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Agitating the energy patch

by Claire Poole  |  Published June 10, 2013 at 9:25 AM
Oil and gas has long been an industry to hate by environmental activists, going back to the Exxon Valdez oil spill in Prince William Sound in 1989 and more recently in 2010 with BP plc's Deepwater Horizon explosion in the Gulf of Mexico. However, activists of a different sort -- that is, activist investors -- have increasingly tried to force change at several oil and gas companies over the past year. Among their targets: Occidental Petroleum Corp., Nabors Industries Inc., Chesapeake Energy Corp., Transocean Ltd., Hess Corp., CVR Energy Inc. and SandRidge Energy Inc.

The latest target: Houston's Oil States International Inc. by Barry Rosenstein's Jana Partners LLC, which holds 9% and is urging the company to spin off its lodging business into a separate company or real estate investment trust. There are whispers that Swiss-based Weatherford International Ltd. might be next, having missed earnings targets for the past three quarters, as well as Oklahoma City-based Devon Energy Corp., which is now moving forward with a long-resisted idea to raise cash by putting its gas gathering and processing assets into a master limited partnership.

What gives? Simmons & Co. International analyst Bill Herbert wrote in a recent report that "full-throttled aggression" by shareholder activists has come because of largely uninspired results for energy companies in general over the past year and the "ongoing intransigence" of the industry to embrace capital discipline, more balanced capital allocation and improved corporate governance.

"What is interesting, however, is the degree to which activists have been emboldened and are now pursuing agendas with previously unassailable management teams," the report said, noting the Oil States case. "Prior exemplary track records are not deterrents if the perception is that managements are being unresponsive to seemingly legitimate shareholder agendas. In this climate, should a management team disagree or rebuff, activists shall squeeze if they believe they have well-founded arguments for change -- this seems to be the activist mantra for '13."

New Orleans-based Global Hunter Securities LLC said activists are going beyond just asset unloading for capital needs or better focus, which was the case with Murphy Oil Corp., to shaking managements' trees trying to unlock shareholder value, whether it be for overpaid managers, entrenched boards or just plain mismanagement. "We believe other underperformers, APA [Apache Corp.] a chief example, are pre-emptively looking to shed some noncore assets and even buy back shares to stave off potential activism," the firm said.

Some activists have been successful in the energy sector, others have not. Paul Singer's Elliott Management Corp. was able to get Hess CEO John Hess, son of the company's founder, to give up the chairmanship, but New York-based Hess was able to keep its new board nominees after agreeing to add three from Elliott.

And TPG-Axon Capital Management LP won in its fight with Oklahoma City's SandRidge, gaining board seats (although not control of the company), management changes (including the potential departure of founder and CEO Tom Ward by June 30), a formal review of related party transactions by an independent firm and a strategic review process that could lead to a sale of assets or of the entire company. "If all goes according to [the activists'] plans, we should see a leaner, meaner SD [SandRidge] emerge, with a renewed focus on capital discipline, risk management and project economics," Global Hunter wrote in a note May 8.

Carl Icahn has had mixed results. While he was able to take control of Sugar Land, Texas-based refiner CVR Energy, which issued a special $6.50 per share dividend to shareholders on May 28, and got CEO Aubrey McClendon of Oklahoma City's Chesapeake booted, he only achieved a partial victory with Transocean, convincing the board to vote out chairman Michael Talbert and install one of his own nominees but failing to boost the annual dividend to $4 per share from the Swiss-based offshore driller's proposed $2.24.

Even a whisper of potential activism can send an energy stock soaring, whether a big change is coming or not, given a tough energy stock market plagued by directionless crude oil prices, mixed industry fundamentals and general commodity skittishness, Houston's Tudor, Pickering, Holt & Co. Securities Inc. said. The firm cites Key Energy Services Inc., which said May 24 it was expanding its board of directors to include Mark Rosenberg, principal of MHR Fund Management LLC and Key's largest shareholder. The Houston oil service provider's stock added 10% over two days on the news. "Activists [have had] much success moving energy stocks over the past year," the firm wrote.

However, a professional involved in several of these situations said activists' focus on boosting near-term share prices doesn't make for the best long-term profitability. "This is a fad, and in two years, I suspect, there won't be much activity," the professional said.

Allen Brooks, an analyst at Houston energy services investment banking boutique PPHB, agreed, describing the emergence of activist shareholders targeting exploration and production companies for mismanaging their businesses as the normal counterbalance of capital markets and may slow with the doubling of natural gas prices this spring. But for managements of truly troubled companies, he said: "We would remind them of what one of our stock market-savvy bosses used to remind us: 'Wishing and hoping isn't a strategy.' "
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Tags: Barry Rosenstein | BP | Chesapeake Energy | CVR Energy | Deepwater Horizon | Devon Energy | Elliott Management | Global Hunter Securities | Hess | Jana Partners | Murphy Oil | Nabors Industries | Occidental Petroleum | SandRidge Energy | Simmons & Co. International | Transocean | Weatherford International

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Claire Poole

Senior Writer: Energy



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