Energy

In Oil And Gas, Activist Investors Lose Steam


Upstream energy companies rarely meet their demands.

By Nate Trela and Hana Askren, with analytics by Philip Segal

Relatively steady but low oil and gas prices in North America have led to a slowdown in energy M&A and activist investors are finding that when deals do happen, they rarely get what they want.

The increasing use of low premium, all-stock deals in the energy sector is blunting the returns for investors, which seems to be dimming activist interest in the space, according to sector advisors.

The deal landscape is framed by an eternal conflict in the oil and gas space; bidders are basing offers on current commodity prices while sellers want valuations that reflect a more optimistic view, a sector banker said. As a result, companies are settling on equity-heavy terms that require activists to have greater patience because they are unlikely to be realized in the next quarter or two, the banker said.

The average premium for the three all-equity oil and gas deals this year was 10.8%, according to Mergermarket. This compares with an average premium for sellers of 28.6% during the period from 2013 to 2018, based on the share price one day prior to the deal announcement.

The broad lack of activity, in turn, has put a crimp in activists’ favored demands, said a sector attorney and the banker. Activists came into the oil and gas space over the last few years hoping to push companies toward strategies that could provide better shareholder returns, such as major divestitures or company sales, the banker said. Those efforts in many cases have failed to produce deals, he noted.

In January, QEP Resources received a $8.75 per share acquisition proposal from Elliott Management. Elliott, in turn, urged the Denver-based company to hire advisors for a broader sale process. While reports indicated there was some external interest in acquiring QEP, Elliott reportedly slashed its bid in July before the two sides settled in August. That agreement called for QEP to remain independent while working with Elliott on realigning its board composition.

In other cases, companies had already unsuccessfully explored strategic options before activists demanded them.

For example, Abraxas Petroleum has been urged by activist Saltstone Capital to sell its North Dakota assets—but the company had already tried and failed to sell them into a moribund market, the banker said. On 14 October, Abraxas announced it retained Petrie Partners to review strategic alternatives.

In another case, the activists’ goals meshed with the companies’ strategy but not their timetables. PDC Energy had talked with SRC Energy for several years about a possible tie-up before a $1.7 billion deal was announced in August, Activistmonitor reported. The transaction is in line with what activist Kimmeridge Energy Management called for after it reported a 5.1% stake in PDC in February.

Kimmeridge began to push for PDC to make acquisitions in its core basins, but it sold its stake off in June after losing a proxy fight – and before the SRC deal was announced.

Nate Trela covers the energy sector and general business in the Rocky Mountain region for Mergermarket and Dealreporter from Denver. He can be reached at nate.trela@acuris.com.

Hana Askren covers energy and mining M&A for Mergermarket from New York. She can be reached at hana.askren@acuris.com.

Philip Segal is the Head Analyst for Mergermarket – Americas based in New York, he can be reached at philip.segal@acuris.com.



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