(By Mani) Hess Corp. (NYSE: HES) shares are on the cusp of upside due to the activist battle from Elliot Associates and its own strategic plan.
First things first. Elliott Associates, an activist shareholder, submitted a detailed proposal to boost the stock price to a theoretical value of $126/share, 88 percent above the current level and more than double the level in December, when it began establishing a position in the company.
After thorough analysis of Hess operations, the group blamed management for the poor stock performance over recent years and suggested strategic actions including a potential spin-off of the Bakken asset to refocus its portfolio.
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The company continues to defend its global business strategy, which balances low-risk resource development with reduced, but more focused, offshore exploration. It believes that if it just had the Bakken or Utica alone as suggested by Elliott, it would not be self-funding and could not access the credit markets.
The company indicated that it is currently examining Elliott's presentation and will have a response in the next few weeks.
iStock believes that the company could consider some of Elliot's ideas, which is the key upcoming catalyst for the stock.
"We think it is a win-win situation for HES shareholders, and most likely will be adopted by other activist investors, which is likely to provide the catalyst needed for change and lift sector valuations," Oppenheimer analyst Fadel Gheit wrote in a note to clients.
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The group, which has a 4 percent percent stake in Hess, is nominating five experienced executives for seats on the board. Hess, while defending its strategy, indicated that the board considers everything to enhance long-term shareholder value and that it has no sacred cows in the business or in the boardroom.
Hess is in the late stage of a five-year transition from an integrated oil and gas company to a predominantly E&P company, and shift its growth strategy from high-impact exploration to lower-risk, unconventional development and exploitation with a smaller but more focused exploration portfolio.
It closed its money-losing HOVENSA joint venture refinery a year ago and would close its last refinery at Port Reading, New Jersey next month, thus exiting the refining business. However, it will retain its retail and energy marketing business.
The company has announced divestitures totaling $2.4 billion, including its interest in the Bittern, Beryl and Schiehallion fields in the UK, the Snøhvit field in Norway, and is in the process of selling its Russian subsidiary Samara-Nafta and its Eagle Ford assets in Texas.
Hess also plans to sell its terminal network, which is expected to free up $1 billion of capital that would help fund E&P investments. The major moves to reshape its portfolio are expected to be completed by the end of 2013, but the company says it will evaluate all opportunities to enhance long-term shareholder value.
Through the ongoing divestiture program, Hess eliminated a third of its assets and significantly reduced its international exposure.
The cash obtained from asset sales would help the company to fund high-risk, high-return offshore exploration with more predictable, lower risk and long reserve life oil-rich unconventional resource plays onshore the US, mainly in the Bakken formation.
Shares of Hess gained 27 percent year-to-date versus a 9 percent peer average and 5 percent for the S&P 500. Hess has lagged its peers in the last 3-, 5-, and 10-year periods.