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August 15th, 2013

Direct Energy Purchases Hess Energy Marketing

by Andrew Price, President & COO

Hess surprised energy markets on March 4th of this year by announcing that it would exit retail sales of electricity, natural gas and oil. It was announced on July 30th that Centrica, the parent company of US energy marketer Direct Energy, had emerged as the winning bidder. In a prior blog, I discussed the ramifications of a potential sale for CES clients. Now that a buyer has been identified, it is timely to revisit this topic.

First, a few details about the transaction. Centrica agreed to pay just over $1 billion ($731 million in cash and $300 million in working capital) for Hess Energy Marketing. Hess had about 23,000 electricity and natural gas customers. Hess was a much larger marketer of natural gas in the US compared to Direct Energy (378 bcf compared to 77 bcf) but had a significantly smaller book of electricity business (28 Twh compared to 51 Twh). Combined the acquisition will more than double Direct Energy’s business in the northeast US. Direct Energy will have an expanded footprint that covers most of New England, Mid-Atlantic and the Mid-West. The deal did not include Hess owned oil-storage terminals or gasoline stations but moves Hess much closer to becoming a pure energy exploration and production company – the source of most of the company’s profitability. Direct Energy’s parent company, Centrica, is a large multinational energy company with headquarters in Windsor, United Kingdom.

CES is always completely supplier neutral. We have helped many clients execute energy contracts with both Hess and Direct. Indeed, over the past 13 years we have helped clients navigate through dozens of similar supplier mergers, divestments, expansions, contractions, and bankruptcies. Direct and Hess are both leading suppliers of electricity and natural gas to CES clients and we have no reservations about placing new or existing business with either company.

As much as we look forward to working with Direct Energy going forward, the sale of Hess Energy Marketing could have a downside. A core function we provide is maximizing the competitive bid process by getting all qualified suppliers to bid for our client load. Having one less supplier in the marketplace may reduce overall competitiveness. Luckily, several new suppliers with strong qualifications have entered the market recently, so we do not expect the merger to have significant or lasting impacts on pricing. With much larger retail operations, Direct Energy may also achieve economies of scale that improve their competitiveness.

A few additional items to keep in mind:

  • Hess is not out of the retail market yet. Until the transaction is finalized, Hess and Direct have indicated that they will continue to bid on new business as competitors.
  • Once the transaction is finalized, Direct Energy will be obligated to honor all terms and conditions in existing Hess contracts.
  • The sale is expected to be completed prior to the end of 2013.
  • It is unclear at this time how staff at Hess and Direct will be integrated.  

CES will monitor the transition from Hess to Direct closely. Both companies have very talented staff and we do not anticipate any significant issues.

Regarding the Hess toy trucks – I unfortunately have no update. I have heard unsubstantiated rumors that Hess will go forward with a 2013 edition (perhaps orders have already been placed??). Because the toy trucks are based in the heritage of Hess as a local oil delivery company, it would not surprise me to see Direct discontinue the tradition. Hopefully Direct finds a way to keep this tradition, which dates back more than 6 decades, alive.

Please don’t hesitate to reach out to me, your CES Account Executive, or anyone at CES if you would like to discuss the announcement that Direct Energy is acquiring Hess.

(Tags: Hess Energy Marketing, Direct Energy, Centrica, Electricity, Natural Gas, Retail Energy, Competitive Supplier)

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