Activist investors from Carl Icahn to Daniel Loeb are amassing stakes in energy companies to replace directors and spin off assets dragging down valuations amid record oil prices.
Shareholder interventions have been staged for U.S. oil and natural gas producers with more than $100 billion in collective market value since the beginning of 2012 as energy stocks failed to match the surge in crude prices, according to data compiled by Bloomberg. Targets that included Chesapeake Energy Corp. (CHK:US), Hess Corp. (HES:US), Murphy Oil Corp. (MUR:US) and SandRidge Energy Inc. (SD:US) have been censured by unsatisfied investors for everything from sloppy financial controls to self-dealing by executives.
Occidental Petroleum Corp. (OXY:US), the largest oil producer in the continental U.S., may be next in line for a boardroom makeover, Deutsche Bank AG said. With a market value of $69 billion, Los Angeles-based Occidental would be more than triple the size of any of the energy producers rocked by activism in the past year. Nabors Industries Ltd. (NBR:US) and Weatherford International Ltd. (WFT:US) also are vulnerable as the implications of “poor decisions” by managers during the last decade become clear, said Scott Gruber, an analyst at Sanford Bernstein & Co.
“Prominent investors are saying enough of the overreach, enough of the constant overspending, enough of the entrenched board memberships,” Mark Hanson, an equity analyst at Morningstar Inc. in Chicago, said in a telephone interview yesterday. “It’s time to start optimizing your assets.”
Oil and gas stocks have underperformed crude for the past half decade, failing to capture most of the upside of global demand that is escalating faster than production. The Standard & Poor’s 500 Energy Index of 43 companies returned 26 percent during the 2007-2011 period, less than half the 76 percent increase in Brent crude futures, the benchmark price for two- thirds of the world’s oil.
In the past year, investor activism from Icahn, Loeb’s Third Point LLC, Jana Partners LLC and TPG-Axon Capital Management LP drove Chesapeake to remake its board, Murphy to spin off its filling-station business, and CVR Energy Inc. and Marathon Petroleum Corp. to form master-limited partnerships. Transocean Ltd., SandRidge and Hess are currently weighing demands from investors that have questioned company strategy.
After Murphy announced plans for the spinoff of its retail fuel business, Deutsche Bank analyst Paul Sankey said in an October 17 note to investors that Hess, Occidental and ConocoPhillips may be the next targets.
Occidental’s stock has lost 20 percent of its value since Stephen I. Chazen succeeded Ray Irani as CEO in May 2011. During that same period, the benchmark U.S. oil price has been little changed. The company has been dogged by delays and ballooning costs at its California oilfields, prompting Chazen to institute cost-saving measures such as simplified well designs and cheaper drilling methods.
Chazen told analysts and investors in a Jan. 8 presentation that those efforts will save the company as much as $450 million in 2013 and reduced drilling costs by 15 percent compared to last year.
“Occidental has issues that it wasn’t facing previously with their cost structure and growth potential,” said Brian Youngberg, an analyst with Edward Jones & Co. in St. Louis who rates Occidental a buy and doesn’t own shares. “The steps they’ve taken in the past few weeks have calmed those fears, but investors want to see whether or not the cuts are actually proceeding.”
Occidental, which gets about 75 percent of sales from oil and gas wells and the rest from chemicals and pipelines, trades at a discount to some peers because investors don’t recognize it either as a so-called integrated company such as Exxon Mobil Corp. (XOM:US) or a pure-play energy producer such as Apache Corp. (APA:US), Duane Grubert, an analyst at Susquehanna Financial Group in Stamford, Connecticut, said in an interview.
Occidental would be more highly prized if it split into international and domestic businesses, Grubert said.
“Investors want pure plays, companies operating in the sectors they’re interested in,” Louis Meyer, a New York-based special situations analyst at Oscar Gruss & Son Inc., said in an interview yesterday. “It underscores that managing all these different businesses gets to be problematic.”
Melissa Schoeb, a spokeswoman for Occidental, declined to comment on potential interest from investor activists, board compensation or possible restructuring of the company. Occidental rose 0.3 percent to $85.32 at the close in New York.
In 2011, Occidental’s directors, which include former U.S. Energy Secretary Spencer Abraham and former U.S. diplomat Edward Djerejian, were the most highly compensated among the company’s peers, including 16 focused on exploration and production and five integrated energy companies on the Standard & Poor’s 500 Index, according to Bloomberg calculations based on the companies’ latest proxy filings.
Excluding directors who didn’t serve the entire year, Occidental’s 11 non-executive board members were paid more than $630,000 each in 2011, more than double the average among the 21 other energy companies on the S&P 500 that explore for and produce oil and natural gas.
