Oil Revolt Generates $35 Billion as Icahn-Singer Agitate

Apache Corp. isn’t waiting for Carl Icahn to tell the energy company how to reverse a two-year decline that’s erased $14 billion from its market value.

The Houston-based oil and natural gas producer said it will sell $4 billion in properties, buy back shares and cut the target compensation for Chief Executive Officer Steve Farris by 18 percent. He received $17.1 million last year, a 7.1 percent increase from 2011, even as Apache’s stock fell 13 percent.

Farris, 65, is taking the medicine before an activist investor demands it, as Icahn did at Chesapeake Energy Corp. and Paul Singer at Hess Corp. Those two are among eight energy companies with shareholder revolts whose average gain after activism commenced was quadruple the return on the Russell 3000 Energy Index, according to data compiled by Bloomberg. That added $35 billion to their combined market value.

“Energy is ripe for this,” Tim Beranek, a money manager at Cambiar Investors LLC in Denver, said in a phone interview. “Whether there’s activism or the fear of it, it’s causing management to change course and look for ways to create value. I don’t think it’s over.” Cambiar oversees about $8 billion, including shares in Devon Energy Corp.

Apache, Devon and Newfield Exploration Co., the worst-performing U.S. producers in the past year, are making changes to escape an unprecedented wave of shareholder rebellions that’s forced out chairmen and CEOs, slashed pay and perks and overhauled boards with hand-picked members.

Doubling Dividends

National Oilwell Varco Inc., the worst performer in the Philadelphia Oil Service Sector Index this year, said May 20 it would double its regular dividend to $1.04 a year. Prior to that, the annual dividend had increased to 52 cents from 40 cents in 2009.

Investors see opportunities for big returns at laggards whose shares fell last year even as U.S. crude output grew the most since the first U.S. oil well was drilled in 1859.

The companies under pressure have announced plans to sell as much as $30 billion in assets since the start of 2012, data compiled by Bloomberg show.

“Investors of all stripes are no longer willing to sit back and accept the status quo,” said Ted Harper, a portfolio manager at Frost Investment Advisors LLC who helps manage more than $8 billion and holds Apache shares. “The companies are owned by the shareholders and we have the ultimate say. If the board and senior managers can’t deliver, you’ll see changes.”

Shareholder Talks

Apache began evaluating its assets last fall, and recent governance changes were part of a “long-term dialogue” with investors that’s covered a number of issues, Robert Dye, senior vice president of global communications, said in a telephone interview May 21. “We’ve talked to a number of investors and we welcome their opinions. They really made a difference.”

The eight companies that have been publicly targeted more than doubled the gain, on average, of the Standard & Poor’s 500 Index after each saw activist intervention. They are Hess, Transocean Ltd., Chesapeake, Occidental Petroleum Corp., CVR Energy Inc., Marathon Petroleum Corp., SandRidge Energy Inc. and Murphy Oil Corp. Of them, SandRidge and Transocean trailed the Russell 3000, data compiled by Bloomberg show.

Shareholder ire played a role in the ouster of former Occidental Chairman Ray Irani and Chesapeake CEO Aubrey McClendon, led to breakup or restructuring at CVR, Marathon and Murphy and forced a reconstituted board at SandRidge.

Energy Shake-up

“Activism for better governance has really shaken up the energy space this year,” said James Post, a management professor at Boston University. “That’s why folks in the industry may feel like they’re walking around with a bull’s-eye on their backs.”

Hess and Transocean last week joined the litany of companies forced to accept change amid rising investor unrest. To settle a proxy fight with shareholders including Singer’s Elliott Management Corp., John Hess stepped down as chairman at the company his father founded 80 years ago, and agreed to sell assets worth $3.5 billion this year alongside a near-complete overhaul of the board.

Transocean saw Chairman Michael Talbert depart, reinstated its dividend and planned cost cuts of $300 million and an additional $1 billion in debt repayments after it was announced in January that Icahn had taken a stake that eventually grew to represent 5.6 percent of outstanding shares.

Singer’s Elliott now has three directors on Hess’s board, and one of Icahn’s nominees was installed by Transocean shareholders.

Activist Victories

Oil States International Inc., a provider of housing at oilfields, saw hedge fund Jana Partners LLC take a 9.1 percent stake in the company last month. Barry Rosenstein’s Jana has advocated for the Houston-based company to create a real estate investment trust for its housing business.

