Hess Waves The For Sale Sign On The Way To Stripping Away $9 Billion

With its most recent leviathan deal, Hess Corp. (NYSE: HES) is on the path of “shrink-to-grow” as it continues its billion-dollar sell offs and slashes debt, analysts said.

On Oct. 9, Hess agreed to sell its U.S. East Coast and St. Lucia terminal network to Buckeye Partners LP for $850 million. The terminal had been up for sale since January.

Hess has divested $5.4 billion so far in 2013 and has three more assets on the market in Indonesia, Thailand and its retail gasoline convenience stores on the East Coast. Those could generate about $2.5 billion by the end of 2014, said, Evan Calio, lead analyst for Morgan Stanley.

“We also believe there is potential for increased asset sales going forward,” he added.

The upshot is that the company will be more tied to the Bakken than ever, and that exposure increases as each asset is sold.

“With this deal, and assuming proceeds retire shares, we estimate that the Bakken makes up 40 percent of our net asset value (NAV) and 29 percent of our target enterprise value,” said Calio. “Assuming all marketed assets are sold … we estimate that the Bakken will make up 33 percent of our target implied enterprise value.”

That means Hess will increasingly be poised to benefit from higher Bakken recoveries and other basin operating momentum. But the company has “dramatically lagged Bakken peers in the last two quarters,” Calio said.

As a result of the terminal network sale, Hess is expected separately to release about $900 million of working capital, with another $100 million continuing to be retained by the retail business as part of its ongoing operations.

In January, Hess announced plans to sell its terminal network following the sale of its refining business. John Hess, chairman and CEO, said then that the terminal sale “should release approximately $1 billion of working capital in addition to the proceeds from the transaction.”

The sale of the terminal network, along with four upstream producing assets completed earlier this year and the announced sale of the Energy Marketing business, brings total year-to-date divestitures to $5.4 billion.

Hess has used the initial proceeds from its completed asset sales to repay debt and to further strengthen its balance sheet.

Hess plans to add $1 billion cash to its balance sheet. It also is re-purchasing shares under a $4 billion authorization program and intends to use proceeds and working capital to continue the program.

The Hess terminal network is located along the U.S. East Coast and has a total of 28 million barrels of storage capacity in 19 terminals, 12 of which have deep-water access.

The terminals previously served as the primary outlet for Hess’ share of production from its HOVENSA joint-venture refinery. The HOVENSA refinery closed in 2012. The company’s St. Lucia oil storage terminal in the Caribbean with 10 million barrels of capacity will also be included in the package for divestiture.

Hess sold its refining business after activist investor Elliott Associates filed for regulatory approval to buy an $800 million stake in the company with aspirations for a seat on the board.

The agreement is subject to regulatory approvals and other customary closing conditions and is expected to close in the fourth quarter of 2013.

Sameer Uplenchwar, an analyst with Global Hunter Securities, said in a report that Hess is executing a three-pronged growth strategy. First, it’s focusing on unconventional assets driven primarily by the Bakken and Utica.

It will also look to grow by exploiting Tubular Bells, Valhall and the North Malay Basin. And the company will focus exploration in areas such as Ghana.

“We expect total proceeds from the 2013 divestiture program to exceed $9 billion,” Uplenchwar said. “The company plans to use the proceeds for debt reduction ($2.5 billion), and to fund about $1 billion capex deficit in 2013.”