Hess Corp. (HES:US) Chairman and Chief Executive Officer John Hess said his plans to shed several units and focus on oil exploration and production aren’t a response to criticism from activist shareholder Paul Singer’s Elliott Management Corp.
The company said today it will name six new board members, exit the energy trading and marketing businesses and sell its 1,350 gasoline stations. The proposals accelerate transitions that were already under way at the company, John Hess said in an interview today.
Singer’s Elliott Management said Hess is doing “the least possible to maintain the status quo.” The New York-based hedge fund acquired a 4 percent stake and in January began pressing for asset sales and changes to the company’s board. Hess has rejected Elliott Management’s proposed board members and dismissed calls to split U.S. onshore and offshore production, saying it ignores credit risk, taxes and the company’s real value.
“The decisions we made have been carefully structured, and really thought out, and are not a response to an activist,” John Hess said in a telephone interview. “This was the culmination and end point of us focusing on exploration and production more.”
The confrontation at Hess follows other shareholder interventions at energy companies including Chesapeake Energy Corp. (CHK:US), SandRidge Energy Inc. (SD:US), Nabors Industries Ltd. (NBR:US) and Transocean Ltd. (RIG:US) Singer’s Elliott Management, with funds that have $21.5 billion of assets under management, has successfully pushed for board changes at other companies, including BMC Software Inc.
Hess plans to boost shareholder value by buying back as much as $4 billion in stock and more than doubling the annual dividend to $1 a share, John Hess told shareholders in a letter filed with the U.S. Securities and Exchange Commission today.
The proposals are “part of a calculated move to create a dynamic where he avoids taking larger actions,” John Pike, a senior portfolio manager at Elliott Management said in a telephone interview.
“The shame of Hess is that there are great assets and great enterprises buried within an opaque conglomerate,” said Quentin Koffey, an associate portfolio manager at New York-based Elliott. The company said Hess’s proposal “falls dramatically short,” in a statement today.
Hess said he’s not been approached by anyone seeking to buy the entire company. Shareholders would gain more value from developing its assets than from a sale, he said in the interview.
“Singer’s proposals demonstrate no meaningful operational insight into our business,” Hess said in the letter. “His proposals would orphan our most promising assets and foreclose the potential for future real value creation.”
The CEO said he was open to meeting with Elliott Management. Representatives from Elliott Management said they spoke with Hess’s investor relations office, and were told John Hess wasn’t open to their proposed changes.
Hess rose 3.5 percent to $68.84 at the close in New York, the biggest gain in more than a month. The shares have climbed 30 percent since the start of the year.
Hess expects to complete the divestitures by the end of 2014, Chief Financial Officer John Rielly said today on a conference call with investors. Proceeds will be used first to pay off $2.5 billion of debt, build a $1 billion cash reserve and fund planned capital projects, he said. Restructuring costs will be incurred in 2014 and aren’t yet estimated, he said.
The announcement today is another effort to strip away assets from the company, formed in 1933 by John Hess’s father, Leon, who also owned National Football League’s New York Jets. Hess announced in January that it would close its last refinery and seek buyers for 19 oil-storage terminals to become “predominantly” a crude exploration and production company.
Hess said then that it had no plans to abandon the retail and energy marketing business.
“Management clearly is accelerating the changes rather than digging in its heels and fighting with its newest shareholders,” Roger Read, a Houston-based analyst for Wells Fargo Securities LLC, said today in a note to clients. “We applaud the changes.”
Businesses to be shed include Hess-branded retail gasoline stations in 16 eastern U.S. states, according to the company website. The stations, known for selling Hess-branded toy trucks during the holiday season, employ about half of the company’s 14,700 workers, John Hess said on the conference call.
Hess also plans to divest its stake in Hetco, a trading company formed in 1997 by the company and two former Goldman Sachs Group Inc. traders. Hetco trades oil, refined products and natural gas, according to its website.
The marketing business sells electricity, gas and fuel oil to 21,000 customers, according to the company’s website. Yankee Stadium in New York is a Hess customer, according to the Major League Baseball team’s website.
Hess couldn’t immediately comment on how many jobs might be cut as a result of its proposed changes, said Jon Pepper, a company spokesman.
Hess will keep operations in North Dakota’s Bakken Shale, the Utica Shale of Ohio, the North Sea, the U.S. Gulf of Mexico, offshore Ghana and fields in Malaysia, according to the statement. Pipeline and processing operations in the Bakken may be monetized in 2015, according to the letter.
Exploration and production accounted for 91 percent of Hess profit last year, according to data compiled by Bloomberg.
Hess’s nominees for its 14-member board would increase the number of independent directors to 13 from 11, the company said. Hess contacted a search firm seeking new board members before Elliott began requesting changes, the CEO said. He said he doesn’t know the new nominees personally.
Elliott Management maintains further changes are needed because Hess is elevating John Mullin III to lead independent director. Mullin was identified in a 2012 filing as an executor the Hess estate.
The company’s new board nominees are John Krenicki Jr., former vice chairman of General Electric Co.; Kevin Meyers, former senior vice president of Americas exploration and production at ConocoPhillips; James H. Quigley, former CEO of Deloitte LLP; Fredric Reynolds, former CFO of CBS Corp.; William Schrader, former chief operating officer of TNK-BP Russia; and Mark Williams, a former member of Royal Dutch Shell Plc’s executive committee.
The board members will be voted on at the company’s annual meeting, scheduled for May 16.
Leaving the Hess board will be former U.S. Treasury Secretary Nicholas Brady, who served for more than 18 years, and former New Jersey Governor Thomas Kean, who served for 22 years.
Also stepping down from the board will be former U.S. Senator Sam Nunn; Greg Hill, Hess’s exploration and production chief; and Frank A. Olson, chairman emeritus of Hertz Corp., according to the filing. F. Borden Walker, executive vice president for refining and marketing, resigned from the board last week, according to the letter.
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