“It sounds like Jana folks might be on to something,” David Einhorn, president and co-founder of Greenlight Capital Inc., said May 8. “We wish them luck for making this happen.”

Activists’ string of victories is likely to continue as oil and gas companies underperform compared to oil prices, Cambiar’s Beranek said. Cambiar’s funds own about 2.9 million Devon shares, according to data compiled by Bloomberg.

Devon, which Beranek suggests may be the next to face activist pressure, has promised to decide by June 30 whether to raise cash by forming a master-limited partnership that would buy its gas-gathering and processing assets, a step it has resisted since 2007. The company also is considering joint ventures and asset sales to boost its share price, David Hager, an executive vice president, said at a conference on May 21.

Highlighting Value

There are a “number of different ways” to highlight the value of assets in the company’s stock price, he said. Devon was the second-worst performer on the Standard & Poor’s 500 Oil & Gas Exploration & Production Index in the past year.

“It’s notable that Devon Energy has not been the subject of the kinds of governance criticism that tends to precipitate activist pressure,” Chief Executive Officer John Richels said today in an e-mailed statement. “Rather than speculate on activist matters, our focus continues to be on optimizing long-term value for shareholders.”

Apache rose less than 1 percent in the past 12 months through yesterday, compared to a 26 percent gain on the S&P 500, making it the third-worst performer on the S&P exploration and production index in that period. Shares declined amid the company’s $16 billion acquisition spree in 2010 through 2012.

Shareholder Rebuff

The company has climbed 7.2 percent since May 8, the day before it said it’s expanding asset sales to $4 billion from $2 billion and would buy back as many as 30 million shares.

Shareholders rejected Apache’s executive compensation plan in a non-binding vote at its May 16 annual meeting. The next day, the company announced an 18 percent cut in the target compensation for CEO Farris compared with his 2012 pay.

The company said director compensation also is being reduced to $300,000 from $350,000, with a cut in the equity component of the pay package. Apache also put in a mandatory retirement age of 75 years for all future directors first elected at or after the 2013 annual meeting.

Apache has drawn the attention of T. Boone Pickens’ Dallas-based BP Capital Management LP, which bought almost 125,000 shares valued at $9.6 million in the three months ended March 31, according to a May 15 filing with the U.S. Securities and Exchange Commission.

Newfield Performance

Newfield, the worst-performing U.S. producer in the past year, has fallen 16 percent while U.S. crude prices have surged

2.9 percent. The company’s earnings have missed the average of analysts’ estimates in at least five quarters since the beginning of 2011 as Newfield sought to boost its production of oil and liquids, data compiled by Bloomberg show.

“Obviously, our share price has underperformed our peer group and I think we have made some very positive steps in terms of strategic direction,” Steve Campbell, vice president of investor relations, said in a telephone interview yesterday.

Newfield lacks the money to fund both U.S. onshore growth and international exploration and development, Campbell said. So The Woodlands, Texas-based company is refocusing on what it calls its “assets of the future” -- its onshore U.S. properties, he said. Newfield said in February it planned to explore a sale of its international assets off the coast of Malaysia and China.

Greater Certainty

Developing onshore projects has more certainty than overseas work, Chairman and CEO Lee Boothby said in a March interview. The company has estimated domestic production may rise from the equivalent of as much as 40 million barrels of oil this year to 57 million barrels in 2015.

National Oilwell Varco, based in Houston, boosted its backlog for rig technology orders to a record $12.9 billion while reporting cash of $2.4 billion at the end of the first quarter.

The world’s largest maker of oilfield equipment has seen shares rise 3.7 percent in the past year, about a seventh of the return on the 15-member Philadelphia Oil Service Sector Index. Clay Williams, chief operating officer at National Oilwell Varco, did not immediately return phone and e-mail messages seeking comment.

The steps at Devon, Apache and Newfield, while positive for shareholders, may not be dramatic enough to ward off an activist push, said David Neuhauser, a managing director of Livermore Partners Inc., which owns shares in Devon and Apache.

“There are a lot of levers to pull in energy and they’re going to continue to be explored,” Neuhauser said in a telephone interview. “A lot of those management teams in oil have been around for a long time and they’re used to doing things one way. Now somebody is coming in from outside to help them see another way.”