It seems that integrated energy firm Hess (NYSE:HES) is about to get a little less integrated. The refining business has been difficult to gauge over the last few years because — as the fastest growing sector in the U.S. and Canada — the general upswing of the oil and gas industry has helped hide variable management performances.
But with energy prices falling, many former integrated giants have begun spinning off or splitting up their exploration and downstream assets.
Hess, for one, came under pressure from activist hedge fund Elliott Management — one of the its largest shareholders — to reshape the company. Elliott accused the board of “poor oversight,” and said that the company’s management was responsible for more than a “decade of failures.”
As such, it produced a set of proposals to fix the energy producer. Hess ultimately decided to move ahead with its own set of plans to unlock shareholder value, but the recent battle still highlights the growing amount of shareholder activism going on the energy space.
The “Pure Play” Plan
Following the lead of Murphy Oil (NYSE:MUR), ConocoPhillips (NYSE:COP) and others, Hess has officially decided to exit several energy businesses, making it a “pure play” exploration and production company. The firm had already announced plans to sell its oil storage terminal network and ditch the refining sector completely. Now, it will shed its 1,350 iconic green- and-white Hess-branded retail gasoline stations in 16 eastern U.S. states.
Additionally, the once-integrated energy producer plans to divest its stake in Hetco — its energy trading company. Hess holds a 50% stake in the venture, while two top Goldman Sachs (NYSE:GS) traders hold the rest. Hetco was formed in 1997 and trades oil, refined products and natural gas.
Hess will also exit its energy marketing business, which sells electricity, gas and fuel oil to 21,000 customers, including Yankee Stadium. And last but not least, it will unload stakes in its Asian portfolio by divesting operations in Indonesia and Thailand. The company plans to focus its E&P efforts on the North Malay basin and a joint development area in Malaysia and Thailand.
Along with these operational changes, Hess has also announced a slate of five independent director nominees for election at this year’s annual meeting, which will bring the number of independent directors on Hess’s 14-member board up to 13 from 11. For the icing on the cake, Hess plans on returning capital directly to shareholders through an increase in the annual dividend and a share buyback of up to $4 billion.
Far From the First
While Hess said that Elliott’s proposals demonstrated “no meaningful operational insight into our business,” and “would orphan our most promising assets and foreclose the potential for future real value creation,” the company certainly must have felt the pressure to unlock some value for its shareholders.
Once again, Hess is just the latest example of this emerging trend in the energy business. As one of the hotbeds of the U.S. economy, shareholder activism is growing, with activists stalking generally profitable businesses that haven’t necessarily been treating their shareholders right.
We’ve already seen billionaire Carl Icahn shove Chesapeake Energy (NYSE:CHK) CEO and founder Aubrey McClendon out the door as well as push CVR Energy (NYSE:CVI) to unlock value via refining spin-off CVR Refining (NASDAQ:CVRR). Likewise, hedge funds TPG-Axon and Mount Kellett Capital are hoping to emulate Icahn’s success by ousting Tom Ward from the top position at SandRidge Energy (NYSE:SD).
Other recent examples include activism at drillers Nabors (NYSE:NBR) and Transocean (NYSE:RIG) … and even the beleaguered coal sector is under attack. British hedge fund Audley Capital Advisors recently announced that it was seeking to nominate five candidates to the board of Walter Energy (NYSE:WLT).
Many of these moves have — at least in the short run — resulted in big gains for their shareholders. Hess is up nicely since Elliott made its intentions known and has increased about 32% since the start of 2013. Likewise, CHK has rebounded sharply since McClendon’s ouster.
Another Potential Pick
For investors, the growing the focus on cost-control, execution and tax-efficient spin-offs of non-core assets could spell plenty of future returns — especially for a select group of companies. Activist investors are looking for “bloated” energy firms that still remain profitable, but could use a slight push in the right direction.
One such option: Occidental Petroleum (NYSE:OXY). Shares of the company shed nearly 30% from a May 2011 peak of $115 a share to the end of 2012, despite the recent oil boom. As such, many analysts are calling for it to be the next target for activist shareholders, especially since its 23-year tenured CEO just retired.
Several estimate that a big shareholder could push OXY to shed its international assets and focus on Texas and California. The company has the most acreage in California’s Monterey shale and is the top producer in Texas. A sale or spin-off the international business could fetch about $35 billion in proceeds, according to analyst estimates.
Additionally, OXY has all sorts of midstream and chemical refining assets that would fit perfectly in a tax-advantaged master limited partnership. Basically, investors can think of Occidental as bigger version of Hess — one thank can hit $120 to $135 a share based on various break-up value appraisals. OXY can currently be had for about $82 bucks a share, even after a 7% climb alongside the broader market so far this year.
All in all, Hess is a prime example of however shareholder activism can be profitable … and OXY could be just the way to cash in.
As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.