Billionaire Paul Singer’s best chance to maximize his potential $800 million investment in Hess Corp. (HES) may be to press for a sale of the whole company after the oil and natural gas producer exits its refining and storage businesses.
Hess, which in 80 years developed from a one-truck fuel deliverer to a global wildcatter that finds and extracts oil from West Africa to North Dakota, is among the cheapest energy opportunities in North America. The New York-based producer trades at the lowest valuation of any so-called integrated oil company, such as Exxon Mobil Corp. (XOM), on the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.
Elliott Management Corp., founded by Singer, today proposed five new Hess board members and called on the company to consider strategic options including spinning off its Bakken shale assets. Singer would become the fourth activist investor in the past year to wrest profit from energy company restructuring.
“Elliott is trying ultimately to get the value of this company up, whether through a sale or another means,” Louis Meyer, a New York-based special situations analyst at Oscar Gruss & Son Inc. “There are many ways to get a stock price up. That is one arrow that can be shot. Whether a company has armor or takes this seriously is another question.”
Singer’s interest in Hess recalls the decision by Murphy Oil Corp. (MUR) last year to spin off its retail fuels segment after hedge fund Third Point LLC bought a stake and urged the El Dorado, Arkansas-based company to shed assets. Carl Icahn nearly doubled his $2 billion investment in CVR Energy Inc. (CVI) after urging the company to sell itself and acquiring an 82 percent stake through a proxy fight. After failing to find a buyer, Icahn spun off CVR’s refining assets into a master-limited partnership on Jan. 16.
Jana Partners LLC bought 19.7 million shares in Marathon Petroleum Corp. (MPC) before the company announced plans to spin off some of its pipeline assets. Marathon Petroleum rose 89 percent in 2012, while CVR more than doubled its share price.
Elliott affiliates own 4 percent of Hess’s common stock, the investment company said in a letter to shareholders today. The stock, which closed yesterday at $62.48, may be worth more than $126, Elliott said.
Singer may find the easier path to increasing value is advocating for a sale of part of Hess’s stakes in oil and gas fields such as those offshore Ghana or in the North Sea, Gianna Bern, principal of Brookshire Advisory & Research Inc. in Chicago, said in a telephone interview yesterday. He also might urge returning more cash to shareholders through share buybacks, or through a spinoff of the company’s gas station business.
“Bringing in additional partners on those assets or exiting less efficient businesses are some of the low-hanging fruit that these investors may pursue,” she said.
Hess, with a market value of $21 billion as of yesterday, has risen 13 percent in the past year as it closed an unprofitable refinery and ramped up operations offshore Norway and in North Dakota’s Bakken oil fields. Hess rose 5.1 percent to $65.69 at 9 a.m. in New York, before the start of regular trading.
Hess trades at a multiple of 3.1 times earnings before interest, taxes, depreciation and amortization, the lowest of any energy company on the Standard & Poor’s 500 Index that has gasoline stations, according to data compiled by Bloomberg.
Fears that Singer’s efforts to increase returns to shareholders might harm the company’s ability to pay debt drove down the price of its bonds. Hess’s $1.25 billion of 5.6 percent notes due February 2041 fell 4.66 cents yesterday to 111.56 cents on the dollar to yield 4.84 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the biggest decline since the debt was issued in August 2010.
The cost to protect Hess’s debt from losses climbed to the highest this year. The credit-default swap contracts, which typically rise as investor confidence deteriorates, increased 12.9 basis points to 151.7 basis points as of 5:30 p.m. yesterday in New York, CMA data show.
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Those prices imply that the market perceives a 12.6 percent chance the company will default within five years, up from 11.6 percent before Hess revealed Singer’s plans to take a stake, according to a standard pricing model maintained by data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
The implication of the move by Elliott Associates LP is that Hess has not moved aggressively enough in its restructuring efforts, Phil Adams, a senior analyst at Gimme Credit LLC in Chicago, wrote in a note to clients yesterday. “The concern for bondholders would be that Elliott Associates would successfully agitate for a more aggressive return of cash to shareholders.”
Hess’s quarterly earnings, after adjusting for one-time items, have declined from a year earlier in four out of the past five quarters, according to data compiled by Bloomberg. Hess, which reports fourth-quarter results tomorrow, is expected to earn $1.22 a share, 4.3 percent higher than adjusted earnings a year ago, according to the average of 21 analysts’ estimates.
Singer might push Hess to lower its capital spending budget as a way to make its debt and other obligations more manageable, Phil Weiss, an analyst at Argus Research in New York, said yesterday in a telephone interview. Lower spending “reduces the need to raise cash,” he said. Chairman and Chief Executive Officer John Hess probably wouldn’t agree to a sale of the whole company that was founded by his father, Weiss said.
Singer is the founder and president of Elliott Management which oversees two funds, Elliott Associates and Elliott International LP, that have $21.5 billion of assets under management.
Elliott has advocated for a sale recently of software companies including Compuware Corp. (CPWR) and BMC Software Inc. (BMC), offering last month to buy Compuware outright and adding two board seats to BMC.
Hess responded to Elliott’s interest with an announcement yesterday of a restructuring plan that included selling its storage business, closing its last refinery, and refocusing its spending on developing U.S. oil and gas assets. Exiting refining would help save $1 billion in costs, Hess said. A sale of its fuel storage business may fetch as much as $2 billion, Paul Cheng, a New York-based analyst at Barclays Plc (BARC), said yesterday in a note to investors.
Hess’s restructuring announcement appeared to be an attempt to deflect pressure from Elliott Associates, Pavel Molchanov, an analyst at Raymond James, wrote yesterday in a note to investors.
Some analysts also expect more pressure on Hess to spin off its retail fuels business, which includes more than 1,350 Hess- branded sites in 16 states along the U.S. East Coast, to focus the company exclusively on exploration and production.
“We would not be surprised to see Elliott pursue a retail spinoff, which is a logical step to complete the company’s transition,” Molchanov wrote. Hess plans to continue its long- term commitment to the retail and energy marketing business, Jon Pepper, a spokesman for Hess, wrote yesterday in an e-mail.
Goldman Sachs Group Inc. (GS) is Hess’s financial adviser on the terminal sales.