Hess Needs To Clean Up Its Mess!

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Back at the end of November I wrote how I wished for Hess (NYSE: HES) to spin off its downstream refinery and retail outlets. This past week they announced the closing of their Port Reading, New Jersey refinery and they are also looking to sell its network of storage terminals. However, they are going to hold on to their retail outlets. The refinery was profitable in only one of the last three years and Hess blames the problem on having to buy crude at Brent pricing.

 I don't know about you, but I grow tired of hearing how the refineries on the two coasts have such a disadvantage because they have to buy Brent priced crude. No they don't! Look at Phillips66 (NYSE: PSX), they just signed a five year contract with Global Partners LP to use their transportation network to deliver the cost advantaged Bakken crude to its New Jersey refinery via rail. Last year they purchased 200 rail cars to move that oil not waiting for pipelines to be built. It may be also why Phillips is thriving up over 80% in price the last year. It seems Hess wants to have their cake and eat it too. I believe if they really wanted to increase shareholder value they would keep the refinery open and spin off the entire downstream operation. Now they will be held captive to other refiners to supply their 1300 plus branded gas stations.

 Maybe they should have looked at Marathon Petroleum (NYSE: MPC) and how they are a successful spin off of downstream assets. Last year they increased their dividend by 40% and bought back 1.35 billion dollars of stock. They just announced the board authorized another 2 billion in share repurchases. They earned 755 million in the fourth quarter of last year. When one is a well-run corporation one plans for the future. Marathon did just that with the purchase of the Texas City refinery. According to the United States Energy Information Administration oil inventories are up over 30 million barrels from the same period last year and an production is expected to increase by 0.9 bbl/d in 2013. What has that got to do with Marathons Texas City refinery? One simple word, exports. They will be situated to export refined oil products to markets where they will find better prices and profits.

 Adding to the mess Hess now has Elliott Management to deal with. They plan on purchasing $800 million dollars or about 4% of Hess shares and want them to consider spinning off their Bakken shale assets while trying to place five members on their board. That is over 800,000 acres of prime Bakken land, one of the best oil shale plays in the world!

 I wouldn't buy Hess right now because they have too many negative things going on. Maybe they should look to Phillips66 and MPC and see how a spin-off is done and how when managed properly can become very lucrative. Hess has some great assets but until they straighten out the mess and find direction I'd steer clear.


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