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Hess Corp. (NYSE: HES) to Reorganize

Brian Hicks

Written By Brian Hicks

Posted March 7, 2013

Hess Corp. (NYSE: HES) issued a letter to its shareholders on Monday outlining the company’s transformation into a pure play exploration and production company.

In the letter, Hess assured its shareholders that although changes have been vast, those changes are paying off, and it serves to push the company in the direction it wants to go.

And the market has seen the change. Between the time Hess released its mid-year strategy on July 25, 2012 and the time it announced its planned terminal sales on January 28, 2013, Hess shares jumped from $43.93 to $58.90; by last Friday shares closed at $66.54 per share, MarketWatch reports, also stating that 2012 saw Hess’ highest cash flow operations in its 80 year history and the third-highest net income ever.

Hess has a market capitalization of about $23 billion, Reuters reports, and plans to focus efforts on its P&E operations in its oil and gas fields located in the U.S., Norway, Malaysia, and Ghana. By 2015, all 1,300 or so of its gas stations will be sold, along with its power plants and its energy trading company Hetco.

Speculation swirled as to why Hess was making drastic changes to its business model, and many thought it was due to pressure from investors to initiate a break-up of the company’s diverse hand in oil.

A majority of that pressure is from shareholder Elliott Management, a hedge fund that owns 4 percent of Hess. Despite all the changes being made, the fund states, Hess has made many declarations during its supposed turnaround in 2010, and still problems remain.

The fund also claims that Hess downplayed its lackluster stock performance and that the company neglected to recognize its management mishaps that have hindered the company for years now.

Elliott, headed by Paul Singer, announced last month that it had nominated 5 board member candidates and owned a 4% stake in the company, the New York Times reports. These candidates would be the answer: they would have the discipline, know-how, and independent thinking that Hess lacked, something that caused it to lag behind the competition. They also wouldn’t have ties to the Hess family, something that Elliott criticized.

But in Monday’s letter, the company rejected Paul Singer’s candidate proposal, instead naming six of its own board candidates—highly qualified candidates, Hess states, most of whom are former oil executives.

John B. Hess, the company’s chief executive, told the New York Times on Monday:

“With the new company that we’re becoming, we feel that we have the right people for the board.”

And Mr. Hess was sure to give credit to his departing board members, adding that they helped shape the company’s forward progress, but that it was time to mix things up a bit.

In the shareholder letter, Hess also addresses fault with Elliott’s plan to divide exploration and production into different divisions, saying it ignores the probability for credit and tax ramifications.

The internal turmoil of Hess Corp. may be a prolonged battle, and other investors are latching onto Elliott in support. Relational Investors, who has oil industry experience, has recently joined forces with Elliott, according to the New York Times.

Despite inner rumblings, Hess is surging forward and announced that it will buy back as much as $4 billion of its stock and increase annual dividends to $1 from 40 cents, a move that will go into effect in July, the New York Times reports. Shares were already up 3.5 percent on Monday and have seen a 10 percent increase since Elliott initially made waves.

According to a 4-Traders report, Hess will also be eliminating operations in Indonesia and Thailand, instead focusing on prospecting the North Malay basin and a joint venture it has in Malaysia and Thailand, as well as its continued efforts in the Bakken.

Yes, Hess may be commonly known for its gas stations and toy trucks we see at Christmas time, but according to the New York Times, those gas stations make up only 4 percent of company revenue, and as for now, the 2013 toy truck will still be there on Christmas day, batteries included.

With the additional capital that Hess will create by divesting and diverting funds—90 percent of which will go towards exploration and production—the Hess name will continue to grow, evolve, and be a part of the growing oil boom taking place throughout the United States and other parts of the world.

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