Announces Culmination of
Names Six New, Highly Qualified Independent Directors
Responds to Elliott Management’s Flawed Recommendations
For information about Hess’ transformation and the 2013 Annual Meeting, please visit: www.transforminghess.com.
The text of the
Dear Fellow Shareholder:
The 2013 Annual Meeting will be important for Hess and all our shareholders.
Your Board and management have been transforming Hess into a more focused, pure play exploration and production (“E&P”) company. The strategy has been working well, creating near term value and positioning us to drive returns over the long term.
Indeed, now more than halfway through our transformation, the market has been recognizing our progress. Hess shares significantly outperformed the peer index, rising from
BECOMING A PURE PLAY E&P COMPANY
This morning we announced actions that represent the culmination of our multi-year transformation into a pure play E&P company. The transformed Hess will have a focused portfolio of higher growth, lower risk, oil linked E&P assets that we anticipate will deliver a five year compound average annual production growth rate (“CAGR”) of 5 to 8%, based off of pro forma 2012 production, with aggregate mid-teens production growth between pro forma 2012 and 2014, while increasing returns to all shareholders. Specific announcements today include:
- Fully exiting our downstream businesses, including retail, energy marketing, and energy trading
- Further focusing our E&P portfolio by divesting
- Pursuing monetization of Bakken midstream assets, expected in 2015
- Returning capital directly to shareholders through an increase in the annual dividend to
$1.00per share commencing in the third quarter of 2013 and a share repurchase program authorization of up to $4 billion, with amount and timing tied to proceeds from our asset sale program
- Adding six new world class independent directors with the right mix of corporate leadership, operational and financial expertise, and top level E&P experience
HESS’ 5-YEAR TRANSFORMATION
Starting in 2010, we began taking decisive actions to grow the value of our world class asset base by focusing on the exploration and development of our most promising lower risk, higher growth, oil linked E&P assets.
In the first phase of our transformation, we invested significantly in our most promising assets, substantially increasing our leadership in the Bakken oil shale, and entering the
We began our second phase on
- Divested approximately
$1.5 billionin non-core assets across Europeand Asia, and have announced that we are pursuing the sale of our Russian subsidiary, Samara-Nafta, and our Eagle Ford assets in Texas
- Announced that we will sell our terminal network. In addition to the sale proceeds, this transaction will release approximately
$1 billionof working capital
- Exited the refinery business with the closure of our
Port Reading, New Jersey refinery
- Announced a 17% reduction in upstream capital expenditures and reduced exploration spending by 29% in 2013, with further capital expenditure reductions expected in 2014
These actions have positioned the Company well to enter this third phase of our transformation, announced today, which will create a pure play E&P company.
THE MARKET RECOGNIZES THE VALUE YOUR BOARD IS CREATING
Your existing Board and management have driven our strategic transformation and built the world class asset base that we have today. On
These strong results reflect the hard work we have done to transform the Company and, as noted above, the market has been recognizing the success of our transformation. Hess shares significantly outperformed our peer index from
Elliott Management, a New Shareholder, Is Seeking to Undermine the Value We Are Creating
As you may have seen, Elliott Management, a new shareholder, has made a recommendation that would effectively dismantle Hess, disrupting the progress we have made and foreclosing the prospect of real value creation that would benefit all Hess shareholders.
In his “reassessment” of Hess, Singer offers a seriously flawed analysis of Hess’ stock price performance based on an arbitrary endpoint. Among many other things, he fails to take into account the meaningful share price appreciation that Hess’ stock had enjoyed in response to our announcements of a series of transactions and initiatives along with our indication that other steps were underway.
We are convinced that our transformation is driving superior value creation far beyond Singer’s short term time horizon.
LOOK AT WHAT INDEPENDENT ANALYSTS HAVE TO SAY
In addition to the price appreciation of Hess’ shares since our mid-year 2012 strategy update, knowledgeable industry analysts noted Hess’ transformation.
