TEXT - Fitch says Hess sale shows pressure on smaller, integrated models

Tue Jan 29, 2013 3:51pm EST

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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.
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