Hess Going for a New Spin
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The decision was due for some time now, and had to be out today or tomorrow. Hess (NYSE: HES) has finally decided to do away with its downstream activities, increased the annual dividend to $1 per share, and authorized a buyback worth $4 billion.
These decisions were accompanied by another major change, the nomination of five independent board members to be elected in the next Annual General Meeting, along with a sixth independent director to be elected in 2014. A lot of factors have led to such an important strategic decision. Let’s take a dig at those.
The “Elliott”-ian Effect:
Influence of activist investors like Carl Icahn, and many other hedge funds, has led to a change in the boards of various companies, some as big as Chesapeake Energy (NYSE: CHK). Icahn was a key force behind Chesapeake’s Founder and CEO Aubrey McClendon's ouster. McClendon has been accused of sanctioning more than $1 billion in loans from Chesapeake, while holding his position in the company.
The news of McClendon stepping down as CEO brought back investor confidence in the company, and the stock rose by more than 10%. A similar trend can be seen with Elliot stepping in as the third largest share holder of Hess.
Since Elliot acquired 4% stake in Hess in January this year, he has been pursuing Hess to split its U.S. onshore and offshore business. Though Hess has turned down the advice, it has decided to sell off its retail, energy marketing, and energy trading segments to concentrate on the more lucrative upstream activities.
The temptation of “upstream”:
ConocoPhillips (NYSE: COP), in a brilliant move, had decided to spin off its refinery business under the name Phillips 66, so that it could focus on the more rewarding E&P activities. Currently, ConocoPhillips is engaged in exploration and production activities in some of the best shale plays, and is even supplying liquefied natural gas from the U.S.' only export terminal in Alaska.
Though it is mulling the decision to cease exports from the LNG terminal in Alaska due to insufficient gas supply, ConocoPhillips has performed well as an independent oil and natural gas E&P company.
Following the trend, Hess has also made a smart decision to sell off the refinery and retail business, and concentrate on the more rewarding E&P activities. Almost 90% of Hess’ revenue comes from exploration and production. Hess has not only decided to concentrate on exploration and production, but has also decided to concentrate on the most prolific E&P assets, and divest interest in the company’s assets in Indonesia and Thailand.
This will help Hess to zero in on the higher growth assets, which would in turn lead to higher growth in the coming years.
The decisions taken by Hess are bound to have an effect on the future performance of the company. Along with the decision to concentrate on the high yield E&P assets, the decision to buy back stock and increase dividend will increase the stock’s value, and boost investor confidence. Though Hess denies it, the push from Elliott has come as a blessing in disguise for the company, which promises to lead Hess to newer heights. The stock is worth keeping an eye on.
sattybose has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!