While Hess has been slowly disposing of some assets, its “asset base is far too diverse for a company of its size.” Mr. Sankey believes the company trades at a nice discount to NAV due to concerns over “ballooning capital costs, chronic lack of free cash flow, a high oil price breakeven, and recent difficulty executing against guidance and expectations.” Rough, but don’t worry Hess, Mr. Sankey was willing to dole out some free advice. First off, he suggests selling off the company’s Eagle Ford assets (he thinks these should be worth ~$1b) and then the company should restructure its Bakken shale infrastructure as an MLP. Apparently, an MLP is something the company would consider, but according to Hess CEO John Hess, the company has no plans to spin off its downstream assets like Murphy Oil (MUR) is planning. The company intends to ‘focus on selling off’ assets instead. Oh well.
Mr. Sankey’s OXY case seems a bit flimsier. He notes that although the ‘discount’ isn’t so high, “the ranking of management is falling fast” and the company is no longer considered best in class. He believes a change in strategy could fix that. Couldn’t a change in strategy just as easily confirm that belief though? Maybe former CEO Ray Irani was worth that $70+m salary after all…the company management was ranked high then.
To be clear, I don’t think speculating purely on spinoff announcements is a good strategy. Viewing a spinoff as a possible catalyst to unlock potential in an undervalued company…now that makes sense. Even then, it is difficult to know what management is thinking. It’s worth being aware of rumors and analyst discussions though…sometimes they have a knack for turning into truths.
Disclosure: Author holds no position in any stock mentioned.