Can Asset Sales Save Hess Corp.?

Over the past several years, Hess Corp. (NYSE: HES  ) has struggled with overspending and poor capital efficiency, resulting in the loss of a great deal of shareholder value. But after a bitter proxy battle with Paul Singer's activist hedge fund Elliott Management, the company is looking to turn things around.

After divesting some $7.8 billion worth of assets over the past year, Hess is zeroing in on higher-growth, lower-risk resource plays as it transitions toward becoming a pure-play exploration and production company. But will asset sales be enough to revive the company and push its share price higher?

Utica dry gas asset sale
The most recent asset sale announcement came on Jan. 29, when Hess said it had agreed to sell approximately 74,000 acres of its dry gas acreage in Ohio's Utica Shale to an undisclosed third party for $924 million. Though Hess didn't specify the name of the third party, The Wall Street Journal reported that the buyer was none other than American Energy Partners, led by former Chesapeake Energy (NYSE: CHK  ) CEO Aubrey McClendon.

Hess expects to receive roughly two-thirds of the cash proceeds from the transaction by the end of this year's first quarter, with the balance to be received in the third quarter. It will use the proceeds to buy back more of its own shares. Hess' CEO John Hess explained the company's decision to part with its Utica dry gas assets within the context of its ongoing portfolio streamlining:

"While our wells in the dry gas portion of the Utica were highly productive, we concluded that the potential returns from such an investment, at current and projected natural gas prices, no longer justified retaining this acreage as a strategic part of our overall liquids-based asset portfolio," he said.

The key takeaway from the CEO's comments, I think, is the last part, referring to Hess' liquids-based asset portfolio. With 79% of its reserves consisting of liquids, the company ostensibly wants to maintain its high degree of leverage to more profitable oil and natural gas liquids. By comparison, peers such as Occidental Petroleum (NYSE: OXY  ) , ConocoPhillips (NYSE: COP  ) , and Devon Energy (NYSE: DVN  ) have 72%, 62%, and 47% of their reserve base consisting of liquids, respectively.

Positive impact of asset sales
Hess' other major asset sales over the past year include the sale of its stake in Russian subsidiary Samara-Nafta to OAO Lukoil for total proceeds of $1.8 billion; the sale of its Energy Marketing unit to Direct Energy, the North American unit of British utility Centrica, for $1.03 billion; the sale of its East Coast and St. Lucia storage terminal network to Buckeye Partners for $850 million; and the sale of its interests in the Pangkah and Natuna A assets offshore Indonesia for $1.3 billion.

While these and other asset sales reduced Hess' full-year 2013 production by about 72,000 barrels of oil equivalent per day, they've allowed the company to significantly improve its financial health by paying down $2.4 billion of short-term debt and boosting its cash balance by roughly $1 billion. They've also allowed it to repurchase $1.9 billion of its own shares, reducing its fully diluted outstanding share count by about 6.5%, as well as to raise its annual dividend by 150% to $1.00 per share in September.

And Hess isn't done yet. Additional planned asset sales include the sale or spinoff of its retail business, the sale of oil and gas assets in Thailand, the sale of its stake in its energy trading joint venture, Hetco, and the monetization of its Bakken midstream assets, most likely through an MLP vehicle.

With an improved balance sheet and more liquidity thanks to these asset sales, Hess can accelerate drilling activity in its key growth asset -- North Dakota's Bakken shale. Given the company's strong Bakken well performance, 15% year-over-year reduction in drilling and completion costs, and deep inventory of drilling locations in the play, its target of 150,000 boe/d of net Bakken production in 2018 looks quite achievable.

The bottom line
Overall, I think Elliott Management's shakeup of the company was exactly the catalyst it needed and should unlock a great deal of shareholder value over the next few years. Despite a 15% increase in Hess' share price over the past year, I think the stock is still trading at a significant discount to its net asset value and has plenty of upside. Credit Suisse has a $100 price target on the stock, which represents 30% upside from current levels.

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