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Hess Corporation (NYSE: HES) announced yesterday that it had filed a Form 10 with the Securities and Exchange Commission (SEC) for the potential spin off to its shareholders of its existing retail oil products marketing division and convenience store chain, the wholly owned Hess Retail Corporation.
Parent company the Hess Corporation today is a leading global independent energy company engaged in exploring for, and producing, crude oil and natural gas, and now known as a “pure-play” developer.
In 2012 and 2013 Hess had been dismantling some of its global energy interests, and downstream operations, to focus more on U.S. exploration and production, particularly in theBakkenand Utica oil shale plays. Hess has gotten out of the refinery business altogether, and said last March it would also exit the retail gasoline and convenience store business by 2015.
The company recent share price of US$82 per share has a market capitalization of about US$28 billion. The company’s shares have risen by almost 55% in the last year, and the market is obviously happy with the strategic moves the company has been taking.
With today’s announcement Hess seems to be finally finding a way to pull back for good from the retail end of the business, the business where it actually started in 1933. Like many large integrated operators in the oil business, Hess’s retail margins are always squeezed between the profitable production side of the business and intense competition at the nation’s gas stations. Only nimble independent operators, it seems, can skate the thin line needed to turn razor thin operating margins into solid returns on capital in that business. During 2013 Hess had no takers to buy the division, though there were certainly rumours at one point that the hedge fund owners behind BJ’s Wholesale Club might take it on.
In announcing the plan for the spin-off Hess also stated that the Internal Revenue Service (IRS) had provided a ruling to the company permitting the spin-off to be on a tax-free basis.
The documentation Hess filed with the SEC yesterday includes full details of the retail business operations, including balance sheet and income details such as you would expect to see disclosed for an independent company. Accordingly capital structure, business, risk factor and management and governance arrangements are all outlined there as well.
Hess are actually covering themselves two ways with this announcement, as the company states it intends to continue to solicit buyers for the retail group at the same time as it pursues the organizational arrangements for a spin-off. If it should instead finally get a decent offer, one that Hess believes to be superior for its shareholders, it obviously might then prefer to take that route instead.
Since late 2012 activist investor Paul Singer and his Elliott Management hedge fund had been pushing Hess into taking some of these steps, having moved in as a significant shareholder a year ago and successfully demanded changes to the board. Elliott Management still owns about 5% of the company. John Hess, the Hess CEO, has taken a good deal of Paul Singer’s advice, but so far has kept the shale assets in the US against his advice at the time, which turns out to have been a good bet and which Singer initially wanted sold.
For the moment however, Hess remains the largest owner of convenience stores along the East Coast with operations in 15 states plus the District of Columbia.
With revenues of US$9.8 billion in the nine months to September 30th, 2013, the retail division contributed just US$35 million in net income to the consolidated company, yet tied up US$1.37 billion of the parent company’s equity.
As a stand-alone entity it is not exactly clear how much it might trade for when it becomes listed either. Going with 2013’s numbers to date, annualized earnings before deducting depreciation, amortization, interest and taxes (EBITDA) would be about US$170 million. Multiplying by ten would give a, perhaps generous, enterprise value of about US$1.7 billion. Then deducting existing specific debt in the division’s balance sheet of US$250 million would give a possible implied trading value of about US$1.45 billion, or just a little above its present equity book value.
Once Hess sees whether or not it can in the end drum up some third party bids for the division, it will then nail down all the final details if the spin-off itself becomes a “go”. No shareholder vote is needed to approve the action, however, which will be decided by the Board of Directors on its own.
The Hess retail division presently has over 1, 250 fuel and food outlets from Florida to New Hampshire. It is also a major Dunkin’ Donuts franchisee. And the business also operates 81 travel plazas, including a number of major interstate highway stops over 10, 000 square feet in size.
Hess presently supplies all the gasoline for its branded stations, and even makes its own toy trucks for sale there. Once independent, the new company, which will still be called Hess Retail Corporation, may be expected to contract to purchase up to 80 percent of its fuel under long-term contracts from third parties, with the rest bought on spot markets.
About the Hess Family
The CEO of parent company Hess Corporation is John Hess, age 59, who is the son of the company’s original founder Leon Hess. Under new governance arrangements announced in March 2013, John Hess gave up the Chairmanship, which he also held, in favour of an outside director. This is in line with best practice for corporate governance, much favoured by institutional investors.
A graduate of Harvard College and the Harvard Business School, John Hess also holds directorships in a number of leading US corporations.
His father Leon Hess, who founded the company, was born in New Jersey in 1914 and died in 1999 at the age of 85. His own father was a butcher who had emigrated from Lithuania but worked as an oil delivery-man in New Jersey once he arrived in the United States. Leon worked for the same company too when he grew up, and later took it over after it went bust in 1933 in the depression. He then built it up to become a large business, including initially by aggressively bidding for Federal oil contracts.
During World War Two Leon Hess joined the army and rose there to the rank of Major, serving at one point as the fuel supply officer for General Patton himself.
After the war was over he continued to build the company into a major integrated oil company, even possessing at one time the country’s largest refinery. After he retired in 1995 his son John took over and continued to build the company to its current scale.