Activist investors may spur a return to dealmaking in the energy industry as shareholders seek to reap greater value from oil and natural gas reserves.
A new round of boardroom shakeups in the oil patch should force additional restructuring and asset sales in the next year, William D. Anderson Jr., a Goldman Sachs Group Inc. (GS) banker, said at the Bloomberg Link Oil & Gas Conference in Houston yesterday. Corporate takeovers may be less likely.
“It’s tough to get buyers and sellers together,” said Anderson, who leads a group at Goldman that defends companies from raids. “Will you see more public company M&A as a result? I think the jury’s out.”
U.S. energy deals were on a pace through June to reach about $116 billion this year, the lowest since 2009, according to an analysis by accounting firm PricewaterhouseCoopers LLP. Divestitures such as asset sales were a dominant factor in deals in the second quarter, the PwC analysis showed.
Activists will be drawn to energy companies so long as oil and gas prices remain at historically stable levels and protect against losses, Bruce Goldfarb, founder of Okapi Partners, a New York firm that advises investors on shareholder votes, said at the conference. No public company is immune to activism, he said.
Targets may include those where charismatic leaders or “founding families” ignore shareholders seeking quick returns that can be achieved by management and governance changes, Andrew Siegel, a partner at Joele Frank Wilkinson Brimmer & Katcher, said at the Bloomberg panel.
“You’re seeing a lot of companies moving proactively and pre-emptively to address issues that may make them vulnerable to an activist,” said Siegel, who advised Abraxas Petroleum Corp. (AXAS) amid shareholders’ demand to boost value.
“There’s been a perennial lack of discipline in the industry that has improved with the attention of activists,” Relational Investors LLC’s Ralph Whitworth said in an interview.
Relational helped seek and win boardroom concessions at Occidental Petroleum Corp. (OXY) in 2010 as well as a slate of asset sales and restructuring at Hess Corp. this year. Occidental Chief Executive Officer Stephen Chazen outlined plans for a potential breakup after investors voted to oust longtime Chairman Ray Irani at the company’s annual meeting in May.
Occidental today announced plans to sell a minority stake in its Middle East and North Africa operations and dispose of other assets. Breaking up the 93-year-old company may boost value by as much as 23 percent, Wells Fargo & Co. analyst Roger Read said in a report in September.
Since 2011, 10 companies targeted by activist investors such as Carl Icahn or Daniel Loeb have registered a net gain of about $40 billion, rising an average of almost triple the returns on the Russell 3000 Energy Index, according to data compiled by Bloomberg.
Devon Energy Corp. (DVN), Freeport-McMoRan Copper & Gold Inc. (FCX) and WPX Energy Inc. (WPX) may become targets for activists who see a chance to speed up efforts to boost shares, buy reserves that are undervalued and win shareholder support for management and governance changes, according to Edward Jones & Co., Frost Investment Advisors LLC and Livermore Partners Inc. Spokesmen for Devon and WPX declined comment. A spokesman for Freeport didn’t return a call and e-mail for comment.
Icahn started off the new activist season earlier this month by taking a 6 percent stake in Canadian oil and gas producer Talisman Energy Inc. (TLM) Icahn paid about $277 million for shares in the Calgary-based company and said in a post on Twitter that he may seek conversations with management regarding “strategic alternatives, board seats, etc.”
More investor money is flowing to activist portfolios that might reproduce those windfalls in other energy companies. Hedge funds that break up boardrooms or push for sales are among the fastest-growing and best-performing investments on Wall Street, with $73 billion to deploy this year compared to $12 billion in 2003, and an average return of 13 percent since 2009, according to Barclays Plc.
Devon, Apache Corp. (APA) and Newfield Exploration Co. (NFX), which have embraced asset sales and other shareholder-friendly steps to boost value, may still draw activists pushing for faster change, David Neuhauser, managing director at Livermore Partners, said in a telephone interview Oct. 15.
“Even though some aren’t waiting for Icahn to come knocking, they may need to do more to show that they’re serious about extracting value,” said Neuhauser at Livermore, which owns shares in Occidental, Talisman and Devon.
Icahn announced his stake in Talisman Oct. 7 after the company spent a year working on its own restructuring plan under a new chief executive officer.
Devon, Apache and Newfield hold oil and gas reserves that are among the lowest valued by investors in energy companies on the Standard & Poor’s 500 index, according to data compiled by Bloomberg. The ratio of Newfield’s stock price as a multiple of the company’s oil and gas reserves per share is about 7, Devon’s is 8.6 and Apache’s at 12.4. The average of 23 energy companies on the S&P 500 is about 16.
Some investors may also seek to force Oklahoma City-based Devon to raise its payouts to shareholders, said Brian Youngberg, an analyst with Edward Jones in St. Louis. The company holds $4.23 billion in cash on its balance sheet, an amount that exceeds the cash held by ConocoPhillips (COP), which is about four times Devon’s size, according to data complied by Bloomberg.
Devon CEO John Richels began repatriating some of the $6.5 billion in cash it had amassed in overseas subsidiaries, returning $2 billion to the parent company this year. Shareholders may push for the company to bring the rest back immediately rather than waiting for the company to announce its plans, Youngberg said. Spokesmen for Apache and Newfield declined to comment.
Activists may also be attracted by the potential for gas prices to rise in the next few years as more power plants consume the fuel and exports get under way, said Gianna Bern, president of risk-management adviser Brookshire Advisory and Research. That might lead investors to see more value in gas reserves.
WPX Energy holds reserves that are valued the least among all energy companies on the S&P 500 at a price to barrel ratio of 5.5, and QEP Resources Inc. (QEP)’s are valued at 8.3, according to data compiled by Bloomberg.
Freeport-McMoRan, which bought Plains Exploration and Production Co. and McMoRan Exploration Co. in June for $9 billion, may draw interest from an activist seeking to gain support from investors that were put off by the deal, said Ted Harper, who helps oversee more than $9 billion at Frost Investment Advisors LLC in Houston.
BlackRock Inc. (BLK) was among shareholders that complained about the deal after it was announced in December. Frost sold its shares in the company, seeing no benefit to diversification outside the company’s core business of copper and gold mining, he said.
“The potential exists to unearth value within their asset base,” said Harper, though “it might be a higher hurdle than other opportunities.”
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