HOUSTON — Activist investors are getting impatient with oil producers that have redirected large investments from U.S. shale gas to liquid plays, building out projects that often take years to become profitable, according to Moody’s Investors Service.
After natural gas prices began to sink three years ago, independent producers far outspent their falling cash flows in an effort to acquire and drill oil land in the Eagle Ford in South Texas and elsewhere, racking up debt.
Moody’s analysts expect the activists to keep pressing oil companies this year to boost returns and pay out larger distributions to investors. They typically have targeted companies with high spending levels, small returns on capital and faltering stock prices.
“In 2014, we see a large number of North American energy companies at risk of shareholder activism, taking steps to head off potential activists,” the analysts wrote. “Shareholders have become less tolerant of elevated spending levels. They have demanded greater discipline in capital spending and in executive and board-member compensation in order to free up more cash for shareholder distributions.”
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Last year, shareholders forced out managers at a handful of energy firms and pushed companies like Chesapeake Energy and SandRidge Energy to cut debt levels, which has improved their corporate debt ratings, Moody’s reported. Many investors have been eager to quarter some assets into tax-advantaged master limited partnerships, which typically pay out larger cash distributions to shareholders than other corporate structures.
Apache Corp. and Devon Energy have been two of the most responsive to shareholder pressure, with Houston-based Apache selling off billions in assets in part to pay for stock buybacks and Oklahoma City-based Devon creating a midstream MLP.
The shareholder activism hasn’t always benefited balance sheets, though. El Dorado, Arizona-based Murphy Oil used debt to pay for shareholder rewards, and Swiss rig contractor Transocean paid a multibillion-dollar dividend after a long fight with billionaire activist investor Carl Icahn — both “credit negatives,” according to Moody’s.
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The ratings agency said Houston-based flow equipment provider Cameron International, Williams Companies and Talisman Energy have already drawn the attention of activists this year.
Lagging shares at Plano, Texas-based Denbury Resources and weak returns at Canadian oil and gas producer Encana Corp. could make those companies targets in 2014, as well.
And at Occidental Petroleum, which recently announced it would split its business and move its headquarters to Houston, it’s unclear how much it “will reduce debt in order to offset the loss in cash flow” after it spins off its California business, according to Moody’s.
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