Hess outlines proposed asset sales as it refocuses

New York oil and gas company Hess Corp., under pressure from billionaire Paul Singer's hedge fund Elliott Management LP, said Monday it expects to divest more assets in its quest to become a pure play exploration and production company.

Besides divestments that have already taken place, including last year's sales of about $1.5 billion in European and Asian assets and the closing of its New Jersey refinery, the company said it planned to fully get out of its downstream business, including gas stations and energy marketing and trading, and to sell its Indonesian and Thai assets. It also said it would pursue deals for its Bakken midstream assets, which it expects to sell some time in 2015.

The company also expects to boost its annual dividend by $1 per share in the third quarter of this year and authorize a share repurchase program of up to $4 billion with the timing to be tied to its asset sales.

But the latest restructuring outlined by the company fell short of what the hedge fund had wanted it to do.

Elliott has been pushing for Hess to spin off its Bakken Shale assets as soon as possible, but Hess claimed that would have tax and credit implications that would leave the spinoff underfunded and able to be snapped up on the cheap.

In a letter to shareholders, Hess said Elliott's "reassessment" of Hess is "seriously flawed" and "irrelevant," and that it would dismantle the company and disrupt the progress it has made. "For the most part, his proposals would orphan our most promising assets and foreclose the potential for future real value creation," Hess said in the letter. "We are convinced that Singer's agenda would destroy shareholder value."

Elliott Management said in a statement Monday that Hess' proposal "falls dramatically short of what is needed" and "substantial change needs to be delivered rather than partial change promised."

Tudor, Pickering, Holt & Co. Securities Inc. wrote in a special report to clients, which was obtained by The Daily Deal, that the divestitures could raise $7.2 billion, including $1.3 billion for the Indonesia/Thailand assets, $1.6 billion for the Bakken assets and $4.3 billion for the remaining downstream assets.

"Liquidating assets to repurchase shares has proven successful at boosting stock prices, even for those without much upside to NAV," the firm said, using ConocoPhillips Co. as an example. In the case of Hess, TPH expects to see 35% upside to its $90 per share net asset value.

Hess expects the moves to help it achieve a five-year compounded annual growth rate of 5% to 8% based on 2012 pro forma production, with aggregate midteens production growth between pro forma 2012 and 2014.

"By 2014, Hess will be a pure play E&P company with a tremendous portfolio comprised of higher-growth, lower-risk assets," chairman and CEO John Hess said in a statement. "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."

The company also announced six new independent directors for election at its 2013 annual meeting on May 16, including former General Electric Co. vice chair John Krenicki Jr., former ConocoPhillips senior vice president of E&P Kevin Meyers, former Deloitte LLP CEO James Quigley, former CBS Corp. CEO Fredric Reynolds, former TNK-BP chief operating officer William Schrader and former Royal Dutch Shell plc executive committee member Mark Williams.

Longtime directors leaving the board include former U.S. Senator and Treasury Secretary Nicholas Brady, former New Jersey governor Tom Kean and former U.S. Senator Sam Nunn as well as former Hertz Corp. CEO Frank Olson and Hess executives Greg Hill and F. Borden Walker.

Elliott has proposed its own five-member slate of directors, including former BP plc deputy CEO Rodney F. Chase, former Anadarko Petroleum Corp. COO Karl Kurz, former executive vice president of Pioneer Natural Resources Inc. David McManus, Ultra Petroleum Corp. CFO Mark Smith and former American Express Co. chairman and CEO Harvey Golub. It also proposed alternates William Berry, former executive vice president of ConocoPhillips, and Jonathan Macey, a professor at Yale Law School.

Hess, led by the 58-year-old son of company founder Leon Hess, joins other oil and gas companies selling assets to raise money to fund their drilling programs, including Chesapeake Energy Corp., BG Group, BP, ConocoPhillips, Marathon Oil Corp., Murphy Oil Corp., Royal Dutch Shell and Total SA.

The oil and gas industry has also had its share of activism lately, most notably, Carl Icahn's campaign at Chesapeake Energy, where CEO Aubrey McClendon announced in January that he would retire in April after Icahn managed to repopulate the board.

In January, amid reports that Elliott was thinking of buying $800 million more shares and nominating directors to its board, Hess said it planned to sell its terminal network in the U.S. and complete its exit from the refining business by closing its Port Reading, N.J., refinery at the end of February. Goldman, Sachs & Co. is advising Hess on the terminal sale, with vice president Daniel Korich leading the effort.

Hess has announced divestitures of $2.4 billion in nonstrategic assets and committed to sell its oil and gas assets in Russia and its Eagle Ford assets in Texas.

In November, it said it would pursue the sale of its Russian unit Samara-Nafta after Forbes reported last summer that the unit's top executive Alexey Veiman had Russian mob ties. (Hess fired Veiman soon after.) Goldman Sachs' Robert Kimmel is said to be leading that effort, which could bring in $1 billion to $1.1 billion.

In October, Hess sold its stake in the Beryl oil and gas fields in the U.K. North Sea and the Scottish Area Gas Evacuation System to Royal Dutch Shell for $525 million. And in September, it sold minority stakes in some Azerbaijan fields and a pipeline to India's ONGC Videsh Ltd. for $1 billion.

Its Eagle Ford properties in South Texas are expected to fetch $820 million.

--Paula Schaap contributed