Oil company M&A lottery: you could win an activist shareholder

Last year, upstream M&A activity in the oil sector broke all the records. Wood MacKenzie, in its annual M&A review, said that $232 billion was spent, mainly big companies buying smaller companies in order to expand or diversify their portfolios.

Most recently that has included large Russian companies buying out their big partners (TNK-BP), Asian companies invading North America (CNOOC-Nexen, Petronas-Progress, Sinochem-Pioneer), and oil companies sloughing off unwanted assets to others who want them (ConocoPhillips, Hess).

This history of big players swallowing up smaller ones, then regurgitating them as spinoffs or just closing them when times go bad, has been the traditional recurring pattern.

Now, with seemingly endless new discoveries of oil and gas around the world making news headlines almost daily, some new players are stepping up to the plate.

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There is a new big game in the M&A lottery: activist shareholders. When a billionaire investor or a hedge fund takes a big enough chunk of an oil company, and sets about changing said oil company, it is news. When enough of them do it, it becomes a trend.

Trendsetter activist shareholders seem to have a common agenda — to make their targets slim down on high-cost assets while fattening up on the producing ones.

Take, for example, US billionaire and corporate raider Carl Icahn and Chesapeake Energy. Such was his influence that the board was shaken up and the CEO, Aubrey McClendon, was eased out this week after allegations of improper financial conduct.

The oil business must have piqued Icahn’s interest, because in January this year he also took an interest in Transocean, after the beleaguered drilling company settled the BP Macondo lawsuit by agreeing to pay $1.4 billion to settle criminal liability for its role in the disaster.

Then there is Hess. When activist shareholder and hedge fund Elliott Associates decided to take an $800 million, 4% share in Hess, it came in firing from both barrels, demanding to replace five board members with its own nominated slate and insisting that Hess restructure and streamline the company.

In the case of Hess, the firm’s business model had barely changed since Leon Hess founded the company in 1933 with the purchase of an oil delivery truck. While others dove in and out of retail oil delivery, refining and storage when the markets dictated, Hess doggedly held onto its business and assets, even in bad times.

When Elliott Associates’ seemingly unwanted attention came to light, Hess had only just announced its shake-up to shed these assets and focus on E&P. Elliott Associates clearly thought it wasn’t enough.

Other activists just want to see better governance in their acquisitions. Independent oil and gas company SandRidge has been fighting off claims from activist hedge fund shareholder TPG-Axon, which holds a 6.7% stake in SandRidge and is forcing a shareholder vote to replace SandRidge’s current board with one of TGP’s choosing.

TGP has accused the current board of failing to police Chairman and CEO Tom Ward, while they watched as the company’s stock value was destroyed.

But not all drastic corporate asset-repositioning in the energy space has been favorable, as Starr Spencer reported in Platts Oilgram News on January 29. Devon Energy three years ago opted to become a North America-focused resource player and sold off successful operations in the Gulf of Mexico, Brazil and Azerbaijan at a handsome profit.

Oppenheimer analyst Fadel Gheit said: “They improved the balance sheet and bought $3.5 billion of their stock and beefed up their homeland assets,” Gheit said. “But it backfired; Devon is by far the cheapest energy stock you can buy.”

But the trend for activists to get involved in oil is obvious and the rewards for a corporate raider can be vast.

For those energy companies that are in the sights of the acquirers, I can only imagine that they are fervently hoping to avoid the gaze of activist shareholders. That way they can quietly trim the unprofitable assets, while jumping into the juicier producing ones, without making the papers.

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  1. Sophocles at February 3, 2013 6:24 am

    CWEI has argueably the most and best drillable acres for its size than any other company. The CEO and his family owns more than 52% of the shares. The company is run more like a private rather than public company. It has taken a huge amount of debt to buy assets and build infrastructure. So much so that it does not have the cash to drill much. If it would sell some of the land, the stock price could double or triple from here. The company has talked about selling or doing JV but it does not give a regular update on anything as most public companies do. Suffering shareholders need an activist one in CWEI.


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