Tough oil and gas deal-making environment limits activist aspirations – Analysis

19 November 2019

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

Relatively steady but low oil and gas prices in North America have led to a slowdown in energy M&A, with bidders basing offers on current commodity prices while sellers are looking for valuations that reflect a more optimistic view for the industry, a sector banker said.

Deal-making has happened but has not delivered the returns activists were expecting.

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

The lack of movement in turn has blocked activists from their stated 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 USD 8.75 per share acquisition proposal from Elliott Management which in turn urged the Denver-based company to hire advisors for a broader sale process. While reports indicated that Callon PetroleumWhiting Petroleum and Blackstone showed interest, all dropped out of the bidding and Elliott reportedly slashed its bid in July before the two sides settled in August. That agreement called for QEP to remain independent but it would work with Elliott to identify board nominees and to agree upon two new independent directors.

In many cases, companies have already explored strategic options that activists would demand without much success.

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 the assets into a moribund A&D market, the banker said. On 14 October, Abraxas announced it retained Petrie Partners to review strategic alternatives, with Whiting having made an all-stock offer for the company, according to a Reuters report. Abraxas shares are trading around USD 0.31.

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 USD 1.7bn 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 the company 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.The PDC/SRC deal points to the difficulties activists are having navigating a rather prolonged sector downturn, the sector advisors noted. Activists will require greater patience in seeing returns because they are unlikely to be realized in the new quarter or two, the banker said.