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Hess Corp. announced Monday it is further whittling its operations as it aims to turn itself into a pure exploration and production company. But the move failed to quell a rebellious shareholder seeking to break the company up even further and put its own slate of board nominees in place.
Hess said in a letter to shareholders that it is exploring options for its entire downstream business and pruning its Asian portfolio, while also unveiling a share-buyback program of up to $4 billion and more than doubling its quarterly dividend. It also proposed new board members, addressing concerns that the company's board is too close to top management and not experienced enough in the energy sector.
The moves come as Hess continues to battle with hedge fund Elliott Management, which seeks to replace much of the board and argues that Hess could be worth more as two slimmer companies focused respectively on North American and international operations. But Hess Chief Executive John Hess said Monday morning that the changes announced have been in the works for months, and were not prompted by the challenge from the activist shareholder.
"This is not something that just happened overnight," Mr. Hess said Monday in a conference call with analysts. "Elliott got on the train after it left the station," Mr. Hess said.
Shares rose 3.5% Monday morning after the announcement. In a statement Monday, Elliott said the changes did not go far enough, and questioned how long Hess has taken to restructure itself and whether the company will be able to execute the new strategy.
"For a company that has hidden, for 17 years, behind an entrenched board, unfocused strategy, opaque disclosure, and flagrant disregard for its obligations to shareholders, today's promises are neither credible nor sufficient," the fund said in a statement.
Hess said it would divest its Indonesia and Thailand assets, look for a way to monetize its Bakken midstream assets by 2015, and fully exit its retail, energy-marketing and energy-trading businesses. Earlier this year, Hess closed its last remaining refinery in Port Reading, N.J., and said it would sell its network of terminals.
Some of the changes Hess announced Monday are in line with demands made by Elliott, but Hess described the hedge fund's central thesis, that Hess should divorce its holdings in the fast-growing Bakken oil formation in North Dakota from costly international assets, as "little more than financial engineering based on flawed assumptions."
The company said in its letter that Elliott's proposals are shortsighted efforts to run up the value of the stock that ignore long term potential for growth. Elliott didn't immediately respond to requests for comment.
Hess said it expects to increase production by 5% to 8% annually, driven by the Bakken. But it needs cash generated by other assets in the portfolio, which includes operations in the Gulf of Mexico, Malaysia, and Ghana, to fund work in the Bakken and in Ohio's Utica formation. Without that funding, the U.S. shale assets would likely be sold off, the company said.
But Elliott disagreed with Hess's description of its funding model, arguing that the company squandered the income from conventional assets and that it would still have access to credit markets as a more streamlined company.
"Hess's conventional portfolio did not fund the development of the Bakken, rather it funded $4.5 billion of exploration failure and over $4 billion of acquisitions of conventional assets and downstream investments," the fund wrote.
Argus research analyst Phil Weiss said he thinks becoming a pure-play exploration and production company makes sense for Hess.
"When I looked at the Elliott presentation [in January], absent this whole thing about splitting U.S. and international, I thought they made really salient points," Mr. Weiss said.
But questions remain about Hess's cost structure, which Mr. Weiss said is higher than its peers, and how quickly Hess will be able to bring that down. Hess has said its exploration and capital spending will both be lower this year, with more cuts to come in 2014.
Still, Mr. Weiss said, "it feels like they're executing really slowly."
Hess is raising its quarterly common dividend 150% to $1 a share on an annual basis, beginning in the third quarter of this year.
Two slates of board nominees will go head to head at Hess's annual meeting this spring: one group nominated by Hess, and another group nominated by Elliott.
Hess's slate of nominees includes the chief executive of General Electric Co.'s energy business, John Krenicki Jr., and ConocoPhillips's former senior vice president of exploration and production for the Americas, Kevin Meyers. Hess also appointed former Deloitte chief executive, James Quigley, who will stand for election in 2014.
Elliott's nominees to Hess's 14-member board include Rodney Chase, former deputy chief executive at BP Plc, Karl Kurz, former chief operating officer at Anadarko Petroleum Corp., and Harvey Golub, former chief executive officer at American Express Co.
Daniel Gilbert contributed to this article.
Copyright (c) 2012 Dow Jones & Company, Inc.
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