I have been busy this week which explains the lack of action on this blog. My apologies for that. I started writing this post a week ago and it remained half written. Nevertheless, I finally gotten around to finishing it today.
Hess Corp (HES) is a medium size oil major listed on the NYSE. Many of the integrated oil companies (Royal Dutch Shell, Exxon Mobil, Chevron Crop, etc) have seen valuation compression over the last decade to reach a historical low. A number of them struggle with the same problems - reserve depletion, poor project execution, and poor E&P cost controls. These problems are no strangers to HES. What is unusual about HES is that, it is widely known to suffer from poor management. The company has a long history of poor corporate governance and operational performance.
Over the last few months, HES started popping up in a number of hedge fund portfolios and I felt compelled to take a look. Some of the famous hedge fund managers that have taken up position in HES includes Michael Price, David Einhorn, John Paulson, David Tepper, and Dan Loeb. The reason why is that, HES is currently the target of an activist hedge fund, Elliott Management, due to its poor operational performance. In case you don't know who Elliot Management is, they have been very active in activist type investments, even at a sovereign level. There was a historical example, when Elliot won a court order to size an Argentine naval vessel docked in Ghana in their attempt to get the Argentine government to repay its bond. In other words, these guys mean business and are well respected in the hedge fund industry. When they take on an activist position in a company, you can be sure they will try all means to bring about restructuring.
The catalyst, which has swept so many big names along for the ride is really the proxy fight on the 16 May 2013. Elliott Management, in their attempt to bring about changes to the company, is trying very hard to push five of their candidates on to the board of directors. Much of Elliott's argument can be found on the self created site www.ReassessHess.com, which unfortunately, has been taken down following a truce. In any case, I have summarized the flaws in HES identified by Elliott below:
(i) Persistent operational issues - drilling costs which are 17-38% higher than peers for Bakken, their main unconventional shale gas asset.
(ii) Undisciplined capital allocations - loss of US$4bn from exploration programs over the past five years, which is billions more than any other peers. Hess lost US$800m at Eagle Ford Shale (the most lucrative unconventional shale plays in the US), whereas many peers have made fortunes there.
(iii) Endless restructurings that the HES management touted, with little to show.
(iv) Ineffective hedging program, losing 9% of E&P revenue from 2002-2012, 9X worse than peers.
(v) Poor corporate governance. Many board members are related to the CEO. None of the independent directors have oil & gas operating experience. The CEO, John Cess hardly speak to the press and has poor accountability to Hess's shareholders. There has been multiple attempts by shareholders to de-stagger Board re-elections, but thus far blocked by John Hess.
To sum up, the picture portrayed here by Elliott is that, the management has been failing and needs a wake up call. Where many oil majors including BP and Exxon Mobile have been rationalizing their balance sheet, disposing of their non-relevant and downstream assets, listing their midstream assets, HES has been fixated on growing company size, at the expense of shareholder value.
Value Enhancing Initiatives
To unlock the value of HES's various assets, Elliott proposed a number of measures:
(i) Spin off retail assets, such as their gasoline stations, petroleum terminals and gas fired power plants. The rationale here is that oil and gas are commodities. A Hess branding will not enable the company to sell oil and gas at a higher margin.
(ii) Divest their energy marketing business (a supplier of natural gas, electricity and fuel oil to commercial, industrial and utility companies) and their retail marketing business (independent gasoline convenience store retailing). These are non-core to HES's business and should be divested such that the market price them efficiently.
(iii) Monetize their Midstream assets through a MLP. Fund raising for MLPs today is relatively easy and offers a low cost of capital due to the stability of the cashflow that a MLP generates. Thus, their Midstream assets can achieve a much higher valuation multiple compared to being part of a integrated oil major.
(iv) Separating their conventional and unconventional oil & gas businesses.
(v) Create a Bakken standalone entity, which will house their crown jewel shale gas asset.
