Hedge fund Elliott Management will nominate five executives to Hess Corp's (HES.N) board as it pitches a plan to break up the U.S. oil and gas company to boost returns for investors.
Activist investor Elliott, which owns about 4 percent of Hess, urged the company on Tuesday to consider a spinoff of much of Hess' onshore holdings in the United States and the sale of retail operations. Hess shares closed 9 percent higher at $68.11 on Tuesday.
"We are convinced that tremendous value is trapped inside the Company as a result of poor oversight by a board of directors lacking both the experience and independence to set a clear, shareholder-focused, value-creating strategy," Elliott wrote in a letter to Hess.
The oil company disclosed on Monday that Elliott was considering putting a slate of nominees up for the company's board. The company also announced plans to sell its oil storage terminal network and exit the refining business.
Hess has been shifting away from refining since early last year, when the HOVENSA refinery, a joint venture between Hess and Venezuela's PDVSA, was closed. Chief Executive Officer John Hess has said the company's strategy was to focus on lower-risk, higher-return assets like its position in the Bakken oil shale in North Dakota.
Elliott suggested that the company should spin off that position in the Bakken, as well as positions in the Eagle Ford and Utica shales. It said that the company should streamline its remaining offshore and international operations, focused on long-lived oil assets.
The hedge fund also said that - along with the company's planned exit of storage and refining - Hess should sell its retail and other businesses as well as consider a master limited partnership structure for its infrastructure assets.
Elliott said it believed the underlying value of Hess' assets if the company follows its plan was more than $126 a share.
Hess said in a statement that it would carefully review the material made public by Elliott, "but we do not understand why it chose to put forward its proposals and announce a slate of director nominees without any attempt to engage in discussions. Hess is already undergoing a significant transformation as part of a multi-year strategy to deliver significant value to all Hess shareholders."
Oppenheimer analyst Fadel Gheit said he was not sold on Elliott's proposal, which he believes would limit the company's upside.
"The whole idea of getting into the Bakken in a big way was to provide a stable part of the business that would grow in a predictable manner and to have the really spicy upside potential that would come from drilling offshore," Gheit said.
Elliott, which has around $20 billion of assets under management, said that its investment in Hess was its largest initial equity investment in its 35-year history.
John Pike, senior portfolio manager at the hedge fund, said he believes that poor governance at Hess has led to "a totally unfocused strategy."
"What are these guys doing running a hedge fund? Why are they operating an electric generating facility? Why are they funding fuel cell technology?" he said in an interview. "These adventures have no place in Hess Corp."
Elliott's nominees to Hess board are former BP Plc (BP.L) Deputy CEO Rodney Chase, former American Express (AXP.N) CEO Harvey Golub, former Anadarko Petroleum Co (APC.N) Chief Operating Officer Karl Kurz, former Pioneer Natural Resources (PXD.N) Executive Vice President David McManus and Ultra Petroleum Corp (UPL.N) Chief Financial Officer Marshall Smith.
One obstacle facing Elliott in its bid to elect its nominees to Hess' board is the company's largest shareholder, John Hess, who owns more than 10 percent of the company's shares.
Yield spreads on bonds issued by Hess widened after Elliott's announcement. As of 3 p.m. EST, the company's 5.6 percent 2041 bonds were the most actively traded of the session, according to Tradeweb, widening 25 basis points to Treasuries plus 194 basis points.
(Reporting by Michael Erman in New York and Anna Driver in Houston; editing by Gerald E. McCormick, Lisa Von Ahn, Tim Dobbyn and Matthew Lewis)