Hess Corp.’s (NYSE: HES) transition into a pure play E&P company is nearly complete after a May 22 announcement that its retail business had gone from a spinoff to a selloff.
Marathon Petroleum Corp. (NYSE: MPC) said subsidiary Speedway LLC would buy Hess Retail Holdings LLC’s retail locations, transport operations and shipper history on various pipelines, including approximately 40,000 barrels per day (bbl/d) on Colonial Pipeline.
Marathon will pay $2.37 billion cash, an estimated $230 million in working capital and $274 million in capital lease assumptions—a $2.874 billion purchase, all told.
Analysts had estimated that the retail business’ spinoff value could be worth $1.2-$1.5 billion.
“This acquisition will be transformative for MPC and Speedway as it will significantly expand our retail presence from nine to 23 states through these premier Hess locations throughout the East Coast and Southeast,” said Gary R. Heminger, president and CEO.
Hess is the largest operator of convenience stores along the East Coast and the fifth largest in the U.S. by number of company-operated sites with 1,256 stores located in 16 states.
“Our strategy is focused on growing higher-valued, stable cash flow businesses, and this transaction fully supports that objective. With this significant geographic expansion, we will be able to further leverage our integrated refining and transportation logistics operations, providing an outlet for an incremental 200,000 bpd of assured sales from our refining system.”
Hess had planned to spin off its retail business and in January it received notification from the IRS that the company could distribute the business to stockholders tax-free, according to documents filed with the Securities and Exchange Commission.
The spinoff was one in a line of divestments the company has undertaken. In 2014, the company sold assets in Thailand for $1 billion and 74,000 acres in the Utica for $924 million. Previously, the company sold $7.8 billion in the United States, United Kingdom, Southeast Asia and the Caspian.
“Hess gets a win,” said Roger Read, senior analyst, Wells Fargo Securities. “Our prior expectation for Hess to execute a spin-off of its retail assets would have generated considerably less cash for Hess than this direct sale for $2.6 billion in cash.”
Read said the company would likely defer recognizing a gain on the sale, meaning it would see no immediate tax impact.
“With just a few noncore assets remaining for disposal, Hess has for all effective purposes reached its goal of becoming a pure play E&P.”
Hess also increased its share-repurchase program to $6.5 billion from $4 billion, which is consistent with prior commitments following the disposition of the retail operations.
MPC said the acquisition is expected to be funded with a combination of debt and available cash and is expected to close in the third quarter of 2014.
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