All of the above measure serves to simplify HES's balance sheet, making it much more cleaner and easier to for the market to analyse. Capital markets have always favor clear cut business models, which is why conglomerates are commonly priced at a discount to NAV.
The Restructuring & Valuations
Elliott argues for the breakup of Hess Corp into two separate corporate entities and divestment of non core assets. Their valuation estimates are shown below:
1) Creation of Hess Resource Co. to house their unconventional assets, which includes 725,000 net acres in the Bakken, estimated to be worth TEV of US$13bn-14.4bn.
2) Creation of Hess International to house global offshore and conventional assets including long-life, oil-weighted reserves in Shenzi, Valhall, Ceiba & Okume, as well as gas assets in Southeast Asia including JDA and Natuna Sea Block. Elliot estimates this to be worth a TEV of of US$21.4bn-30.2bn.
3) Monetise their resource infrastructure through selling their midstream assets in Bakken, which includes the Tioga gas plant and Bakken rail terminal - estimated TEV US$2bn-2.5bn
4) Divest their downstream and other non related businesses. These have low rates of return and drag down the overall ROE of Hess. Elliot estimates that this will be worth TEV of US$3.1bn-3.5bn.
Overall, the net outcome of the restructuring will create entities worth TEV of US$39bn-50bn, which translates to a share price of US$95.70-US$128.46, a lot higher than the last traded price of US$67.50. I don't profess to be an expert in analyzing integrated oil companies. This to me is a event-driven trade, where the success of unlocking value depends on the activist attempt. A lot of the valuation work hinges on valuing the individual oil and gas assets in HES, which is really a job for industry experts rather than financial analysts. Nonetheless, the price range of US$95-128 is awfully high. I have only seen sell side target around 80ish-90.
Current Situation
In response to aggression from Elliott and the proxy fight on the 16 May, the board has been pressured into announcing several restructuring initiatives to unlock hidden value. Now, the announced long-term strategy is to transform Hess into a pure play E&P company. A list of the changes they have brought about so far includes:
(i) Complete exit from its legacy downsteam retail and energy marketing business. This should release working capital for redeployment to fund other growth opportunities. This includes closing its Port Reading refinery in New Jersey and selling its terminal network.
(ii) Sell non-core assets in Indonesian and Thailand.
(iii) Sale of its interests in the Beryl area fields and Scottish Area Gas Evacuation System to Royal Dutch Shell for US$525m.
(iv) Sales of its minority interest in the Azeri, Chirag and Guneshli Fieds in Azerbaijan and associated BTC pipeline to ONGC Videsh for US$1bn.
(v) Selling its 15.7% interest in the BP operated Schiehallion field and associated share in the Schiehallion Floating, Production Storage and Offloading vessel and West of Shetland pipeline system to Royal Dutch Shell.
(viii) Increase ordinary dividend by 150% with annual dividend of US$1 per sare with effect 3Q2013.
This is a very welcomed change as opposed to the management's previously aloof approach. Short of splitting the company between conventional and unconventional oil and gas companies, these measures help instill capital discipline and lowers the capital intensity of HES. This will definitely be beneficial for valuation.
John Hess himself has stepped down from the chairman role in favor of John Krenicki a former vice chairman of General Electric. That wasn't enough to appease angry shareholders and the 16 May proxy fight culminated in a truce between HES and Elliott. In the end, both parties reached an agreement, with Elliott pushing three of its nominated directors onto the board. Bear in mind here that HES has a total of 14 board members and Elliott thus far only has 20% representation on the board. While the management seems to have bowed down to shareholder pressure, further restructuring of the company other than that of those announced is not a certainty.
