Fitch: Hess Corporation's Announced Restructuring; Mixed Credit Impact

NEW YORK--()--Hess Corporation (Hess; NYSE: HES) announced yesterday that it would take new measures to complete its transformation from an integrated company to a pure play E&P. The overall impact of Hess' plan on credit quality is mixed, according to Fitch Ratings.

Announced measures included an exit from the downstream; the sale of additional upstream assets; strengthened corporate governance measures, including the nomination of a new slate of directors; additional de-leveraging, as well as shareholder friendly initiatives (150% increase in dividend and an up to $4.0 billion share repurchase program).

The measures follow a challenge by activist investor Elliott Management at the end of January, which announced it was seeking to unlock shareholder value through its own strategic initiatives, and included a proxy challenge for board seats at the company's upcoming Annual Shareholder Meeting.

HESS' PLAN

In terms of asset sales, Hess will completely exit the downstream by divesting or exiting its East Coast retail marketing, energy marketing, and energy trading (HETCO) businesses. On the upstream side, Hess plans to divest mature international assets in Indonesia and Thailand. A spinoff or sale of midstream assets in the Bakken is contemplated for 2015.

These moves follow earlier restructurings by Hess including the closure of the HOVENSA jv refinery in January 2012; the sale of non-core upstream properties in the North Sea and Norway in 2012; the announced closure of the Port Reading refinery; the pending sale of the company's East Coast terminals, and expected sale of upstream positions in Azerbaijan, Russia, and the Eagle Ford.

PLANNED USES OF CASH

Increased asset sales proceeds are earmarked for repayment of short term debt (approximately $2.5 billion), for the creation of a $1+ billion cash position to provide a cushion against downside commodity price volatility and any accompanying future funding gaps, to pay out increased dividends, and for share repurchases (in that order).

OVERALL CREDIT IMPACT MUTED

The overall impact of Hess' plan on credit quality is mixed. On the positive side, the plan provides significant de-leveraging over the next several quarters and should improve key debt/boe credit metrics from levels that are currently weak for the 'BBB' category (as calculated by Fitch, at YE 2012, Hess' total debt/boe 1p had climbed to $4.83/boe, total debt/PD to $8.53/boe, and total debt/flowing barrel to approximately $20,000). Liquidity is also expected to improve significantly as the wind-down of HETCO and energy marketing should free up the large use of LoCs associated with those businesses (approximately $0.7 billion at YE 2012). Finally share repurchases are the last stated priority and are expected to be paid only out of excess asset sale realizations

These considerations are balanced by the smaller asset base, reduced diversification and lower production and cash generation expected to be seen at Hess on a pro forma basis once the divestment plans are complete. In addition, the risk of further shareholder friendly actions remains. In particular, the loss of the upcoming proxy challenge to the activist investor would be detrimental to the company's credit profile.

Fitch currently rates Hess with a Stable Outlook as follows:

--Long-term IDR 'BBB';

--Senior unsecured notes/debentures 'BBB';

--Senior unsecured bank facility 'BBB';

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--'Corporate Rating Methodology' (Aug. 8, 2012)

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contacts

Fitch Ratings
Primary Analyst
Mark C. Sadeghian, CFA, +1-312-368-2090
Senior Director
Fitch Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Daniel Harris, +1-312-368-3127
Associate Director
or
Committee Chairperson
Jason Pompeii, +1-312-368-3210
Senior Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Mark C. Sadeghian, CFA, +1-312-368-2090
Senior Director
Fitch Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Daniel Harris, +1-312-368-3127
Associate Director
or
Committee Chairperson
Jason Pompeii, +1-312-368-3210
Senior Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com