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Analysts take sides in Elliott Management fight with Hess

Elliott Management Corp. may not have a very high opinion of the leadership of Hess Corp., but some analysts back Hess.

For the second time in four years, Elliott has taken an aggressive approach with Hess. After forcing CEO John Hess to step down from his position as chairman and installing its own representatives on the board in 2013, the hedge fund released new demands Dec. 14: the CEO should resign or consider selling part or all of the company.

"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 distributed to media outlets. "Shareholders are getting impatient, because the changes needed to remedy Hess's severe undervaluation are substantial and need to be announced without delay."

Hess Corp. quickly rejected Elliott's demands in a statement of its own, saying members of the board of directors "unanimously and unequivocally" supports John Hess remaining as CEO.

"While these are challenging times for the entire industry, Mr. Hess and the management team have moved aggressively and done an excellent job high-grading the portfolio and repositioning the company … and returning billions of dollars in capital to shareholders," Hess Corp. said. "The company is well positioned to deliver industry-leading returns and value to shareholders for many years to come."

In its take on the dispute, Capital One Securities dismissed the idea of a sale as "unlikely."

"[Hess] has a market cap of ~$13.3B and an enterprise value of ~$17.4B and we cannot think of any company of Hess's size or greater where an acquisition of [Hess] would not result in significant cash flow dilution and EV/EBITDA multiple expansion," the firm said. "We think potential buyers would certainly be interested in the company's crown jewel assets, including Guyana and the Bakken. However, the near-term dilution would likely be too much to stomach."

Capital One came down on the side of Hess and the board of directors. It said they have taken "proactive positive steps" in balancing exploration and production with shareholder-friendly initiatives while maintaining a respectable balance sheet.

"We don't think it would be financially prudent to execute a massive stock buyback in the next year or two given the large capital outlays that will be required of [Hess]," the firm said. "[Hess] unfortunately just looks to be caught in the somewhat awkward phase of significant cash flow outspend prior to bringing on a massive and very economic discovery during a time that oil & gas investors are clamoring for companies to spend within or less than cash flow and return cash to shareholders."

Morningstar analyst David Meats was less impressed. He agreed that Hess has taken steps to improve, but he said the results have not yet turned out as planned.

"Hess hasn't improved enough, does have some good reasons why not, but at the end of the day, it remains at the weaker end of the group regarding capital efficiency," Meats said. "Hess has historically spent more than it should, ranked poorly on capital efficiency, and impaired substantial capital in the past. Their defense would be that a large part of their value is in Guyana, a lower-cost asset that hasn't started production yet and thus hasn't contributed to those metrics."

Meats said the lack of positive news has likely tried Elliott's patience. "The first Elliott activity was a while ago and little improvement has occurred so far," he said. "Again, Hess would point to the downturn, and collapse in crude prices that prevented meaningful improvement. However, they did not improve relative to peers."