Recap
Now, revisiting Elliott's original proposal, they estimate that Hess Resource Co. which houses the unconventional asset will be worth TEV US$13bn-14.4bn, and Hess International which houses their global offshore and conventional assets is worth TEV US$21.4bn-30.2bn. Both of them together accounts for ~88% of the target TEV US$39bn-50bn that Elliott estimates the restructuring will bring about. So far, the HES management has not been willing to go down this path. Without debating whether the conventional/unconventional spilt is the right move (some analysts argue that what HES is doing is the right thing, funding their unconventional drilling and production with cashflow from their mature conventional business); we are unlikely to reach the mid/upper range of Elliott's US$95.70-US$128.46 price estimate without this spilt. Unless, markets recognize the hidden value of HES's unconventional assets and prices them in accordingly. To achieve a spilt, I believe Elliott will require majority representation on the board, which will take quite some time.
And how have markets reacted to this truce? Shares plummeted below US$70 on the announcement and has been rolling over since. I am inclined to think that markets do not believe that truce will result in further unlocking of value from the company. The share price is a far cry from that estimated by Elliot. Plus, HES has already announced and implemented quite a number of balance sheet rationalisation initiatives that are in line with those proposed by Elliot. We have to assume here that those are already baked into the price. In the absence of any further catalyst, I do not see HES rallying further on a short term basis.
Conclusion
I do not recommend jumping in so late in the game, the stock having rallied 25% YTD. Most of the fund managers that jumped on the bandwagon did so early during 1Q and have gains to show for it. If anything, I am inclined to think they will be exiting and taking profits, given that the activist attempt has stalled somewhat. Most managers have jumped on to make a quick buck, and they did. Conversely, they will be equally quick to take their profit. However, if the selling forces HES to US$55-60, I may be a buyer at that point.
Hess Corp (HES) is a medium size oil major listed on the NYSE. Many of the integrated oil companies (Royal Dutch Shell, Exxon Mobil, Chevron Crop, etc) have seen valuation compression over the last decade to reach a historical low. A number of them struggle with the same problems - reserve depletion, poor project execution, and poor E&P cost controls. These problems are no strangers to HES. What is unusual about HES is that, it is widely known to suffer from poor management. The company has a long history of poor corporate governance and operational performance.
Over the last few months, HES started popping up in a number of hedge fund portfolios and I felt compelled to take a look. Some of the famous hedge fund managers that have taken up position in HES includes Michael Price, David Einhorn, John Paulson, David Tepper, and Dan Loeb. The reason why is that, HES is currently the target of an activist hedge fund, Elliott Management, due to its poor operational performance. In case you don't know who Elliot Management is, they have been very active in activist type investments, even at a sovereign level. There was a historical example, when Elliot won a court order to size an Argentine naval vessel docked in Ghana in their attempt to get the Argentine government to repay its bond. In other words, these guys mean business and are well respected in the hedge fund industry. When they take on an activist position in a company, you can be sure they will try all means to bring about restructuring.
The catalyst, which has swept so many big names along for the ride is really the proxy fight on the 16 May 2013. Elliott Management, in their attempt to bring about changes to the company, is trying very hard to push five of their candidates on to the board of directors. Much of Elliott's argument can be found on the self created site www.ReassessHess.com, which unfortunately, has been taken down following a truce. In any case, I have summarized the flaws in HES identified by Elliott below:
(i) Persistent operational issues - drilling costs which are 17-38% higher than peers for Bakken, their main unconventional shale gas asset.
(ii) Undisciplined capital allocations - loss of US$4bn from exploration programs over the past five years, which is billions more than any other peers. Hess lost US$800m at Eagle Ford Shale (the most lucrative unconventional shale plays in the US), whereas many peers have made fortunes there.
(iii) Endless restructurings that the HES management touted, with little to show.
(iv) Ineffective hedging program, losing 9% of E&P revenue from 2002-2012, 9X worse than peers.
(v) Poor corporate governance. Many board members are related to the CEO. None of the independent directors have oil & gas operating experience. The CEO, John Cess hardly speak to the press and has poor accountability to Hess's shareholders. There has been multiple attempts by shareholders to de-stagger Board re-elections, but thus far blocked by John Hess.