Doug Leggate, BAML
|“Management is doing all the right things, in our view, and while criticisms of past strategy have some merit, the outlook has never been better…”|
John Herrlin, Societe Generale
|“… We very much like what HES is doing operationally. We think it makes sense to reduce mature North Sea exposure, monetize US Eagle Ford, Russian operations and US terminal business.”|
Doug Terreson, ISI
“Significant repositioning unfolded at Hess during the past five years. Investments emphasized areas of competitive strength with non-strategic interests divested or allowed to decline in relation to the rest of the portfolio.”
Fadel Gheit, Oppenheimer
|“…[Gheit said] energy companies often have unproved resources and assets that haven't yet realized their value, and trying to split up a company like Hess would be a mistake in the long run. ‘ It makes no sense. It's cutting your nose to spite your face. You don't gain anything by doing that.’"|
Arjun N. Murti, Goldman Sachs
|“…Hess is increasingly demonstrating it can deliver results that are competitive with other leading Bakken companies.”|
January 29, 2013
|“Management's continued commitment to reshaping HES's portfolio has driven an impressive turnaround...”|
HESS TRANSFORMED: A PURE PLAY E&P COMPANY DRIVING SHAREHOLDER VALUE
While we have accomplished a great deal, we are not finished. As noted above, we have announced the culmination of our transformation into a pure play E&P company. That includes:
- Exploring strategic alternatives for our entire downstream business, including retail, energy marketing, and energy trading
- Pursuing additional E&P asset sales by pruning our Asian portfolio to focus on the long lived, low risk
Malaysia/Thailand Joint DevelopmentArea and the North Malay Basin
- Reviewing potential alternatives to monetize our Bakken midstream assets, expected in 2015
- Using the initial proceeds from both previously and newly announced asset sales to pay down short term debt, and retain financial flexibility to fund our growth
- Returning capital directly to shareholders by increasing our quarterly common dividend 150% to
$1.00per share on an annual basis, beginning in third quarter of this year
- Further returning capital by initiating a share repurchase program of up to
$4 billion, with amount and timing tied to proceeds from our asset sale program
- Returning additional capital to shareholders as a result of monetizing Bakken midstream assets, expected in 2015
A Focused, Higher Growth, Lower Risk, Oil Linked Portfolio to Drive Growth
As a result of the steps already taken by your management and the Board, and the announcements today, Hess will be a pure play E&P company with a focused portfolio of higher growth, lower risk assets.
This portfolio will allow us to capitalize on our leadership position in the Bakken oil shale, enhance production at our existing conventional assets, and substantially focus our exploratory program by allocating the majority of our exploration spend to our most promising prospects.
Production growth into 2013 and 2014 is expected to be driven by currently producing assets and expected new production from Tubular Bells and
The transformed Hess will have a focused portfolio of world class, higher growth, lower risk E&P assets that we anticipate will deliver a five year CAGR of 5 to 8%, based off of pro forma 2012 production, with aggregate mid-teens production growth between pro forma 2012 and 2014.
Future Production growth is expected to be driven largely by six core assets:
Bakken Shale( North Dakota)
- Valhall Field (
- Tubular Bells (Deepwater Gulf of
Mexico) North Malay Basin( Malaysia) Utica Shale( Ohio) Ghana
Leveraging Our High Quality Technical Capabilities Across A Global Platform
Hess is also able to leverage its robust drilling, completion and production platform across its asset base, allowing us to realize synergies from the transfer of technical skills and operating capabilities globally. For example:
- Bakken hydraulic fracturing expertise is utilized in the
Malaysia/Thailand Joint Development Area.
- Managed pressure drilling expertise in South Arne (
Denmark) is applied in the Uticashale play.
- Gulf of
Mexicodeep water expertise has driven Hess’ recent drilling success in Ghanaand Equatorial Guinea.
- High pressure and high temperature experience in Gulf of
Mexicois being deployed in the North Malay Basinand other international assets.
These capabilities are recognized by the world’s leading oil companies, national oil companies, and host governments. It is not by accident that in recent years, we have been chosen by
While we are pursuing growth, we are also efficiently allocating capital in order to maximize returns. We have recently announced substantial reductions in capital and exploration expenditures. In 2013, we decreased E&P capital expenditures by 17% and expect further reductions in 2014. In terms of exploration, we have focused our budget by decreasing allocated spending by 29% when compared to 2012. Additionally, a program to further reduce costs is underway. With a leaner organization and focused capital expenditure budget, we will be well positioned to deliver growth and increase returns to all shareholders.
