Icahn, Elliott Associates and Other Investors Drill for Oil and Gas Deals

Updated to clarify Hess asset sales

NEW YORK ( TheStreet) -- From corporate raider Carl Icahn to hedge fund firm Elliott Associates, activist investors are drilling into the oil and gas industry for value investments.

The moves indicate that the energy sector is poised for another busy year of asset sales and board transitions after many of the nation's largest players, from ConocoPhillips ( COP) and Sunoco ( SUN) to Chesapeake Energy ( CHK), underwent dramatic change in 2012.

On Monday, Hess ( HES) said Elliott Associates may take an activist stake of more than $800 million in the integrated oil and gas driller, in an effort gain seats on the company's board. Elliott's move comes amid analysis that the company should split its energy-exploration assets from its midstream refining and marketing operations.

According to a press release from Hess, Elliott Associates has notified the company it may nominate candidates to Hess's board of directors at its annual shareholders meeting this year.

Hess has 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.

Still, Hess reiterated its conviction in remaining an integrated player in the energy sector, with businesses in oil and gas exploration and those in downstream businesses like energy marketing.

The New York-based company has already been an active seller of assets to unlock value for shareholders, an effort Chief Executive Officer John Hess referred to on Monday.

In recent months, Hess has 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.

"We have transformed Hess into a predominantly exploration and production company, which is part of a multi-year strategy to grow shareholder value," the CEO said in a statement. "We are pleased that the market has been recognizing the success of our strategic transformation as reflected by the fact that Hess shares have significantly outperformed our peers over the past six months."

In November, Jim Cramer said at The Deal's Deal 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.

" The indication of increased ownership and request for board representation from Elliott Associates should be a positive for existing shareholders. Secondly, the decision to exit the final vestiges of refining is a clear positive as it removes a typically negative contributor to earnings and potentially frees up approximately $1 billion of capital for other efforts," Wells Fargo analysts said in a note Monday.

Other oil and gas giants, notably Transocean ( RIG), are also feeling the heat of activist investors in 2013.

On Friday, Carl Icahn increased his stake in oil rig contractor Transocean to 5.6% and called for the company to pay out a $4 dividend to investors. Icahn, who is now Transocean's largest shareholder, noted in a filing that the recommendation may go up for vote at the company's annual shareholders meeting and could be ratified without board support if a majority of shareholders approve the proposal.

Guggenheim Partners analysts noted Icahn's activism as a reason to upgrade Transocean to "buy" and put a price target as high as $90 a share.

"A higher probability of dividend-centric outcomes stands the best chance to exploit premium yield-based valuations and limit capital budgeting risks, warranting a higher expected return. ... A $4 dividend, paid at a rate of $1/quarter for a year, stands as the most likely outcome (30% chance), in light of an activist push in that direction," Guggenheim analysts said.

Speculation that Transocean could increase capital to shareholders began this month after the company admitted criminal charges for its role in a 2010 oil spill in the Gulf of Mexico and agreed to pay out $1.4 billion in fines to settle claims with the Department of Justice.

With criminal litigation in the rear-view mirror and a fine in line with Transocean's provisions, some speculated the company would be free to boost its dividend, an analysis seemingly confirmed by Icahn's investment.

Icahn has had a busy 12 months in the oil and gas space, highlighted by an activist stake in embattled driller Chesapeake Energy ( CHK), which has netted billions in asset sales and a revamping of the company's board.

Sandridge Energy ( SD), another noteworthy energy sector activist play, is currently battling hedge funds Mount Kellett Capital Management and TPG-Axon Capital Management over whether CEO Tom Ward should be fired.

All told, there's a cloudy outlook for the oil and gas industry.

Many drillers have spent wildly to gain access to highly valued shale assets, but may be stretched financially as drilling programs kick into gear. Meanwhile, gas-focused drillers still face uncertain commodity prices that could make production too costly.

See TheStreet ratings for Hess and Transocean for more on the outlook for both companies.

-- Written by Antoine Gara in New York

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