Sixty-one percent of Occidental’s oil and natural gas production in the third quarter came from U.S. operations, where it’s the largest onshore producer outside of Alaska. Of that, more than two thirds was oil or other petroleum liquids, according to the company. Most of Occidental’s U.S. output, the equivalent of 469,000 barrels a day of crude, comes from Texas and California.
Among providers of oilfield services, Nabors and Weatherford are the most likely candidates for activist intercession, Sanford Bernstein’s Gruber said.
“It’s a bit of a transition from the boom times of the 2000’s where a rising tide lifted all boats,” Gruber said. “Poor decisions by management teams during the 2000’s are now coming to roost, and they’re having to deal with them. Activists are looking at certain companies where they believe they can unlock value based on righting the ship.”
Nabors, the world’s largest land-rig contractor, is the cheapest service stock in the Standard & Poor’s 500 Energy Index, with an enterprise value that’s 4.3 times earnings before interest, taxes, depreciation and amortization over the past year, according to data compiled by Bloomberg. Dennis Smith, a spokesman at Nabors, did not immediately return phone and e-mail messages seeking comment.
Pamplona Capital Partners III LP, Nabor’s largest shareholder, said in a filing Jan. 23 it held talks with management and has become “increasingly concerned about the underperformance” of the stock. Nabors was the second-worst performer in the Philadelphia Oil Service Index in 2012, falling 17 percent.
The filing shows Pamplona, which is run by former Nabors board member Alexander Knaster, “may be preparing to take an activist role,” Bill Herbert, an analyst at Simmons & Co. in Houston wrote the next day in a note to investors.
While the company is in the midst of selling non-core assets, including stakes in oil fields and an air-travel logistics unit, the sales process has gone slower than hoped, CEO Tony Petrello said in October.
Weatherford, the world’s fourth-largest diversified oil service company with 523 subsidiaries according to its latest annual report, is so big that a shareholder activist might push the company to break itself up as a way to boost value, said Joe Hill, an analyst at Tudor Pickering Holt & Co. in Houston. Karen David-Green, a spokeswoman for Weatherford, did not return phone and e-mail messages seeking comment.
“Weatherford on paper certainly looks like it’d be a fairly fertile candidate for shareholder activism,” Jeff Spittel, an analyst at Global Hunter Securities in Houston, said in a telephone interview.
Weatherford has been working to clear up a series of tax accounting errors over several quarters, so it may be too late for an activist to jump in and make accounting improvements, Spittel said. And it’s probably too early to judge whether there are execution issues that an activist shareholder might push to improve, he said.
The company was the worst performer in the Philadelphia Oil Service Index in 2012, falling 24 percent. Shares rose 1.8 percent to $13.36 at the close in New York.
The most recent U.S. company targeted for revamp was Hess, the iconic East Coast fuel-oil distributor with a portfolio of assets as far afield as the North Sea and Malaysia. Billionaire investor Paul Singer’s Elliott Associates LP this week criticized the company’s “illogical” assembly of assets and “appalling capital allocation.”
In a letter yesterday, Elliott urged Hess to split its U.S. and international oil businesses into separate companies, and named five candidates for a board that the investor said has the lowest rate of director independence and the least oil experience among industry peers.
Hess’ $20.6 billion in capital spending during the past three years was accompanied by a 2.8 percent decline in production, according to data compiled by Bloomberg.
On Jan. 9, Chairman and Chief Executive Officer John Hess vowed to “significantly reduce overall expenditures” this year. Three weeks later, the company announced its plan to quit the refining business and sell its fuel-storage network before disclosing Elliott’s intention to invest more than $800 million in Hess’s stock.
“Hess’s illogical, difficult-to-value configuration of assets is evidence of a lack of focus that breeds poor execution, encourages appalling capital allocation, and results in perpetual undervaluation by the market,” Elliott said in a letter published on its website yesterday.
Hess Corp. Chairman and Chief Executive Officer John Hess said today he wants to keep the company’s Bakken shale and offshore assets, despite calls from Paul Singer’s Elliott Management Corp. to sell or spin off businesses. Hess will respond soon to its second-largest shareholder’s comments, the CEO told investors and analysts on an earnings conference call.
Hess reported a $566 million profit for the fourth quarter today, compared with a $131 million net loss for the same period a year earlier, when it recorded costs to close a refinery. Excluding one-time items, per-share profit was a penny less than analysts’ estimates, according to data compiled by Bloomberg.
Before today, Hess has gained 16 percent since Elliott’s intention to acquire a stake was disclosed on Jan. 28, the biggest two-day gain since 2008. Hess fell 0.3 percent to $67.88 at the close in New York.
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