To sum up, the picture portrayed here by Elliott is that, the management has been failing and needs a wake up call. Where many oil majors including BP and Exxon Mobile have been rationalizing their balance sheet, disposing of their non-relevant and downstream assets, listing their midstream assets, HES has been fixated on growing company size, at the expense of shareholder value.
Value Enhancing Initiatives
To unlock the value of HES's various assets, Elliott proposed a number of measures:
(i) Spin off retail assets, such as their gasoline stations, petroleum terminals and gas fired power plants. The rationale here is that oil and gas are commodities. A Hess branding will not enable the company to sell oil and gas at a higher margin.
(ii) Divest their energy marketing business (a supplier of natural gas, electricity and fuel oil to commercial, industrial and utility companies) and their retail marketing business (independent gasoline convenience store retailing). These are non-core to HES's business and should be divested such that the market price them efficiently.
(iii) Monetize their Midstream assets through a MLP. Fund raising for MLPs today is relatively easy and offers a low cost of capital due to the stability of the cashflow that a MLP generates. Thus, their Midstream assets can achieve a much higher valuation multiple compared to being part of a integrated oil major.
(iv) Separating their conventional and unconventional oil & gas businesses.
(v) Create a Bakken standalone entity, which will house their crown jewel shale gas asset.
All of the above measure serves to simplify HES's balance sheet, making it much more cleaner and easier to for the market to analyse. Capital markets have always favor clear cut business models, which is why conglomerates are commonly priced at a discount to NAV.
The Restructuring & Valuations
Elliott argues for the breakup of Hess Corp into two separate corporate entities and divestment of non core assets. Their valuation estimates are shown below:
1) Creation of Hess Resource Co. to house their unconventional assets, which includes 725,000 net acres in the Bakken, estimated to be worth TEV of US$13bn-14.4bn.
2) Creation of Hess International to house global offshore and conventional assets including long-life, oil-weighted reserves in Shenzi, Valhall, Ceiba & Okume, as well as gas assets in Southeast Asia including JDA and Natuna Sea Block. Elliot estimates this to be worth a TEV of of US$21.4bn-30.2bn.
3) Monetise their resource infrastructure through selling their midstream assets in Bakken, which includes the Tioga gas plant and Bakken rail terminal - estimated TEV US$2bn-2.5bn
4) Divest their downstream and other non related businesses. These have low rates of return and drag down the overall ROE of Hess. Elliot estimates that this will be worth TEV of US$3.1bn-3.5bn.
Overall, the net outcome of the restructuring will create entities worth TEV of US$39bn-50bn, which translates to a share price of US$95.70-US$128.46, a lot higher than the last traded price of US$67.50. I don't profess to be an expert in analyzing integrated oil companies. This to me is a event-driven trade, where the success of unlocking value depends on the activist attempt. A lot of the valuation work hinges on valuing the individual oil and gas assets in HES, which is really a job for industry experts rather than financial analysts. Nonetheless, the price range of US$95-128 is awfully high. I have only seen sell side target around 80ish-90.
Current Situation
In response to aggression from Elliott and the proxy fight on the 16 May, the board has been pressured into announcing several restructuring initiatives to unlock hidden value. Now, the announced long-term strategy is to transform Hess into a pure play E&P company. A list of the changes they have brought about so far includes:
(i) Complete exit from its legacy downsteam retail and energy marketing business. This should release working capital for redeployment to fund other growth opportunities. This includes closing its Port Reading refinery in New Jersey and selling its terminal network.
(ii) Sell non-core assets in Indonesian and Thailand.
(iii) Sale of its interests in the Beryl area fields and Scottish Area Gas Evacuation System to Royal Dutch Shell for US$525m.
(iv) Sales of its minority interest in the Azeri, Chirag and Guneshli Fieds in Azerbaijan and associated BTC pipeline to ONGC Videsh for US$1bn.
