Activist exposes Hess as latest governance villain

January 29, 2013

By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

An activist investor has exposed Hess as the latest governance villain in the energy patch. Hedge fund Elliott Associates reckons the U.S. oil company could be worth more than double its current $20 billion-plus value. But as at other energy groups, like Chesapeake Energy and SandRidge Energy, a too-cozy board has brought waste and strategic blunders.

Being a Hess director looks like a pretty safe job. Typically board members stick around 50 percent longer than the average for S&P 500 companies, according to Elliott. Thomas Kean, for example, has been a director for 23 years. Three other non-executive directors, including 82-year-old former U.S. Treasury Secretary Nicholas Brady, boast tenures approaching 20 years.

They don’t even offer industry expertise or much independence. Nobody on the Hess board has drilling experience outside the company, and only the three executive directors have any at all. Several directors also have connections to the founding family – from which Chief Executive John Hess, in situ for 17 years, hails – and its charity.

It’s no coincidence that Hess has a record of inefficient operations. It spends far more as a proportion of revenue on its exploration efforts than big rivals like Exxon Mobil. And Elliott reckons its wells in North Dakota’s Bakken shale cost about a third more to drill than those of its peers.

The CEO also looks overpaid considering the company’s performance. Over the past five years he has earned $96 million, according to Thomson Reuters data, making him well above averagely remunerated for his sector by Elliott’s analysis. Yet even after this week’s gains, Hess’s shares are down 30 percent over the same period, among the oil business laggards. Anadarko Petroleum, by contrast, is up 40 percent.

Hess has been doing some sensible housekeeping, like closing money-losing refineries. But it’s not enough. As at Chesapeake and SandRidge, shareholders are starting to challenge the complacent boardroom status quo. With some prime assets in areas like the Bakken and limited exposure to painfully low U.S. natural gas prices, there’s a case that the company could, or even should, have been among the star performers in its industry. New broom directors, like the five industry heavyweights put forward on Tuesday by Elliott, would make that more likely to happen.

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