Less Hess: Company Announces Retail Exit

Published in CSP Daily News

As corporation shifts focus to E&P, investor unrest continues, interest in station network grows

By  Greg Lindenberg, Online Editor

NEW YORK-- In what he is calling the culmination of "a multi-year strategy to transform Hess into a focused E&P company," John Hess, chairman and CEO of Hess Corp., has announced several initiatives marking the transformation into a pure-play exploration and production entity. But the move is not without its detractors.

As reported in a Raymond James/CSP Daily News Flash on Monday, Hess is exiting the downstream business, including retail, energy marketing and energy trading. It is also divesting business Indonesia and Thailand and pursuing monetization of Bakken midstream assets in 2015. Once complete, the transformed Hess will have a focused portfolio of higher growth and lower risk E&P assets, it said.

"We have been watching the unfolding developments regarding ... Hess, as my firm is keenly interested in their downstream assets," Kenneth Shriber, managing director of Petroleum Equity Group Ltd., Chappaqua, N.Y., told CSP Daily News. "This current news that they plan to sell their retail store network is consistent with recent trends, as the retail marketplace has undergone significant change over the past four years."

He continued, "Hess is a premier, regional and highly competitive fuel marketer, with an outstanding network of company operated locations; however, most retail gas/convenience store chain assets in Hess markets, from New England to Florida, are now in the hands of fuel jobbers (sans Sunoco), 7-Eleven and Circle K. The fact is that these new and/or enlarged entities are threatening the Hess marketing model, giving rise to today's announcement."

Asked about options for the retail segment, such as an initial public offering (IPO), during the conference call announcing the company's strategy, John Hess said, "Moving forward, in terms of pursuing strategic options to maximize value, be it the retail, marketing business or energy marketing business, we are evaluating several options to monetize these businesses to maximize shareholder value, and we are just starting that process."

Hess had approximately 14,700 employees last year, John Hess said, and half are associated with retail business. "As we exit the retail business, [that half] will not be with an E&P company," he said.

As part of its governance review, Hess has named six new independent directors to its board who the company said bring the "right mix" of corporate leadership, operational and financial expertise and E&P experience.

In January, Hess announced that it would pursue the sale of its U.S. terminal network, and that it would complete its exit from the refining business by closing its Port Reading, N.J., refinery.

At that time, the company said that it would continue its "long-term commitment" to the retail and energy marketing businesses.

Following that announcement, investment firm Elliott Management Corp. and its founder and principal, Paul Singer, alleging mismanagement, advocated that Hess conduct a full strategic and operational review to consider ways to maximize shareholder value that could include implementing a substantial divestment program to exit the retail and other businesses. It also offered its own view on Hess's value and recommended its own slate of board candidates, objecting to nominees with ties to the Hess family.

Hess rejected Elliott management's proposal. "As you may have seen, Elliott Management, a new shareholder, has made a recommendation that would effectively dismantle Hess, disrupting the progress we have made and foreclosing the prospect of real value creation that would benefit all Hess shareholders," John Hess said in a March 4 letter to shareholders.

"In his 'reassessment' of Hess, Singer offers a seriously flawed analysis of Hess’ stock price performance based on an arbitrary endpoint. Among many other things, he fails to take into account the meaningful share price appreciation that Hess’ stock had enjoyed in response to our announcements of a series of transactions and initiatives along with our indication that other steps were underway. We are convinced that our transformation is driving superior value creation far beyond Singer’s short-term time horizon," he said.

In turn, Elliott Management responded, "This morning Hess made a series of announcements that it is adopting portions of the suggestions Elliott laid out in its January 29 presentation including changing their board and selling various assets. While motivated by Elliott’s plan, Hess's proposal falls dramatically short of what is needed. Hess’s announcement is incomplete and it lacks accountability--we believe significantly greater share price appreciation can be achieved. But it requires truly independent directors that can hold management accountable and ensure they follow through. Substantial change needs to be delivered rather than partial change promised."

Hess has set up a website, Transforming Hess, to provide information on the initiatives. Elliott Management has also set up a website, Reassess Hess.

New York City-based Hess is a leading global independent energy company primarily engaged in the exploration and production of crude oil and natural gas and the marketing of refined petroleum products, natural gas and electricity. Hess is a major independent gasoline-convenience store retailers on the East Coast with more than 1,350 retail outlets in 16 East Coast states.