Elliott Management Corp springs second challenge to oil and gas producer Hess Corp

With comparatively higher cash reserves, Hess has come under renewed investor pressure to deliver better return to its shareholders.

With activist hedge fund Elliott Management Corp calling the performance of oil and gas producer Hess Corp as “continuing underperformance”, it is likely that it is preparing the grounds for a new fight with Hess Corp’s board.

This will be the second time Elliott Management, which owns 6.6% of Hess as of September 30, has targeted the company.

Earlier in 2013, Elliott had conducted an activist campaign against Hess that led to a slew of asset sales and three Elliott-backed directors joining the board.

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

In 2017, U.S. energy stocks have largely underperformed against other sectors with oil prices failing to rise to their 2017 forecasts dampening investor appetite. Although the price of crude oil rallied to nearly 40% this June, their shares however did not reflect this forward momentum.

“The Hess board unanimously and unequivocally supports the company’s current strategy and John Hess as CEO,” said Hess in a statement. The company’s board has even stated Hess and the management team have done an “excellent job” in challenging times.

“The company is well positioned to deliver industry-leading returns and value to shareholders for many years to come,” said a statement from Hess.

One of the challenges facing Elliot is unseating John Hess, who for more than two decades of experience of running the company which was founded by his father in 1933.

The Wall Street Journal has reported, citing sources familiar with the matter at hand, Elliott is expected to call for disinvestment measures if not a cut in the company’s dividend. One such divestment Elliott could push for would be Hess’ operations in Malaysia and in Thailand.

This strategy, of reducing the number of geographical locations where a company drills, has been used by other U.S. energy companies since it optimises cash usage.

In 2017, Hess has already sold its interests in Norway and offshore Equatorial Guinea, as part of an asset sale program that stemmed from Elliott’s 2013 activism campaign. If it continues down this road, it would leave Hess with two main areas – offshore Guyana, where it’s working with Exxon Mobil Corp and CNOOC, a Chinese oil firm to develop part of the Liza oilfield and the Bakken shale field in North Dakota.

Hess could block Elliott’s move saying any further divestments is likely to impact its ability to generate enough cash to fund future Guyana scheme commitments with the first phase requiring Hess to sink in $955 million out of the $4.4 billion total investment.

However, the company’s current reserves of cash and short-term investments, worth $2.53 billion as of September 30, are much higher than its peers.

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