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The Elliot Plan, set forth by hedge fund Elliott Associates, seeks many changes at Hess (NYSE:HES). The primary changes include, appointing five new independent directors, splitting the company up by asset location and business type, and developing an internal (or via third party) analysis of what direction and assets should be pursued by the company for future development and growth. Most, if not all, of this plan is legitimate. The board, individually, has very little oil and gas experience, the assets of the company are far too diverse and complex, and it will be critical for the company to define its direction for growth.

The company definitely deserves credit for the announced sale of its terminal network along the East Coast and Caribbean and shutdown of its New Jersey refinery; however, there are plenty of changes and adjustments left to simplify the business model and become a true E&P company with solid and low-risk assets. Our hesitation for jumping into the stock involves the fact that transforming into a true E&P company can be easier said than done.

Elliott owns 4% of Hess's outstanding shares and announced its plans to buy upwards of $800 million shares and seek new board members. Elliott believes that if Hess completes all the suggestions that it has laid out, the stock should be worth upwards of $125 - 80% upside from the current stock price. However, we believe that the weaknesses and threats (outlined below) outweigh the strengths and opportunities.

Strengths & Opportunities

· Bakken, Hess showed great results from their Bakken assets. Production is up, 64 Mbbls/d or 20% quarter-over-quarter, and costs are down, $9 million per well, down 25% since the first quarter of 2012. This will be a primary focus for the company moving forward with a net production goal of 120 Mboe/d. For 2012, HES had 6 of the top 25 best performing wells (30 day IP rate) in the Bakken.

· Natural gas markets, Natural gas only makes up 25% of the company's total production, but they are definitely producing it in the right markets. Average realized natural gas prices for 2012 were $6.60 per Mcf, which is roughly 100% higher than prices seen in the US and 5% higher than prices realized in 2011.

· Hedging plan, 55 Mbbls/d of production is hedged at a Brent $108.50, which added roughly $4 /bbl in realized prices for crude in 2012.

Weaknesses & Threats

· Funding gap, the company divested ~$850MM worth of assets in 2012 with another ~$1-2B in asset sales to be completed in 2013. Additional assets are in earlier stages of divestiture, but are yet to be announced. Completion of this program is critical for a couple reasons [1] closing the funding gap and [2] simplifying their portfolio, geopolitically and conventional versus unconventional.

· Diversity, the company has a pretty impressive line-up of international assets and "opportunities," but it's fairly obvious that this company is spread thin. In accordance with the Elliott Plan, Hess needs to divest or pursue partnerships (reduce WI) for their non-core international assets. The third option would be to split Hess into three companies to manage the US assets, the international assets, and the downstream business, quite a task indeed.

Quick company overview. Hess, together with its subsidiaries, operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for and produces oil and natural gas across six continents. The M&R segment manufactures and markets refined petroleum products and electricity. It also operates a refining facility, terminals, and retail gasoline stations with convenience stores located on the East Coast of the United States. The company owns 21 terminals with an aggregate storage capacity of 31 million barrels in the East Coast and St Lucia.

($ in millions)

Market cap

$22,756

Enterprise value

$30,225

Shares outstanding

337.5

TTM Revenue

$37,691

Closing price per share 2/15/13

$67.42

TTM EBITDA

$7,359

Dividend yield

0.6%

TTM Net profit

$2,217

Beta

1.29

Cash

$642

Debt

$8,111

Assets

$43,594

Recommendation. We have a hold on Hess at $65. We need to see three things [1] how the Elliott Plan comes into action through the company, including simplification of assets, division of the company, five board seats, etc.), [2] another quarter of positive results in the Bakken, [3] and further reduction of risk, such as working interest, in non-core international assets.

Until these three developments start to show traction, I would remain on the sidelines for this stock. If it dips down into the $50s on no news, I would purchase shares. The annual meeting in May will have some actionable news for investors, which will help further assess Hess's direction and ability to navigate the Elliott Plan.

Source: Don't Get Too Excited About The Elliott Plan Just Yet