(v) Selling its 15.7% interest in the BP operated Schiehallion field and associated share in the Schiehallion Floating, Production Storage and Offloading vessel and West of Shetland pipeline system to Royal Dutch Shell.
(vi) Monetization of their Bakken midstream assets by 2015.
(vii) Plowing US$4bn of proceeds back into share repurchase.(viii) Increase ordinary dividend by 150% with annual dividend of US$1 per sare with effect 3Q2013.
This is a very welcomed change as opposed to the management's previously aloof approach. Short of splitting the company between conventional and unconventional oil and gas companies, these measures help instill capital discipline and lowers the capital intensity of HES. This will definitely be beneficial for valuation.
John Hess himself has stepped down from the chairman role in favor of John Krenicki a former vice chairman of General Electric. That wasn't enough to appease angry shareholders and the 16 May proxy fight culminated in a truce between HES and Elliott. In the end, both parties reached an agreement, with Elliott pushing three of its nominated directors onto the board. Bear in mind here that HES has a total of 14 board members and Elliott thus far only has 20% representation on the board. While the management seems to have bowed down to shareholder pressure, further restructuring of the company other than that of those announced is not a certainty.
Recap
Now, revisiting Elliott's original proposal, they estimate that Hess Resource Co. which houses the unconventional asset will be worth TEV US$13bn-14.4bn, and Hess International which houses their global offshore and conventional assets is worth TEV US$21.4bn-30.2bn. Both of them together accounts for ~88% of the target TEV US$39bn-50bn that Elliott estimates the restructuring will bring about. So far, the HES management has not been willing to go down this path. Without debating whether the conventional/unconventional spilt is the right move (some analysts argue that what HES is doing is the right thing, funding their unconventional drilling and production with cashflow from their mature conventional business); we are unlikely to reach the mid/upper range of Elliott's US$95.70-US$128.46 price estimate without this spilt. Unless, markets recognize the hidden value of HES's unconventional assets and prices them in accordingly. To achieve a spilt, I believe Elliott will require majority representation on the board, which will take quite some time.
And how have markets reacted to this truce? Shares plummeted below US$70 on the announcement and has been rolling over since. I am inclined to think that markets do not believe that truce will result in further unlocking of value from the company. The share price is a far cry from that estimated by Elliot. Plus, HES has already announced and implemented quite a number of balance sheet rationalisation initiatives that are in line with those proposed by Elliot. We have to assume here that those are already baked into the price. In the absence of any further catalyst, I do not see HES rallying further on a short term basis.
Conclusion
I do not recommend jumping in so late in the game, the stock having rallied 25% YTD. Most of the fund managers that jumped on the bandwagon did so early during 1Q and have gains to show for it. If anything, I am inclined to think they will be exiting and taking profits, given that the activist attempt has stalled somewhat. Most managers have jumped on to make a quick buck, and they did. Conversely, they will be equally quick to take their profit. However, if the selling forces HES to US$55-60, I may be a buyer at that point.
Problem: HP Printer not connecting to my laptop.
ReplyDeleteI had an issue while connecting my 2 year old HP printer to my brother's laptop that I had borrowed for starting my own business. I used a quick google search to fix the problem but that did not help me.
I then decided to get professional help to solve my problem. After having received many quotations from various companies, i decided to go ahead with Online Tech Repair (www.onlinetechrepairs.com).
Reasons I chose them over the others:
1) They were extremely friendly and patient with me during my initial discussions and responded promptly to my request.
2) Their prices were extremely reasonable.
3) They were ready and willing to walk me through the entire process step by step and were on call with me till i got it fixed.
How did they do it
1) They first asked me to state my problem clearly and asked me a few questions. This was done to detect any physical connectivity issues with the printer.
2) After having answered this, they confirmed that the printer and the laptop were functioning correctly.
3) They then, asked me if they could access my laptop remotely to troubleshoot the problem and fix it. I agreed.
4) One of the tech support executives accessed my laptop and started troubleshooting.
