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Big game hunters

26 Mar 2013 By Christopher Swann

Activist investors in America’s energy patch are not quite out of fuel. Hedge fund Audley Capital’s effort to inject fresh board blood into $1.8 billion coal miner Walter Energy suggests bigger targets with egregious governance like Chesapeake Energy and Hess are growing scarce. But there are still a few where weak performance invites scrutiny.

Riddled with overpaid bosses and compliant directors, the energy sector has been a bonanza for Carl Icahn, hedge fund TPG-Axon and other activists. They’ve ousted Chesapeake boss Aubrey McClendon, overhauled the SandRidge Energy board and curbed executive pay at Nabors. Now Hess is beginning to make the governance reforms and other changes that investor Elliott Management has demanded.

Shareholders of Walter Energy, with its bloated costs and cozy board, could also benefit from the attentions of a troublemaking hedge fund. The question is whether any bigger fish are left to fry.

There are several possibilities among companies whose strategy, rather than governance, needs an overhaul. Oil and gas driller Apache, for example, incurred $6 billion in debt and issued 16 percent more stock to finance a $16 billion acquisition splurge over the past three years. Yet its market capitalization has fallen from $33 billion to $29 billion since 2010. The risk of owning wells in turbulent Egypt is partly to blame, but the real problem is that the company and its management are spread too thin, with wells all over the globe. An activist could wangle some needed asset sales.

Devon Energy, whose share price has dropped about 40 percent since 2011, could also use an outsider’s discipline. The $23 billion company has been hurt by low prices for the Canadian oil and U.S. natural gas it produces. A good way to free up capital for investments in more lucrative commodities might be to spin off its pipeline operations into a tax-advantaged master limited partnership. That’s a favorite strategy of investors like Icahn.

In a way, activists have been victims of their own success. Opportunities for squeezing value from governance disasters like Chesapeake are drying up. But there are probably enough poorly performing companies to keep the energy patch fertile.


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