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Hess to Become a Pure E&P Firm

Zacks Equity Research

Hess Corporation (HES) is all set to transform itself into an oil and gas exploration and production (E&P) entity from an integrated oil and gas firm. In this regard, Hess plans to pursue the sale of 20 oil storage terminals in the U.S. and the Caribbean and exit its refining business.

The terminal network up for sale comprises 19 facilities located along the East Coast with a total of 28 million barrels of storage capacity. These terminals served as the major channel for Hess' share of production in the past from its former HOVENSA joint venture refinery and 12 of these have deep water contact. Additionally, the other St. Lucia oil storage terminal in the Caribbean has a capacity of 10 million barrels.

Hess announced plans to wrap up its 70,000 barrels per day Port Reading, New Jersey refinery by the end of February that would mark its complete exit from the refining business. This refinery unit remains engaged in making gasoline and components utilized to blend heating oil and includes a fluid catalytic cracking unit. It incurred losses twice in the last three years and the closure will release around $1 billion of working capital.

It is believed that the recent environmental policies, accompanied with a weak anticipation for gasoline refining profitability, have compelled the New York-based company to take the divestiture decision. Hess remains on track with its strategy of becoming purely an E&P company while boosting its shareholders value, much like ConocoPhillips (COP) and Marathon Oil Corporation (MRO).

These companies spun off their refining units in recent times. ConocoPhillips’ midstream business now operates as Phillips 66 (PSX) and Marathon’s as Marathon Petroleum Corporation (MPC).

Hess’ endeavor to simplify its operations is appreciated by investors as the news pulled Hess shares up around 6% on Monday on the New York Stock Exchange. This makes the company one of the major gainers in the market.

We appreciate the company’s new strategy of concentrating on high-impact exploration areas compared to low risk areas in more stable regions. Consequently, this has led to increased spending on Bakken as well as North Malay Basin, Valhall and Tubular Bells. The closure of the Hovensa refinery venture in Virgin Islands last year amidst weak demand for refined petroleum products is a positive as it will help reduce losses.

In view of the global economic slowdown and new refining capacity entering the world market, these aforesaid decisions of Hess will help boost shareholders’ value.

Meanwhile, Hess also disclosed that Elliott Associates notified last Friday that it intends to file a Hart-Scott-Rodino regulatory report to seek permission to acquire Hess shares. Billionaire Paul Singer is the founder and president of Elliott Management Corp., which manages two funds, namely, Elliott Associates and Elliott International LP.

This hedge fund is expected to take over more than $800 million of Hess shares, or a roughly 4% stake. Elliott Associates also seeks to nominate candidates for election to Hess’ board. Such a move might make Elliott one of the top three shareholders in Hess. However, the investment group did not discuss anything with Hess before stating its intention.

Hess retains a Zacks Rank #3, implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

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