THE RIGHT BOARD FOR A TRANSFORMED HESS; DRIVING LONG TERM SHAREHOLDER VALUE
We are mindful of the role that corporate governance plays in protecting and creating shareholder value. And, as we convert into a pure play E&P company, we recognize the importance of adding individuals to our Board who have directly relevant experience and stature.
Our effort to identify the right people for the future has been underway since last year and today we are pleased to nominate five new highly qualified independent director candidates with the right mix of corporate leadership, operational and financial expertise, and top level E&P experience for election at this year’s Annual Meeting. We have also appointed a sixth additional new independent director who will take the seat of
Former Vice Chairman of GE; President and Chief Executive Officer of
Mr. Krenicki recently joined private equity firm
Former Senior Vice President of E&P for the
Dr. Meyers ran Exploration and Production in the
Former Chief Executive Officer, Deloitte
Mr. Quigley led Deloitte, one of the world's largest accounting and consulting firms. During his 38 years at Deloitte, he was a trusted consultant on strategic leadership and operating matters to senior management teams of multinational companies across industries. As CEO, he was responsible for the consulting, tax, audit, and financial advisory practices of Deloitte, and as an advisor and consultant, helped guide major strategic initiatives at many companies. In 2012, Mr. Quigley was named
Former Executive Vice President and Chief Financial Officer,
Mr. Reynolds was Executive Vice President and Chief Financial Officer of
Former Chief Operating Officer, TNK-BP Russia
Mr. Schrader was a senior leader of many of BP's most important E&P businesses, including serving as President of
Former Executive Committee Member,
Dr. Williams worked for over 35 years at Shell, including more than 17 years in Shell’s E&P and upstream business, serving most recently as a member of the Executive Committee of
We would like to thank our outgoing directors, who have served with distinction and deserve significant credit for helping initiate the transformation we began in 2010. The fact that we now possess some of the most attractive oil assets in our industry is, in large part, due to their commitment to our transformation.
ELLIOTT’S “RECOMMENDATIONS” ARE SERIOUSLY FLAWED, IRRELEVANT
AND UNDERMINE REAL VALUE CREATION
We think Singer’s proposals demonstrate no meaningful operational insight into our business. For the most part, his proposals would orphan our most promising assets and foreclose the potential for future real value creation. We are convinced that Singer’s agenda would destroy shareholder value.
There are points on which we agree with Singer, including the fact that certain divestitures will help unlock the value of our world class asset base. If Singer had taken the time to do his homework and meet with management prior to launching his campaign, however, he might have understood that we were already well down our transformation path to build more value.
ResourceCo & InternationalCo: Singer’s Central Thesis Is Wrong
We, like all our other shareholders, are acutely aware of the value of our assets in the Bakken. In fact, Hess significantly increased our acreage there in 2010 and today we enjoy a significant, low cost leadership position in the play. The Board and senior management are aligned with shareholders – we collectively own approximately 11% of common stock. Our top priority is increasing the value in these assets for the benefit of all Hess shareholders. Elliott’s platform is predicated almost entirely on Singer’s naive assumption that separating our U.S. assets into a stand alone company will create value. It won’t.
Neither the Bakken nor the
The Singer proposal:
- Ignores Credit Implications – Singer would break up Hess into two pieces – both of which we believe would have higher financing costs and limited financial flexibility – severely limiting our ability to realize the substantial value opportunity for Hess shareholders.
- Singer’s ResourceCo would have limited stand-alone debt capacity and substantial negative cash flow, creating an entity that could not fund Bakken development.
- Singer’s International Co would likely retain all of Hess’ existing debt on a smaller asset base with fewer reserves and lower production growth, hampering its ability to retain an investment grade rating and severely limiting its ability to run efficient international E&P activities at attractive financing costs.
- Ignores Tax Consequences – The Singer proposals assert without substantiation that midstream and downstream assets can be monetized or divested without tax leakage or inefficiencies. In fact, he ignores the significant tax consequences inherent in separating Hess into ResourceCo and InternationalCo, such as:
- Bakken capital spending generates substantial excess tax deductions that are used to offset taxable income generated by other U.S. assets.
