(Updates with comments from Hess in seventh paragraph.)
Jan. 29 (Bloomberg) -- Hess Corp., the New York-based oil company, should conduct a full strategic review, including a potential spinoff of U.S. shale assets and sale of other businesses, Paul Singer’s Elliott Management Corp. said.
The activist investor sent a letter to Hess shareholders today urging them to vote for five new board members after a “history of unrelenting underperformance.” Elliott’s funds control $21.5 billion in assets and its 4 percent stake in Hess is the largest initial investment in its 35-year history, according to a statement today.
Hess said yesterday it would exit the refining business and seek a buyer for its storage terminals to “complete its transformation” to an oil exploration and production company. Elliott, which notified the company on Jan. 25 that it would buy more than $800 million in shares and seek new board members, called the steps “financially insignificant” today.
“There are real problems at Hess,” Quentin Koffey, an associate portfolio manager at New York-based Elliott, said in a phone interview today. “They have terrific assets. They have a premier position in the Bakken, one of the best oil shales in the world. They have crown jewel deep-water offshore assets but despite that, this stock has performed abysmally.”
Hess would be worth as much as $126 a share, more than twice the $62.48 closing price yesterday, if the company spun off U.S. shale operations and exited the refining, gasoline station and energy trading businesses, Elliott said in the statement.
Hess rose 9 percent to $68.11 at the close in New York, the biggest gain in more than four years. Prior to the announcement yesterday of Elliott’s interest, the shares had gained 2.8 percent in the past 12 months.
“Hess will carefully review the material made public today by Elliott, but we do not understand why it chose to put forward its proposals and announce a slate of director nominees without any attempt to engage in discussions,” Jon Pepper, a company spokesman, said in an e-mailed statement. “Hess is already undergoing a significant transformation as part of a multi-year strategy to deliver significant value to all Hess shareholders.”
Singer, Elliott’s founder and president, is the fourth activist investor in the past year seeking to wrest profit from energy company restructuring. Elliott began looking at Hess about a year ago, Koffey said.
“Lack of focus is a chronic issue at Hess that remains unchecked by the board,” Koffey and senior portfolio manager John Pike wrote in the letter to shareholders. “New directors are needed for real change.”
Elliott hasn’t met with Hess and no discussions are scheduled, Pike said in the interview with Koffey. Three of Hess’s 14-member board are joint executors of the Hess estate, according to an Elliott slide presentation.
The investment company is seeking to replace Hess’s head of production, Gregory P. Hill, on the board as well as former New Jersey Governor Thomas H. Kean, former Senator Samuel A. Nunn Jr., former Hertz Corp. Chairman Frank A. Olson and former U.S. Treasury Secretary Nicholas F. Brady.
Four of Elliott’s proposed directors have senior executive experience at oil companies that’s missing from the current board, Pike said.
Elliott’s slate includes Rodney F. Chase, former deputy CEO of BP Plc; Karl Kurz, former chief operating officer at Anadarko Petroleum Corp.; David McManus, former executive vice president at Pioneer Natural Resources Inc.; and Mark Smith, chief financial officer of Ultra Petroleum Corp. The fifth is Harvey Golub, former chairman and CEO of American Express Co.
Elliott last year added two new board members to BMC Software Inc., after pushing the Houston-based company to consider a sale.
With 800,000 acres, Hess is the leading petroleum leaseholder in North Dakota’s Bakken oil deposit behind Continental Resources Inc, according to data compiled by Bloomberg Industries. Hess was the most active Bakken driller in the third quarter, with 58 wells, according to Bloomberg Industries.
North Dakota output almost doubled from 2009 to 2011 and it was the biggest oil-producing state behind Texas as of October, according to the Energy Information Administration.
Hess had “striking” mismanagement in the Bakken, using a drilling technique ill-suited to the formation, resulting in overspending, Elliott said. The company spread itself too thin with holdings in more than 20 countries, and its value is “buried” in comparison with international integrated oil companies, the investor said.
Spinning off holdings in the Bakken, the Eagle Ford shale of Texas and the Utica shale of Ohio would add $28 a share of value, Elliott predicted.
“Investors want pure plays, companies operating in the sectors they’re interested in,” Louis Meyer, a New York-based situations analyst at Oscar Gruss & Co., said today in an interview. “It underscores that managing all these different businesses gets to be problematic.”
Hess would still own and operate international offshore exploration and production assets in the Gulf of Mexico, Norway, Equatorial Guinea and Ghana, Elliott’s Pike said. The international operation would generate $2 billion to $3 billion of cash annually for as long as 15 years after investment to redevelop fields, Koffey said.
“That capital could be returned to shareholders or redeployed,” Koffey said. “The nominees we’re putting forward are exactly the folks you want to be stewards of that kind of capital.”
Hess shares trade at a multiple of 3.4 times earnings before interest, taxes, depreciation and amortization, the lowest among so-called integrated energy companies on the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. Integrated companies produce oil, refine it and sell the refined fuel.
Fears that Elliot’s efforts might harm the company’s ability to pay debt drove down the price of its bonds. Hess’s $1.25 billion of 5.6 percent notes due February 2041 declined 6.2 cents to 105.36 cents on the dollar to yield 5.23 percent as of 10:51 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
That’s the biggest decline since the debt was sold in August 2010 and the lowest level since May, Trace data show. The bonds have plummeted from this month’s high of 118.6 cents on Jan. 23.
Elliott’s action at Hess comes after Murphy Oil Corp. last year decided to spin off its retail fuels segment at the urging of hedge fund Third Point LLC.
Billionaire Carl Icahn nearly doubled his $2 billion investment in CVR Energy Inc. after acquiring an 82 percent stake and then spinning off CVR’s refineries into a master- limited partnership on Jan. 16.
Jana Partners LLC bought 19.7 million shares in Marathon Petroleum Corp. before the company announced plans to spin off some of its pipeline assets. Marathon Petroleum rose 89 percent in 2012, while CVR more than doubled its share price.
Elliott Management oversees two funds, Elliott Associates LP and Elliott International LP. Singer, who founded the firm, is among a group of creditors that forced Argentine President Cristina Fernandez de Kirchner to charter a plane this month for an overseas trip, to avoid seizure of state-owned assets.
--With assistance from Mary Childs in New York. Editors: Tina Davis, Jessica Resnick-Ault