Hess Corporation - Shareholders Applaud The Continued Divestiture Strategy

| About: Hess Corporation (HES)
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Shares of Hess Corporation (NYSE:HES) continue to move higher after the integrated energy company announced yet another divestiture as part of its strategy to focus on core assets. On Monday, Hess Corporation announced the sale of its Russian subsidiary Samara-Nafta to LUKOIL. Shares rose 2.7% in response to the announcement.

The Deal

Hess Corporation announced that it has agreed to sell its Russian Samara-Nafta subsidiary to the Russian oil company LUKOIL. Hess expects to receive roughly $1.8 billion in after-tax proceeds following the deal. The Russian activities produce some 50,000 barrels of oil-equivalent per day.

Hess has already announced the sale of interests in the North Sea, the Eagle Ford play in a deal with Sanchez Energy (NYSE:SN), and fields in Azerbaijan. The sales of these activities generated roughly $1.6 billion in after-tax proceeds already.

CEO and Chairman John. B. Hess commented on the divestiture, 'As the sale of Samara-Nafta indicates, we are making excellent progress in executing our asset sales program, which is a central component of our plan to transform Hess into a more focused, higher growth, lower risk pure play exploration and production company. Just as important, by applying the proceeds from these divestitures to reduce debt and strengthen our balance sheet, Hess will have the financial flexibility to fund its future growth and also to direct most of the proceeds from additional asset sales to returning capital directly to its shareholders.'

The deal is subject to customary closing conditions including the approval process of the Federal Anti-monopoly Service of Russia.


Hess Corporation ended its fiscal year of 2012 with $642 million in cash and equivalents. The company operates with $8.1 billion in short and long-term debt, for a sizable debt position of roughly $7.5 billion.

The $3.4 billion in divestitures announced since the start of the year, including the sale to LUKOIL, will result in a significant lower debt position following completion of the deal.

For the year of 2012, Hess generated full-year revenues of $38.4 billion, up slightly from the year before. The company reported a net profit of $2.22 billion for the year, up 30% on the year before.

The market currently values Hess around $25 billion, valuing the company at around 0.65 times 2012's annual revenues, and 11 times annual earnings.

Hess Corporation pays a modest quarterly dividend of $0.10 per share, for an annual dividend yield of just 0.6%.

Some Historical Perspective

Long-term shareholders in Hess have seen decent returns, but have witnessed quite some volatility in the meantime. Over the past decade shares have almost returned 400%, excluding dividends. Shares peaked around $125 in 2008 and fell back to $50 in the following year. Shares recovered and have traded in a $45-$85 trading range ever since, currently exchanging hands at $73 per share.

Between 2009 and 2012, Hess increased its revenues by almost 30% from $29.6 billion to $38.4 billion. Net income rose from just $740 million in 2009 to little over $2 billion last year.

Investment Thesis

On its conference call following the full-year results of 2012, Hess planned to produce between 375,000 and 390,000 barrels of oil-equivalent per day in 2013, down just slightly compared to last year's 396,000 barrels of production. This guidance includes the contribution of the Russian assets, which have now been sold to LUKOIL in a deal which most likely will close before the end of the year. Yet Hess expects to fill up the loss of production by growing production in its other operations in 2014.

The deal is most likely applauded by activist investor Elliot Associates which owns 4.4% of the shares in Hess. In a response to the shareholder activism, Hess has already announced $2.4 billion in divestitures in 2012, bringing total divestitures down to $6 billion. The company plans to move away from risky exploration and production fields, it retraces from unstable geographical areas, and it retreated from the refining and marketing activities.

Elliot Associates believes Hess could be worth $128 per share. The fund furthermore demands board seats and it presented a strategy to focus on core activities, in order to create shareholder value. The solid pace of divestitures and the more shareholder friendly strategy will most likely keep Elliot and other shareholders happy in their pursuit for shareholder value.

The combination of divestitures, falling drilling costs and a 18% cut in the capital expenditure budget for 2013 will generate much cash for the firm. As such, Hess could pay down its debt rather fast or even repurchase shares, or increase its dividend payout, to please investors.

Following the completion of the strategic direction to focus on core activities, the company will be much more appealing to shareholders as a pure play in promising exploration and production areas. A focused Hess will be left with interesting and growing assets in Norway, the Bakken Fields and West Africa, among others.

The overall valuation of Hess seems healthy, despite ongoing pressure on revenues and earnings as the company continues to divest non-core operations. The growing core operations could actually stabilize and undo the negative effects of the divestments, thereby providing financial room to please shareholders.

The undervaluation, recognized by Elliot, will become apparent once the strategy is near completion. Increased dividends, share repurchases or a sale to a large global integrated energy player can all act as catalyst to send shares towards $100 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.