Hess (HES) is in the midst of a multi-year transformation into a focused pure play exploration and production (E&P) company. With a numerous milestones already achieved, the market has rewarded the company with a higher valuation as the share price has climbed from $40 a share at the end of last June to the current trading price of $71 a share. With an activist investor on board and clear potential for further upside, Hess is attractive.
I will now provide an overview of the company. Hess used to be two operating segments, the E&P segment and the Marketing and Refining segment. The latter is being divested so the new Hess will become just the former. The E&P segment explores for, develops, produces, purchases, transports, and sells crude oil and natural gas. This segment conducts exploration and production activities principally in Algeria, Australia, Azerbaijan, Brunei, China, Denmark, Egypt, Equatorial Guinea, France, Ghana, Indonesia, the Kurdistan region of Iraq, Libya, Malaysia, Norway, Peru, Thailand, the United Kingdom, and the United States.
Hess began divesting assets early last year, divesting a few small assets before agreeing to sell a 2.72 percent interest in the Azeri, Chirag and Guneshli Fields in Azerbaijan and its 2.36 percent interest in the associated BTC pipeline to ONGC Videsh for $1 billion. The company followed that up by agreeing to terms for the sale of its interest in the Beryl area fields and the Scottish Area Gas Evacuation System to Royal Dutch Shell (RDS.A) for $525 million. The first official announcement in the company's restructuring into a pure E&P play came in January when the company announced that it will pursue the sale of its terminal network in the United States. Hess also announced that it will complete its exit from the refining business by closing its Port Reading, New Jersey refinery. It was widely applauded by investors as shares rose 9% on the day.
On March 4, an official announcement came about HES's restructuring. This is expected to focus the company on holding higher growth and lower risk E&P assets, or in other words a higher present value of future cash flows assets and therefore, a higher market valuation. With attractive, oil linked reserves, Hess anticipates achieving a five-year CAGR of 5 to 8%, based off of pro forma 2012 production, with aggregate mid-teens production growth between pro forma 2012 and 2014, while increasing returns to shareholders.
The company also fully documented its plans and said that it is expecting to divest the E&P portfolio in Indonesia and Thailand as well as a monetization of Bakken midstream assets that is expected to occur in 2015. Hess also announced a key nugget of information with its plan to return cash to shareholders, showing that is also focused on shareholder returns, aligning interests between management and shareholders. Hess said that it plans to return capital directly to shareholders through an increase in the annual dividend to $1 per share commencing in the third quarter of 2013, and a share repurchase authorization of up to $4 billion tied to the timing of asset sales.
Elliot Management, which is run by billionaire Paul Singer, owns shares in Hess and has been aggressively pushing for changes in the company. In addition to offering up a new slate for the Board, the hedge fund is pushing Hess to separate its assets in the oil-rich Bakken Shale region from less prolific international assets. The firm believes that unlocking the trapped value in the shares could result in a share price of greater than $126 per share, upside of close to 80%.
Elliot Management is focused and is putting additional resources into its Hess investment evidenced by their town hall meetings and continuous back and forth with Hess management. The hedge fund even went as far as creating a website for its plan for Hess. The evidence suggests that Elliot Management is committed and doesn't plan on selling their shares any time soon, a plus for shareholders.
There have been instances in the past of oil companies restructuring their operations to transform themselves into pure E&P plays. Marathon Oil (MRO) spun off its retail and marketing assets into Marathon Petroleum Corporation (MPC) two years ago while Conoco Phillips (COP) spun off its refineries, pipelines and chemicals division into Phillips 66 (PSX) last spring. Both spin-offs have been great performers with MPC up 100% and PSX up close to 80% since they were each spun off.
In addition to Hess, there are other intriguing E&P stocks out there. For example, Multi-Corp International (OTC:MULI), an exploration and production company headquarter in Texas. Multi-Corp owns the Cave Pool Unit property, covering 2,800 acres within Eddy County, NM. The field contains approximately 40 wells that have produced but are currently shut-in. An independent reserve evaluation prepared by Chapman Petroleum Engineering Ltd. indicates estimated Proved light oil reserves of 386,000 STB having a net present value of $11,954,000 at 10% DCF/annum and additional Probable reserves of 1,570,000 STB, having a value of $67,479,000 at 10% DCF/annum.
The company expects that the production of these reserves will be realized through drilling of wells on unexploited locations from the Grayburg sand identified on well logs of the existing wells on these lands. Some of the wells on these lands will be re-entered for production from previously uncompleted zones in the Grayburg reservoir.
Another one is EOG Resources (EOG), which is one of the largest independent (non-integrated) crude oil and natural gas companies in the United States with proved reserves in the United States, Canada, Trinidad, the United Kingdom and China. The analyst consensus on the shares is $148 compared to a share price of $118.
Another one is Devon Energy (DVN), which holds interest in various properties located in Rocky Mountains, Mid-Continent, Permian Basin, and Gulf Coast regions of the United States. It also owns oil and gas properties in Alberta, British Columbia, and Saskatchewan provinces of Canada. The analyst consensus on DVN is $70 for a prospective return of 27%.