- Singer’s ResourceCo would be generating unused tax deductions and InternationalCo would be paying taxes on otherwise shielded income.
- Singer’s InternationalCo would remain a U.S. domiciled entity with the majority of its cash flow generated from foreign assets.
- Uses Flawed Valuation Benchmarks – Singer’s net asset value assumptions that are necessary predicates for the spin off are premised on significant multiple expansion for both entities, and are not analytically sound. They:
- Ignore the declining trend in valuation multiples for pure play Bakken companies; and
- Assume Singer’s InternationalCo achieves a “premium multiple” despite being a more highly levered, less tax efficient company with lower production growth.
Further, Singer falsely asserts that we have failed to control costs in the Bakken. This is simply not true, reflecting either willful distortion or a failure to do his homework. The fact is that Hess is now recognized as one of the most efficient operators in the Bakken, with competitive drilling and completion costs below or in line with peers and further efficiencies expected as a result of our shift to pad drilling. This cost leadership is evidenced by the fact that in 2012 Hess wells enjoyed an 85% average participation rate with its partners, and our exceptional production performance is evidenced by Hess completing 3 of the top 5 producing wells in the play and 10 of the top 25.
Many independent analysts share our view of Elliott’s Flawed Proposals:
|Pavel Mochanov, Raymond James
January 30, 2013
|“Elliott Associates’ shareholder letter and presentation yesterday were, if nothing else, a case study in effective propaganda.”|
“The consequences of spinning off the shales are especially stark, as this would leave the “stub” with a short reserve life, slim growth visibility (almost entirely exploration-centric), and a very high tax burden.”
|Doug Leggate, BAML
January 31, 2013
|“Elliott’s actions have highlighted the deep value embedded in Hess: we concur that substantial additional value remains for the shares to be appropriately valued vs. peers. But our analysis leaves us unconvinced it is something that could not otherwise be achieved by management actions already underway.”
“We agree with Elliott that Hess is undervalued; we are less convinced that closing the value gap is something Hess could not achieve on its own.”
Katherine Lucas Minyard, J.P. Morgan
|“...the primary practical challenge is separating the business in need of funding from the cash generating businesses, while also robbing the blended portfolio of the high-growth assets meant to offset decline in the legacy, cash generating portfolio.”|
|William Featherston, UBS
January 30, 2013
|“…we’d note that HES’ Bakken assets are partly dependent on other parts of its portfolio to fund its growth program, while also providing steady, predictable growth to counterbalance the lumpy less predictable growth associated with its offshore assets.”|
The newly transformed Hess will be a pure play E&P company with a focused, higher growth, lower risk portfolio of world class assets. While retaining the financial flexibility to fund future growth, we will also return capital to shareholders through a substantially enhanced dividend and initiate a share repurchase program. Lastly, we have identified an outstanding team of new directors with substantial E&P, financial, and operational business expertise to lead us into the next phase of our value plan.
As you can see, your Board and management team is decisively focused on the continued successful execution of a strategic transformation well underway that is creating superior value for all Hess shareholders.
We urge all shareholders to make fully informed decisions as to whether now is the right time to disrupt the completion of our plan. For additional information and updates, including today’s investor presentation, please go to www.transforminghess.com. We look forward to continuing the dialogue with you.
Chairman and Chief Executive Officer
The Company will host a conference call today,
To phone into the conference call, parties in
A replay of the conference call will be available by dialing 1-888-286-8010 and entering the pass code 21025193. Outside
This document contains projections and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These projections and statements reflect the Company’s current views with respect to future events and financial performance. No assurances can be given, however, that these events will occur or that these projections will be achieved, and actual results could differ materially from those projected as a result of certain risk factors. A discussion of these risk factors is included in the Company’s periodic reports filed with the
This document contains quotes and excerpts from certain previously published material. Consent of the author and publication has not been obtained to use the material as proxy soliciting material.
Important Additional Information
Jay Wilson, 212-536-8940
MacKenzie Partners, Inc.
Dan Burch/Bob Marese, 212-929-5500
Jon Pepper, 212-536-8550
Sard Verbinnen & Co
Michael Henson/Patrick Scanlan, 212-687-8080