Hess: From a Mess to a Prize

Tickers in this article: HES OXY
Updated from 6:00 a.m. to correct the number of shares Hess owns, last paragraph, page 2.

NEW YORK (TheStreet) -- Just when you think the plot can't get any thicker at energy entrepreneur Hess , an activist shareholder stirs the pot once again.

HES, founded in 1920 and headquartered in New York City, is an independent energy company on a global scale. It operates in two segments, Exploration and Production (E&P), and Marketing and Refining (M&R). Its stock was "stuck in the muck" for a long time. So far in 2013 shares have leapt nearly 35%!

Let's take a look at the five-year price chart of HES and see if the price increase correlates with better revenue-per-share or rising earnings-per-share (EPS). HES ChartHES data by YCharts

Since late 2009 the trailing 12-month (TTM) revenue per share rose somewhat and then flatlined. The TTM diluted EPS has almost been as flat as a pancake. So what's been the driver that helped the share price of HES to move much higher all of a sudden?


Enter Elliott Management led by activist investor Paul Singer, which happens to be HES's second-largest shareholder. Smelling opportunity and probably looking at the same kind of chart we see above, Singer told the company it should sell assets and bring in fresh board members after years of "unrelenting underperformance."

Not surprisingly, Hess rejected Elliott's nominees, proposed its own slate of six new board members and announced plans to sell some of its operations as it transforms into more of a pure-play E&P company. Chairman and Chief Executive Officer John Hess, on Tuesday, wrote a letter to shareholders claiming that Elliott is proposing to pay its board nominees fees to liquidate the company.

Hess doesn't mince words on this topic. The quote from Tuesday's shareholder letter states emphatically:

Despite the strong endorsement our plan has received from independent Wall Street analysts and our shareholders alike, Elliott Management -- an activist hedge fund run by Paul Singer that only recently began accumulating Hess stock -- is asking you to elect a slate of dissident directors who have already compromised their independence by agreeing to be paid directly by Elliott to support the hedge fund's short term agenda.

Under this highly unusual scheme, Elliott would control its directors by potentially paying them millions in cash to effectively dismantle Hess and all but foreclose the prospect of future value creation.

Hess goes on to strongly urge shareholders to endorse the company's slate of proposed director nominees.