Is Billionaire Paul Singer Making A Mess At Hess?
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We are convinced that tremendous value is trapped inside the Company as a result of poor oversight by a board of directors lacking both the experience and independence to set a clear, shareholder-focused, value-creating strategy.
Going a step further, Hess trades at a 40% discount on a P/S basis and a 30% discount on a P/CF basis to Exxon and Chevron, two of the biggest supermajors in the business:
How have the recent spin-offs fared?
Since the July 2011 spin-off from Marathon Oil, its refinery business, now trading as Marathon Petroleum (NYSE: MPC), has outperformed Marathon Oil by 67% and the S&P 500 by 57.5%.
May 2012 marked the spin-off of Phillips 66 (NYSE: PSX) from Conocophillips, and since then Phillips has outperformed Conocophillips by 73.5% and the S&P 500 by 75.5%.
Both of these refiners still trade below top refiner Valero Energy on a multiples basis:
Overall, it appears the spin-offs have performed much better than the surviving exploration and production companies. Worth noting is that the majority of the expected unlocked value is priced into the stock before the actual spinoff occurs. Thus, waiting until the spin-off takes place might be too late. The question is, is there enough value left in Hess shares to prompt an investment?
Uncovering the true value
Under Singer's plan, Hess would keep its offshore assets in the Gulf of Mexico, Norway, and others. Elliott believes these international operations could would generate $2 billion to $3 billion in cash annually for upwards of 15 years. At a 10.8% discount rate, the mid-range ($2.5 billion) of that cash flow stream is worth around $53.57 per share. That's just the international operations alone and does not account for the refining and other onshore value.
Elliott believes that a spin-off of Hess' Bakken, Eagle Ford, and Utica shale assets would add $28 per share in value. That puts the potential value, including future cash flow from international operations and spinoff value of onshore assets, to $81.50 per share. That's 20% higher than the current trading price and gives investors the refining business for free.
Elliott believes the total value of Hess could be as much as $126 per share, almost an 85% upside from current trading levels, if it spun-off its refining and U.S. shale businesses.
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