UPDATE 4-Hess to offload Hetco to focus on exploration, production

Mon Mar 4, 2013 3:05pm EST

* Hess to exit retail, marketing and Hetco trading business

* Company says exit part of long-term restructuring

* Activist investors had called for change

* Raises dividend, to buy back up to $4 bln of stock

* Shares up 4 percent (Adds CEO commentary, updates shares)

By Thyagaraju Adinarayan and Swetha Gopinath

March 4 (Reuters) - Hess Corp will offload its energy trading arm, Hetco, and exit its retail gasoline and marketing businesses by 2015 after pressure from investors accelerated plans to break up the company's sprawling energy empire.

Hess, with a market capitalization of about $23 billion, will focus on exploration and production from oil and gas fields in the United States, Norway, Malaysia and Ghana after divesting its trading arm, power plants and more than 1,300 gas stations.

Hess also said it would buy back up to $4 billion of its stock and increase its annual dividend to $1 from 40 cents, beginning in July. Its shares were up 3.6 percent on Monday.

Hess has joined the ranks of energy companies such as Chesapeake Energy Corp and SandRidge Energy Inc that have come under pressure from activist investors who are seeking change for reasons including share price underperformance and governance issues.

Hedge fund Elliott Management, the third-largest shareholder of Hess, asked the company in January to consider the spinoff of its U.S. onshore assets and the sale of its retail operations.

But John Hess, the company's chairman and chief executive officer, told Reuters the changes announced on Monday were the "culmination of this long-term strategy that we've had in place."

Hess has already exited its refining business, following rivals such as ConocoPhillips, Marathon Oil Corp and Murphy Oil that have sought value by separating their production and refining businesses.

Raymond James analyst Pavel Molchanov said Occidental Petroleum Corp could follow Hess's lead and separate its substantial chemical, midstream segments from its exploration and production portfolio to deliver "breakup value".

The company also rejected a proposal by Paul Singer's Elliott Management, which owns 4 percent of Hess, to nominate five directors at the annual meeting in May.

Now Hess has assembled its own slate of six directors - including some with experience in the energy sector - to nominate in May, following criticism that the company's board lacked independence.

"As we transport Hess to a pure-play (exploration & production company), it was appropriate with all these great candidates to really renew and refresh our board with people that would be even more suited to take us to the next level," CEO Hess said.

In a letter to shareholders, Hess said Elliott's recommendation to split the exploration and production business into U.S. onshore and offshore operations, and to separate Hess's midstream business, ignored credit risk and tax consequences.

In a statement, Elliott Management said Hess's plan "falls dramatically short of what is needed."

PURELY E&P

Hess, known for toy trucks introduced by founder Leon Hess in the 1960s and sold at its gas stations, has been looking to sell non-core assets and pour more than 90 percent of its capital into exploration and production.

Its main assets are in North Dakota's Bakken shale field, Ohio's Utica Shale, the Valhall Field in the North Sea, the Tubular Bells field in the Gulf of Mexico and Malaysia's North Malay Basin.

Hess Energy Trading Co, or Hetco, is a New York-based venture founded by two former Goldman Sachs Group Inc partners in 1997. Stephen Hendel, 61, and Stephen Semlitz, 60, each own 25 percent of Hetco and Hess the other 50 percent.

After a decade-long streak of modest profitability, Hess Corp's trading activities - which it says are largely confined to the Hetco unit - have become a drag on earnings, according to company filings.

A spokesman for Hess said Hetco "continues to enjoy the backing of Hess's balance sheet" until a sale occurs.

The company also said it would prune its Asian portfolio by divesting operations in Indonesia and Thailand to focus on the North Malay basin and a joint development area in Malaysia and Thailand.

"Management clearly is accelerating the changes rather than digging in its heels and fighting with its newest shareholders," said Wells Fargo analyst Roger Read.

Hess will use proceeds from the asset sales to pay down short-term debt. The company had short-term debt of $787 million as of Dec. 31, according to Thomson Reuters data.

The company's marketing operations, which include retail gasoline, generated earnings of $209 million in 2012. The company's net income for the year was $2.25 billion.

Hess, headquartered in New York, operates terminals and retail gasoline stations, most of which include convenience stores, on the East Coast of the United States.

It sells refined petroleum products, natural gas and electricity to commercial and industrial businesses through its energy marketing activities.

"We see Lehigh Gas Partners LP and Energy Transfer Equity LP's Sunoco subsidiary as natural potential buyers of Hess' retail gasoline assets," Baird analyst Peng Hsulin said in a note.

The company's shares were up $2.78, or 4.1 percent, to $69.32 on the New York Stock Exchange on Monday. (Additional reporting by Anna Driver in Houston and David Sheppard in New York. Writing by Robin Paxton; Editing by Sriraj Kalluvila, Rodney Joyce and Jim Marshall)

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