TEXT - Fitch says Hess sale shows pressure on smaller, integrated models
Jan 29 - The oil and gas industry's integrated business model remains under pressure for smaller and medium sized names in the energy space, with Hess' announcement it would close its last remaining refinery in Port Reading, NJ and sell off a network of terminals the latest example of that pressure. Hess' announcement comes as activist investor Elliot Management Corporation announced it has taken a stake in the company to further increase shareholder value. Hess' terminal network comprises 19 terminals with 28 million barrels of storage capacity and served as the outlet for the HOVENSA refinery, which closed last year. Hess' move follows heightened spinoff and separation activity from a number of entities in the energy space over the last few years, including ConocoPhillips, Phillips 66, Marathon Oil Corporation, Marathon Petroleum Corporation, Tesoro, Murphy, Valero, and Delek, among others. The main drivers of the wave of spinoffs, separations, and other shareholder friendly activity in the energy space include the desire to capture the higher multiples associated with stand-alone retail, midstream, and downstream businesses, especially when spun off into tax-advantaged master limited partnerships, a preference for pure play exploration and production models, and the low growth and limited reinvestment prospects within the U.S. downstream industry. From a credit perspective, the impact of spinoffs is typically a modest credit negative but varies on a case-by-case basis and depends on a number of factors, including the size of a spun business relative to the parent company, the lost diversification benefit from the spinoff, any offsetting debt reductions made at the parent company post-spin, and the existence of headroom within the parent rating prior to the spinoff.