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Updated to reflect comments from Elliott Associates.
NEW YORK (
Hess(HESS) plans to split off its oil and gas refining and marketing businesses, in a move that will help the New York-based oil conglomerate refocus on drilling its shale energy assets, while making a big payout to shareholders after years of underperformance.
Such action represents a 'win-win' for shareholders, even if Hess is yet to fully map out the financial impact of its divestiture plan, according to Bank of America Merrill Lynch analysts.
Elliott Associates, a hedge fund pushing for change at Hess,
called the company's plan "incomplete" and lacking in accountability in a
late Monday letter.
The company said earlier it would fully divest its downstream businesses, including retail gas stations, energy marketing and trading, adding to a deconsolidation plan the company
mapped out in January.
Hess also said in a
press release that it would divest oil and gas assets in Indonesia and Thailand and exit midstream businesses in the North Dakota Bakken shale by 2015.
Bank of America energy analyst Doug Leggate forecasts Hess may eventually put its Bakken assets into a master limited partnership (MLP) that can be spun off to investors.
Hess's breakup plan follows similar moves made by
Conoco Phillips(COP - Get Report) and
Marathon Petroleum(HESS) to split exploration businesses from refining and marketing and deliver value to investors.
With proceeds from asset sales and a reduction in overall expense, Hess appears to be ready for a more aggressive drilling program that could increase the company's oil and gas production growth rate in coming years.
The company now targets a five-year production growth rate of 5% to 8%, and forecasts 'mid-teens' production growth between 2012 and 2014.
Shareholders also will see an immediate payout as Hess executes the multi-year plan to focus exclusively on oil exploration and production.
Hess on Monday said that its annual dividend will increase to $1 a share beginning in the third quarter. The company also said it had authorized up to $4 billion in share buybacks tied to the timing of asset sales.
"Our Board and management team have been pursuing a multi-year strategy to transform Hess into a focused E&P company," John Hess, Chairman and CEO of Hess, said in a statement.
"By 2014, Hess will be a pure play E&P company with a tremendous portfolio comprised of higher growth, lower risk assets."
Hess's decision to exit retail, marketing and trading comes on the heels of a large stake taken by Elliott Associates, which in January
said it would make a near $1 billion investment in the company in an effort to gain seats on the company's board.
While Elliott Associates doesn't appear to have impacted Hess's strategy or board configuration -- the company said on Monday that it has nominated six new independent board directors -- those betting on the company's refocus on oil and gas drilling may have won out.
New York Times interview, John Hess
said a board comprising of directors without energy experience created poor optics. Hess's new directors appear to have significant operational or financial experience in the energy sector.
Following Elliott's stake, Hess hired
Goldman Sachs(GS) to sell its terminal network in the U.S. and close a terminal in Port Reading, N.J., which will release $1 billion in working capital. The network, concentrated on the East Coast, has a storage capacity of 28 million barrels of oil spread among 19 terminals.
The company also announced asset sales worth a total of $2.4 billion, in addition to divestitures ranging from oilfields in Russia to the Eagle Ford shale in Texas, in recent months.
In November, Jim Cramer
The Deal'sDeal Economy 2013 that Hess should split off its downstream businesses because its oil and gas assets would be worth more without the added expense of running its refining business.
"[This] type of corporate restructuring should enable Hess's upstream operations to become more predictable and generate more competitive returns given a greater exploitation emphasis, and corporately have less earnings volatility from energy trading and marketing," John Herrlin, an analyst with Societe Generale wrote, in a note upgrading the company from to 'buy.'
The prospective share buyback would allow Hess to reduce its share count by over 15%, Harrlin calculates.
In late Monday trading, Hess shares rose over 3% to $68.90, adding to 2013 gains in excess of 20%.