Hess Corp.’s Downstream Businesses On Verge Of Complete Divestiture

Purchased the Pangkah asset producing an average of 9,000 BOE/d in the first three quarters of 2013.

Months ago, Hess Corp. (NYSE: HES) set out to slim down into a pure E&P company by divesting assets.

Since then, its campaign has more resembled a hunger strike. Hess has shed $7.8 billion in assets in the United States, United Kingdom, Southeast Asia and the Caspian. It begins the new year with a plan to spin off its retail business, valued at roughly $1 billion.

The New York City company also announced Jan. 10 that it completed its Indonesian divestiture, bringing proceeds there to $1.3 billion.

Hess’ retail business has been up for sale for some time. The company announced Jan. 8 that it has received a private letter ruling from the IRS that allows the company to distribute the business to stockholders in a tax-free spinoff, according to documents filed with the Securities and Exchange Commission.

Hess Retail will become an independent, publicly traded company. The distribution to Hess stockholders will generally be tax-free for U.S. federal income tax purposes, except to the extent that cash is received in lieu of fractional shares. No vote of the stockholders of Hess is required in connection with the distribution, the company said.

While pursuing a spin of the retail business, Hess is still soliciting offers to purchase the entire retail business.

One potential buyer is Marathon Petroleum Corp. (NYSE: MPC). Gary Heminger, president and CEO of Marathon, has praised Hess’ retail business.

MLPs such as Energy Transfer Partners (NYSE: ETP) are also contenders, though buyers would have a high valuation threshold considering tax leakage and high peer multiples, said Sameer Uplenchwar, analyst for Global Hunter Securities.

HES has 1,258 retail locations, including 81 travel plazas, and the spinoff value could be in the $1.2-$1.5 billion range assuming up to $1.2 million value per location, Uplenchwar said.

“This compares to our NAV (net asset value) estimate of $850 million, which assumed an outright sale,” he said.

Hess is continuing 2013 divestiture momentum by continuing to squeeze higher value for assets sold above Street expectations, Uplenchwar said.

With a tax-free spinoff value of $1.2 billion for retail, the company will have sold its entire downstream business for about $4.1 billion. “We expect the company to exit the retail business by mid-2014,” he said.

“We see Hess as more defensive than offensive as the company is toward the tail end of planned asset sales,” Uplenchwar said. “Hess needs to deliver on its production growth targets in 2014 (Bakken, Utica, GOM) to maintain/expand its multiple going forward.”

Hess also said Jan. 10 that it finalized the sale of its Pangkah asset to a subsidiary of PT Saka Energi Indonesia for after-tax consideration of $650 million. The asset, located off the coast of Indonesia, produced an average of 9,000 barrels of oil equivalent per day net to Hess in the first three quarters of 2013.

Hess previously completed the sale of the Natuna A for $650 million, the company announced Dec. 6. The Natuna A asset produced an average of 5,500 barrels of oil equivalent per day (BOE/d) net to Hess in the first three quarters of 2013.

The $1.3 billion proceeds from the sale will be used to repurchase shares under an existing $4 billion authorization.