(Bloomberg) -- Billionaire hedge-fund manager Paul Singer’s demand that Hess Corp. find ways to bolster shareholder returns is turning into a windfall for bondholders.

While Hess’s $5 billion of notes suffered the industry’s biggest losses a year ago, when Singer’s Elliott Management Corp. said on Jan. 29 that a “substantial divestment program” could help maximize value for equity holders, the bonds have since returned 3.9%. The $480 billion of debt issued by energy companies and tracked by Bloomberg has declined 0.77% in the same span.

Criticized by Elliott that it was doing “the least possible to maintain the status quo” as its stock languished, Hess has since moved to divest its refining and retail business and allocated $2.4 billion from asset sales to reduce debt. The oil producer, which had the highest leverage of the four largest U.S. integrated oil companies at the end of September, said last week it will spin off its 1,258 gasoline stations.

“We were worried to begin with,” said David Lund, senior investment-grade analyst at Thrivent Financial for Lutherans, which oversees about $80 billion, including Hess bonds. However, “his involvement just lit a fire underneath the company to accelerate their restructuring plans.”

Cash Burn

The company that started with a single oil delivery truck in 1933 stepped up asset sales last year, raising $6.5 billion through Nov. 21, the day Chief Executive Officer John Hess, son of founder Leon Hess, spoke at the Bank of America Merrill Lynch Global Energy Conference.

While the company burned through $1.28 billion in the 12 months through September, according to data compiled by Bloomberg, capital spending reductions and more efficient operations mean “we expect to be free cash flow-positive post-2014,” based on a $100 per barrel price for Brent crude oil, said Hess, who’s run the company since 1995.

Brent futures have averaged $108.56 a barrel in the past year, Bloomberg data show.

Hess raised $731 million in November by divesting its business that supplies natural gas and electricity to 23,000 commercial firms in the eastern half of the U.S., $850 million by unloading 20 petroleum storage centers last month and $1.3 billion by selling interests in oil wells off the coast of Indonesia last week.

Board Changes

Debt decreased to $6.2 billion from more than $8 billion at the end of 2012, Bloomberg data show. Borrowings accounted for 95% of annual earnings before interest, taxes, depreciation and amortization, still the highest among the four U.S. integrated oil and gas companies with market values bigger than $1 billion.

Lorrie Hecker, a Hess spokeswoman, declined to comment on the company’s bond performance, as did Elliot Sloane of Sloane & Co., which represents Singer’s hedge fund.

The billionaire, whose activist firm has recently amassed a 6.2% stake in computer-networking equipment maker Juniper Networks Inc., successfully prodded Hess into adding three members to the board of directors, helping lead to nine new members out of 14 after a four-month proxy fight ended in May. The board also approved $4 billion of share buybacks from asset- sale proceeds, of which $500 million was repurchased in the third quarter, according to a Nov. 7 regulatory filing.

In the three years ended 2012, Hess’s shares fell 12.5%, lagging behind the 24% rise for energy companies in the Standard & Poor’s 500.

Bonds Outperform

On Jan. 29, the day Singer’s hedge fund sent the letter to Hess shareholders urging them to enact changes to turn around the “underperformance,” the oil company’s bonds lost 4%, or more than 12 times the 0.32% drop for energy industry borrowers including BP Plc and Devon Energy Corp.

Bondholders have since become more sanguine on the company’s outlook. The asset sales and debt reduction have precipitated a contraction in the extra yield that investors demand to own Hess securities instead of government debt, signaling improved creditworthiness.

Relative yields linked to Hess have narrowed 56 basis points to 185 since Elliott’s letter was made public, outpacing a 10 basis-point drop to 147 for Bloomberg’s U.S. corporate bond index linked to energy firms. Hess bonds, which include $1 billion of 8.125% notes due 2019, yielded 194 more than benchmarks the week before the hedge fund’s statement.

A basis point is 0.01%age point. Hess bonds are ranked Baa2 at Moody’s Investors Service and an equivalent BBB by S&P.

Credit Positive

“Just because we have an activist in there doesn’t mean it’s a credit negative,” Brian Gibbons Jr., a debt analyst at New York-based CreditSights Inc., which rates the debt “outperform,” said in a telephone interview. Singer’s involvement has been a positive for Hess, he said. “They’re focusing more on core areas and controlling costs.”

The actions have also aided Hess stock, which outperformed industry peers from Jan. 29 through last week. The shares returned almost 20% in that period, which included an increase in the company’s dividend, exceeding the 13% gain for the 44-member S&P 500 Energy Index.

Hess shares traded at $79.04 as of 11:39 a.m. in New York.

Equity owners such as Elliott, the largest shareholder after State Street Corp., may also be anticipating that the company’s Bakken pipeline business unit will become a master- limited partnership, which trades publicly and pays taxes when cash is distributed to unitholders.

‘Beneficial’ Path

Hess owns about 725,000 net acres in the Bakken formation, which sprawls beneath parts of North Dakota and Montana. Combined with the Three Forks and Sanish formations, which are deeper in the ground than the Bakken, it has the potential to be one of the largest oil-producing regions in the next 30 years, data compiled by Bloomberg Industries show.

“The way things have played out in the last year has put me relatively more at ease than I was initially,” Philip Adams, an analyst in Chicago at debt researcher Gimme Credit LLC, which rates its debt “outperform,” said in a telephone interview. “The path that Hess is going down seems to be beneficial to shareholders and not to the detriment of bondholders.”

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