Hess Looks Like a Buy on This Pullback

 | May 16, 2013 | 12:00 PM EDT  | Comments
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Paul Singer, the head of hedge fund Elliot Management, reached an agreement with the leadership at Hess (HES), where he was engaged in a proxy fight. The takeaway from the deal is that Singer has won his battle for the most part and that he is likely to get the divestitures he wants -- and that this will ultimately lead to a higher share price. With the stock down sharply on the news of the deal, Hess represents a great opportunity right now.

Paul Singer recently became an activist at Hess, looking for board seats and the departure of namesake CEO John Hess from the company. Singer wanted the kind of divestiture and concentration on the exploration-and-production assets that would translate into faster profits, considering the still-high global oil price of well above $100 a barrel. For Hess, that would mean a sale of many of the terminal and refining assets, a dominant portion of the East Coast terminal and storage business. HETCO­­­­ -- Hess's profitable trading arm, brought into the company from Goldman Sachs (GS) -- would also be sold.

Based upon Singer's proxy battle and known "sum of the parts" strategy with Hess, shares have already rallied significantly, from under $60 a share to close to $75.

But with the settlement announced Thursday, shares have moderated. As part of the deal, Singer is to get three board seats in a boardroom of eight. This does not give Singer a board majority, but since Hess has already been looking to divest some of its terminal assets, a Singer-controlled board is not necessary in order for Hess to ultimately restructure to a dedicated E&P company that the hedge fund manager wants.

While it may not be as fast, it will be as sure: Hess will be getting out of the terminal and refining business. That restructuring is sure to develop a higher share price in the future. As a dedicated E&P company with excess cash generated by these asset sales, Hess shares should easily be worth $85, and they are a decent buy here on Thursday's pullback.

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