5) I sat back and watched as the tech support executive was navigating my laptop to spot the issue. The issue was fixed.
6) I was told that it was due to an older version of the driver that had been installed.
My Experience
I loved the entire friendly conversation that took place with them. They understood my needs clearly and acted upon the solution immediately. Being a technical noob, i sometimes find it difficult to communicate with tech support teams. It was a very different experience with the guys at Online Tech Repairs. You can check out their website www.onlinetechrepairs.com or call them on 1-914-613-3786.
Would definitely recommend this service to anyone who needs help fixing their computers.
Thanks a ton guys. Great Job....!!
VIRUS REMOVAL
ReplyDeleteIs Your Computer Sluggish or Plagued With a Virus? – If So you Need Online Tech Repairs
As a leader in online computer repair, Online Tech Repairs Inc has the experience to deliver professional system optimization and virus removal.Headquartered in Great Neck, New York our certified technicians have been providing online computer repair and virus removal for customers around the world since 2004.
Our three step system is easy to use; and provides you a safe, unobtrusive, and cost effective alternative to your computer service needs. By using state-of-the-art technology our computer experts can diagnose, and repair your computer system through the internet, no matter where you are.
Our technician will guide you through the installation of Online Tech Repair Inc secure software. This software allows your dedicated computer expert to see and operate your computer just as if he was in the room with you. That means you don't have to unplug everything and bring it to our shop, or have a stranger tramping through your home.
From our remote location the Online Tech Repairs.com expert can handle any computer issue you want addressed, like:
• - System Optimization
• - How it works Software Installations or Upgrades
• - How it works Virus Removal
• - How it works Home Network Set-ups
Just to name a few.
If you are unsure of what the problem may be, that is okay. We can run a complete diagnostic on your system and fix the problems we encounter. When we are done our software is removed; leaving you with a safe, secure and properly functioning system. The whole process usually takes less than an hour. You probably couldn't even get your computer to your local repair shop that fast!
Call us now for a FREE COMPUTER DIAGONISTIC using DISCOUNT CODE (otr214427@gmail.com) on +1-914-613-3786 or chat with us on www.onlinetechrepairs.com.
1 Problem: HP Printer not connecting to my laptop.
ReplyDeleteI had an issue while connecting my 2 year old HP printer to my brother's laptop that I had borrowed for starting my own business. I used a quick google search to fix the problem but that did not help me.
I then decided to get professional help to solve my problem. After having received many quotations from various companies, i decided to go ahead with Online Tech Repair (www.onlinetechrepairs.com).
Reasons I chose them over the others:
1) They were extremely friendly and patient with me during my initial discussions and responded promptly to my request.
2) Their prices were extremely reasonable.
3) They were ready and willing to walk me through the entire process step by step and were on call with me till i got it fixed.
How did they do it
1) They first asked me to state my problem clearly and asked me a few questions. This was done to detect any physical connectivity issues with the printer.
2) After having answered this, they confirmed that the printer and the laptop were functioning correctly.
3) They then, asked me if they could access my laptop remotely to troubleshoot the problem and fix it. I agreed.
4) One of the tech support executives accessed my laptop and started troubleshooting.
5) I sat back and watched as the tech support executive was navigating my laptop to spot the issue. The issue was fixed.
6) I was told that it was due to an older version of the driver that had been installed.
My Experience
I loved the entire friendly conversation that took place with them. They understood my needs clearly and acted upon the solution immediately. Being a technical noob, i sometimes find it difficult to communicate with tech support teams. It was a very different experience with the guys at Online Tech Repairs. You can check out their website www.onlinetechrepairs.com or call them on 1-914-613-3786.
Would definitely recommend this service to anyone who needs help fixing their computers.
Thanks a ton guys. Great Job....!!
Nice Blog ! i have seen that u have written a good Blog and way of expression is Awsome..
ReplyDeleteThankyou @ Packers and Movers Ahmedabad