Elliott Restarts Hess Feud, May Seek Ouster of Founder's Son

(Bloomberg) -- Elliott Management Corp. is reigniting a four-year-old feud with Hess Corp., calling for Chief Executive Officer John Hess to fix the oil producer his father founded or get out.

The activist hedge fund is being joined by other shareholders in its renewed quest for changes to the New York-based oil company. John Hess hasn’t been responsive enough to the discontented investors, who have been expressing frustration for months, according to people familiar with the matter who asked not to be identified because the talks were confidential. 

Elliott is calling for the company to sell assets in Southeast Asia and wants Hess to focus on share buybacks instead of dividends. Elliott has retained investment banks to determine buyer interest in Hess or some of its assets, as well as recruiters to help identify potential dissidents among directors should it pursue another proxy fight, the people said.

“As long-term shareholders in Hess, we are frustrated by the company’s continuing underperformance," John Pike, senior portfolio manager for Elliott, said in an email Thursday. "Shareholders are getting impatient, because the changes needed to remedy Hess’s severe undervaluation are substantial and need to be announced without delay.”

Shares rose 3 percent to $43.93 at 9:39 a.m. in New York. Before today, Hess had dropped 32 percent this year, making it the fourth-worst performer on the S&P 500 Energy Index.

“The Hess board unanimously and unequivocally supports the company’s current strategy and John Hess as CEO,” the company said in an email. “While these are challenging times for the entire industry, Mr. Hess and the management team have moved aggressively and done an excellent job high-grading the portfolio and repositioning the Company.”

A sale by Hess is unlikely given the lofty valuation of its shares, Phillips Johnston, an analyst at Capital One Securities, wrote Friday in a note to investors. The enterprise value of Hess trades at 9.7 times next year’s estimated earnings before interest, taxes, depreciation and amortization. Buyers may be interested in the company’s Guyana or Bakken assets, he wrote.

Short interest in Hess is at 10.8 percent, close to an 11-year high.

John Hess controls 36 million shares, or 11.31 percent of voting stock, according to an April 28 proxy statement filed by the company. That total includes his sole voting rights for shares held by other family members, by the non-profit Hess Foundation and by a charitable trust established in his father’s will.

In comparison, Elliott owned 6.65 percent of the outstanding shares as of Sept. 30, according to data compiled by Bloomberg. When Elliott initially attacked Hess, it was the largest investment the fund had made in its history.

Tension between the hedge fund and the oil producer dates back to 2013, when Elliott fought a bitter battle with Hess, arguing in part that the company suffered from poor board oversight and its corporate focus needed to be streamlined.

Board Reshuffle

Hess eventually acceded to most of Elliott’s demands, agreeing to sell its namesake gasoline stations and spin off other units as well as adding three board members nominated by the fund. As part of the board reshuffle, John Hess gave up his role as chairman of the company.

Even in the midst of that fight, Elliott never called for the ouster of John Hess, 63, who took over as chief executive officer in 1995 from his father. Leon Hess founded the company in 1933, building it from a small seller of residual fuel oil to a multinational oil producer and refiner. John Hess is the longest-serving CEO of a publicly traded oil company.

Two of Elliott’s 2013 nominees remain on Hess’s board today. The company’s statement about unanimous support means Rodney Chase and David McManus -- both former energy executives -- are backing the CEO rather than the hedge fund that fought to put them on the board. The company didn’t immediately make John Hess, Chase or McManus available for comment.

Hess has its next annual meeting in March, which could provide an opening for yet another proxy fight by Elliott if the matter isn’t resolved.

“In general there’s just impatience nowadays in the market” with companies that favor growth over returns, said Brian Youngberg, an Edward Jones & Co. analyst in St. Louis. “The outlook may look better for them two or three years from now, but we’ve got to get there first. That’s the challenge it faces.”

Hybrid Portfolios

The company’s also suffering from investors’ distaste for drillers with hybrid portfolios that spread across the globe, rather than a “simpler” story, Youngberg said. Hess’s U.S. shale acreage is in the more mature Bakken play in North Dakota, not the more lucrative Permian Basin in West Texas.

This year Hess and Exxon Mobil Corp. formally approved a $4.4 billion offshore drilling project in Guyana, the tiny South American country bordering Venezuela, to tap one of the oil industry’s biggest discoveries of the past decade. But production -- and cash -- from that venture is likely years down the road: The first oil isn’t expected until at least 2020.

“For some people, it muddies up the story,” Youngberg said. “ If you’re in the Bakken, do you want to be in Guyana? And if you’re in Guyana, do you want to be in the Bakken? Is that the kind of portfolio that excites investors? Right now, I don’t think it is.”

Hess also came under fire after announcing the sale of $2.7 billion in assets designed to fund future growth in October, instead of putting the money into share repurchases. The company eventually announced a $500 million buyback in November.

The Wall Street Journal reported Elliott’s latest push for change Thursday.

--With assistance from David Wethe

To contact the reporters on this story: Beth Jinks in San Francisco at bjinks1@bloomberg.net, Alex Nussbaum in New York at anussbaum1@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net, Tina Davis, Joe Carroll

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