Forget the Split: An Outright Sale of Hess (HES) Might be Best (STO) (XOM) (CVX)

March 25, 2013 10:22 AM EDT
Elliott Management has been calling for a break up of Hess Corp. (NYSE: HES) ahead of Hess' annual meeting in May. Chairman John Hess has put together an asset sale plan, which also include returning cash to shareholders and appointing six new directors.

Both plans are risky, the WSJ noted today. Some have doubts about the viability of Hess' international business, while shareholders would have to put faith in John Hess following years of lackluster returns.

The WSJ suggests that Statoil (NYSE: STO) might offer a remedy: buy Hess in whole. Other buyers might be names like Exxon Mobil (NYSE: XOM), Bp plc (NYSE: BP), and Chevron (NYSE: CVX), but Norway's Statoil might be the most interesting suitor.

Though Hess has strong assets in Bakken shale, Asia's Malay Basin, the North Sea, and others, aside from some success in Ghama recently, none have given investors confidence. The results have put Hess with a trading range that largely discounts it to peers like Apache (NYSE: APA) and Devon Energy (NYSE: DVN) in terms of price to cash flow over the last several years.

Statoil's $4.4 billion acquisition of Brigham Exploration in 2011 gave in operational rather than passive stakes in the Bakken play, meaning Hess could fill that gap as well as help Statoil diversify away from its home country. Statoil's proved reserves life of 7.4 years is also lowest of the oil majors, while Hess could add 8 years to that number.

At $88 billion, Hess isn't an easy target to take down. The WSJ speculates that Statoil could afford a 30 percent premium to the shares. Statoil currently carries net debt of about 1 times expected FY13 EBITDA. Cost of debt might go up to 5.5 percent, but buying Hess could boost Statoil's FY133 EPS by about 9 percent.

Some convincing would have to be done for shareholders; a buyout price of $91 would be below Elliott's estimated break-up range of $97 to $126.

But, for the low-risk, quick return, shareholders might just find the energy to agree with an outright purchase.

Hess shares are up about 1.7 percent Monday.

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