If you follow Hollywood-related news, you may have heard actor George Clooney publicly mentioning activist investor Daniel Loeb – a major stockholder at Sony Pictures Entertainment (NYSE: SNE). Loeb contended that such movie flops as White House Down and After Earth are a troubling trend in the movie industry, and that Sony Pictures needs to make cutbacks and become its own entity.
But Clooney referred to Loeb as a “carpetbagger” and someone who knows nothing about the movie industry – only referring to two movies that have tanked, while not mentioning others that have done well. And Clooney is right; Loeb is using his purchasing power to make changes in Hollywood.
Activist investors are making their presence known throughout the world, and it can be both a good and bad thing. It is extending to the energy industry, but in this case, it will certainly be a benefit to the oil industry when it comes to deal-making.
Activist investors like Carl Icahn and Daniel Loeb went after ten companies since 2011, generating $40 billion in net return and yielding triple returns on the Russell 3000 Index, Bloomberg reports.
There’s no doubt that the oil industry has brought in lucrative revenue for companies engaging in shale oil production. And although it can be a harrowing venture, drilling for shale resources has caused the United States to become a record producer in such a short time span – soon to surpass Saudi Arabia in liquids production. Companies like EOG Resources (NYSE: EOG) have been leading the charge of the national production boom by focusing on shale areas in Texas.
With all the good news from the energy sector, you would think there would be plenty of wheeling and dealing. But 2013 has been a flat year for mergers and acquisitions. So far, deals this year amounted to $116 billion – the lowest number since 2009.
Meanwhile, international deals hit $41.8 billion in the third quarter, a 59 percent jump from the second quarter but far less when compared to the $138 billion from the fourth quarter of 2012.
But deals are picking up thanks to activist investors, and 2014 will be a better atmosphere for deal-making.
This will mostly be attributed to asset sales and restructuring. Deal-making is expected to gain in the fourth quarter of this year, since oil companies have $135 billion worth of assets in the market place. And foreign oil and gas companies that need energy for their countries are expected to purchase assets in the future.
Investors are becoming more interested in energy companies, since prices have been at steady levels. Natural gas prices have been fairly low, but the commodity is creeping back up in the market as more manufacturers need it to fuel factories.
Oil prices have been fluctuating somewhat on the market but are remaining fairly high, which is attracting more investors with purchasing power.
Deal Growth
The energy world has been riding high, but there has been criticism in the industry for its lack of internal discipline and fiscal structure.
For instance, Chesapeake Energy (NYSE: CHK) has struggled since natural gas prices dropped. Co-founder and former CEO Aubrey McClendon was ousted by a shareholders revolt, led by none other than Carl Icahn, due to several financial scandals and a series of bad investment moves. These investors took control of governance temporarily – shifting attention away from natural gas and making Chesapeake one of the largest producers of shale oil in the Eagle Ford.
Icahn also bought a six percent stake for $277 million in Canadian energy company Talisman Energy (NYSE: TLM), and he hopes to shake things up through management and boardroom changes.
North America has led the world in asset sales, as more companies sell conventional assets and hunker down in the shale-rich areas of Texas and North Dakota. North American deals shot up to $15.9 billion in the third quarter – compared to $10.9 billion in deals in the second quarter.
And there is a projection that the fourth quarter will see more deals to come, with $17 billion on the market.
The North American Oil and Gas Industry, along with several other companies in the energy industry, are planning a $131 billion campaign for projects and maintenance.
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Activist Investor Benefits
The shale oil boom has spurred plenty of excitement in the industry, to the point where companies have no need to forge partnerships and deals with other companies.
Although it may seem as if activist investors are interfering, they can have positive effects for struggling companies, such as management and boardroom changes or increasing shareholder payouts.
The primary goal of the activist investor is to enrich his portfolio, but his moves can also benefit you, since his goal is to get the most out of a given company.
And you’re going to see more asset buying from Chinese companies. China has been drilling in South America and Central Asia for oil assets. The Chinese have been leading buyers, taking up a quarter of the world market.
China National Petroleum Corp. is buying $10.5 billion in assets from all over the world. In its most recent quarter, China National bought $5 billion of assets in Kazakhstan from ConocoPhillips (NYSE: COP).
Other energy companies like WPX Energy (NYSE: WPX) may be targets of activist investing. Hedge funds making changes in boardrooms and boosting company value has been one of the strongest showings on the market.
If you’re worried about the effect it will have on shale oil, you need not worry. Activist investors will play a larger role in maintaining fiscal discipline, while ensuring that you get the best cash value out of a company.
Right now, the energy industry can be compared to a somewhat disheveled haircut. Overall, the hair looks nice, but a little trim is always a nice touch.
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