“How lessons from a recent spate of investor revolts could set a bullish course for America’s worst performing energy producer” —
Shareholder activism is not a new phenomenon.
By its very definition, shareholders are part owners of an organization. Therefore, should there be any disagreement in how the organization operates, shareholders have every right to intervene and call for changes.
So while investor revolts do happen on a regular basis, it literally went viral over the past year.
What’s even more alarming is the sheer number of big corporates that were in hot water with shareholders recently:
- Apple’s refusal to distribute more of its cash to shareholders
- HSBC’s bloated executive salary pay scheme
- Hewlett-Packard’s expensive acquisitions and deal blunders
- Nokia’s failed strategy to compete with Apple and Samsung
- Dell’s unfavorable buyout terms
- GE’s inability to align generous executive share plan to performance
The problems ranged from incompetent CEOs to outrageous compensations to costly M&A decisions.
As a result of investor interventions, sweeping changes at the governance, financial and operational levels were made possible at a number of these organizations.
Perhaps one shareholder said it best at the most recent Nokia AGM: “Are you aware that results are what matter? The road to hell is paved with good intentions. Please switch to another road.”
While above is just a partial list, an unprecedented level of shareholder activism has been taking place in the energy sector as well.
Some notable names include: Hess, Nabors, Transocean, Chesapeake, and Occidental Petroleum.
The issues which triggered investor revolts in the energy space were not dissimilar to those happening to companies mentioned earlier… and so were the end results.
But it would appear that some of the other energy majors who have yet to see the gauntlet drop are taking action ASAP to try and avoid it altogether.
Keeping the Floodgates Closed
According to Fitch Ratings, there’s a risk that the rising trend of investor revolts could lead to further and more frequent dissent.
In other words, Fitch believes that with the precedent now set, if any time a stock performs below shareholder expectation, there may be shareholder activists ready to pounce.
And that could prove damaging to future stock performance, when investors have less patience for volatility.
A certain group of energy companies are well aware of this potential consequence and are hoping to stop it before it begins.
Apache Corp., Devon Energy, and Newfield Exploration Co. were the three worst performing energy stocks on the NYSE over the past year.
Since 2011, the three companies have combined to erase over $30 billion from their market value.
If the past year’s casualties are any indication, these stocks have revolts written all over them.
So they aren’t wasting any time getting their act together.
According to Bloomberg, companies under the threat of potential activism are planning to sell as much as $30 billion in assets.
Some executives are also agreeing to large pay cuts while others are buying back shares and negotiating more joint ventures – all to help boost their companies’ share prices.
So far, this pro-active approach is proving to be effective.
Since hitting lows in mid-April, the three underperformers have gained back an average of 20%.
While there’s no guarantee that any drastic changes can help companies escape shareholder pressure, one thing’s for certain…
The very threat of activism leaves management little choice but to continually look for ways to create value and eliminate things that are not.
And with their feet to the fire, big energy looks set to reward investors for the remainder of 2013.
Time to load up.
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