From Bloomberg
Ben Dell doesn’t just want to change how oilfield executives are paid. He thinks there could be a lot fewer of them around.
If crude prices continue to rise, companies will be tempted to spend more and more to boost output, he said, even as investors continue their push for higher returns. The answer: mergers and acquisitions, said Dell, a managing partner at Kimmeridge Energy Management Co., a New York-based private-equity firm he co-founded.
Now, too many explorers spend needlessly on administrative costs and other overhead even as they work just miles apart in the same shale basins, he said. Dell, a former sell-side analyst, is among a growing chorus of shale investors pressing public companies for better shareholder returns.
“You’re going to see an increasing amount of investors get involved in the space, looking to force companies into combinations,” Dell said in a phone interview. “The reality is if you weren’t motivated by preserving your job, you would run these companies completely differently.”
West Texas Intermediate, the U.S. benchmark crude, has climbed almost 50 percent since June and now sits above $60. But producers have failed to keep up, growing their share prices by roughly half that amount in the same period.
Dell says investors remain concerned explorers will return to old habits as a result.
“When oil prices go up, these guys spend like drunken sailors,” he said. “When oil prices go down, they turn around and say, ‘Look, it’s not my fault the oil price went down. I can’t be expected to manage this commodity.”’
In the nation’s busiest oil patch, the Permian Basin of Texas and New Mexico, the more than 40 companies with at least 20,000 acres each are ripe for consolidation, while in the smaller Niobrara field of Colorado, Dell sees eight drillers that could combine to slash more than $1 billion in the corporate cost identified on balance sheets as “selling, general and administrative,” or SG&A.
Dell’s Kimmeridge owns stakes in PDC Energy Inc., Carrizo Oil & Gas Inc. and Resolute Energy Corp. Dell declined to comment on how his consolidation views related to the companies Kimmeridge owns.
Large explorers outspent their cash flow by 117 percent over the past seven years, according to Barclays. The top 15 oil companies have paid executives $2.8 billion over the past decade while delivering a smaller return to shareholders versus other industries.
There’s a growing consensus “among long-only investors that the current compensation structure is just unacceptable,” Dell said.
Corporate consolidation can help close the gap between oil’s rise and lagging driller shares, according to a Goldman Sachs Group Inc. research note at the end of November.
“We believe U.S. shale producers will see a rising need for scale to further improve recovery rates and lower supply costs,” a group of analysts at the firm led by Brian Singer wrote. “This could bring a new term to the investor lexicon: The SuperE&P.”
Explorers bulked up during the shale boom primarily through individual asset deals, Victor Barcot, managing director of energy investment banking at Houlihan Lokey Inc., said in a phone interview. Now that the land grab is essentially over, the opportunity for producers to buy big asset packages in some of the hottest plays is fading, pushing companies to consider corporate deals.
No Premiums?
Yet consolidation among explorers won’t be easy, David Deckelbaum, an analyst at KeyBanc Capital Markets Inc. in New York, said in a phone interview. This era of lower oil prices makes it especially hard to pay a premium in a merger.
“You’ll probably see consolidation that’s more in the order of mergers of equals, or stock-for-stock deals,” Deckelbaum said.
Human dynamics can’t be ignored in all this, said Buddy Clark, an oilfield transactions attorney at Haynes & Boone LLP in Houston. He expects companies will try to just keep their own assets, forgoing deals.
“Each management team thinks they have the secret sauce,” Clark said.
Still, the oil patch has had no shortage of public proxy fights over the years, from famed activist investor T. Boone Pickens in the 1980s to Carl Icahn today. Paul Singer’s Elliott Management Corp. has been the latest to lead the pack of activist investors over the past year.
Such public activism will help fuel shareholder momentum for further change this year, Barcot at Houlihan Lokey said.
The more investors speak up, “shareholders start to get a little more courage and aren’t as afraid to make public their views,” Barcot said. “I don’t see that changing.”
