is dedicated to unconventional shale resources, with the remained focused on conventional resources.
Some of those unconventional shale plays include expenditures in the Bakken and Utica shale. Hess has indicated that it plans to operate 14 rigs in the Bakken, but drilling in Utica is still in the appraisal phase. On top are also production expenditures at deepwater sites in the Gulf of Mexico, and even fields in Norway and Denmark.
“We are pleased that the market has been recognizing the success of our strategic transformation as reflected by the fact that Hess shares have significantly outperformed our peers over the past six months,” commented Hess. “Since July 24, 2012, the last day of trading before we announced our updated strategy, Hess shares have increased approximately 34% versus 13% for our peer index. We are confident that continued execution of our strategy is delivering and will deliver superior and sustainable value to all Hess shareholders.”
Hess’s strategy seems to be right on target. ConocoPhillips (NYSE:COP) had success divesting its downstream business into Phillips 66 (NYSE:PSX) with the same intention of creating shareholder value. Marathon Oil (NYSE:MRO) did something similar in 2011, divesting its refining business into Marathon Petroleum (NYSE:MPC). The upstream and downstream operations of both companies have performed well in the market after splitting operations.