Hess Midstream Partners' IPO Could Boost Shareholder Value

NEW YORK (TheStreet) -- On Wednesday, Hess  (HES) revealed its subsidiary Hess Midstream Partners has filed for a $250 million initial public offering with the Securities and Exchange Commission. This could be great news for shareholders.

Structured as a master limited partnership, or MLP, the offering "will create value" for Hess's shareholders, Fadel Gheit, senior analyst at Oppenheimer, told TheStreet through an email.

In a press release, the company said Hess Midstream Partners will partly own a natural gas processing plant and the associated railroad terminal as well as a crude oil truck and pipeline terminal in North Dakota and a storage and transloading facility in Minnesota. The new company will start trading at the New York Stock Exchange under ticker HESM from the first quarter of 2015.

Brian Youngberg, senior energy analyst at Edward Jones, told TheStreet in an email that the markets have been expecting this for the last couple of months and its impact is already priced into Hess' shares. The stock has climbed almost 15% for the year to date, currently trading near $95.

With the spinoff, Hess will monetize the MLP's assets while delivering a tax advantage to its shareholders. Gheit explained that a MLP is "more tax efficient and reduces the cost of capital to acquire and grow the midstream assets."  

An MLP pays cash distributions to its investors in place of dividends. Investors get a yield similar to a dividend but the tax structure is different and seen as more favorable.

The large, vertically integrated oil majors, such as Exxon Mobil (XOM) and Chevron (CVX) , have generally shied away from creating MLPs, with the exception of Royal Dutch Shell (RDS.A) , which revealed its plans to spin off its U.S. pipelines business into an MLP earlier in June.

For Hess, the spinoff is a part of its larger strategy aimed at becoming a pure-play exploration and production company focused on exploiting its assets in the prolific Bakken formation in North Dakota and other major oil producing regions such as the Gulf of Mexico. Since 2012, Hess has collected $12.5 billion by selling its non-core assets, including the sale of its gasoline stations to Marathon Oil (MRO) to for $2.6 billion, to fuel the growth of its oil and gas production as well as reward shareholders through dividends and buybacks.

Hess owns 640,000 net acres at Bakken, which, the company said at a conference earlier this month, is going to drive its production growth through 2018. The company has said that it will run 17 rigs in the region in 2014 and has forecast net production of between 80,000 barrels to 90,000 barrels of oil equivalents a day for this year. The company has forecast to increase this to 150,000 barrels of oil equivalents a day by 2018.

Meanwhile, Hess has also ramped up its Tioga Gas Plant in North Dakota, expanding its processing capacity from 110 million cubic feet to 250 million cubic feet a day. Youngberg has said that this plant is going to give a boost to the company's earnings in 2014 and will contribute to an increase in oil and natural gas production from the state.

Additionally, Gheit has said the Tioga plant will also allow Hess to reduce flaring, or wasteful burning, of natural gas.

Lorrie Hecker, Hess' spokeswoman, declined to comment saying the company is currently in a quiet period.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates HESS CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate HESS CORP (HES) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its attractive valuation levels, expanding profit margins, solid stock price performance and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

You can view the full analysis from the report here: HES Ratings Report

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