4 Energy Stocks on Activist Investors’ Hit Lists

by Aaron Levitt | March 28, 2014 9:56 am

4 Energy Stocks on Activist Investors’ Hit Lists

A variety of energy stocks are facing a new threat, and for once, we’re not talking about increasing regulation or potential fracking bans.

Icahn 1063525001 e1291056531509 4 Energy Stocks on Activist Investors' Hit Lists[1]We’re talking about the rise of activist investors.

According to ratings agency Moody’s, the energy sector will continue to be a hotbed of activist activity[2] going forward, and the number of targets in the sector could intensify this year.

Activist investors and hedge funds — like Carl Icahn or Elliott Management — have set their sights on several “bloated” energy firms that need … er, a slight push in the right direction. As they see it, many independent energy stocks have simply not delivered on their promises, debt levels are too high and production has been too low. The nagging result, of course, has been sagging share prices.

But by implementing new cost-controls and execution methods, as well as spinning off noncore assets[3], these activist investors hope to right the ship at several of these energy stocks. (Or at least make a quick buck via hefty special dividends.)

While that does reek of short-term thinking, there’s no denying that, on occasion, meddling by activist investors does help the individual investor. So, here are four energy stocks to keep an eye on, as they’re either already or soon to become targets for activists:

Energy Stocks on Activist Investors’ Hit Lists: Williams Cos. (WMB)

WilliamsCompaniesLogo 4 Energy Stocks on Activist Investors' Hit ListsIt’s a booming time for pipeline firms as America’s shale revolution has made owning the necessary infrastructure a profitable business. However, that hasn’t been the case at Williams Cos. (WMB[4]).

Aside from its massive pipeline network, Williams owns a host of natural gas processing facilities. Low prices for natural gas have crimped margins for WMB, while concerns about cash flows at its master limited partnership, Williams Partners, LP (WPZ[5]), has prevented the firm from keeping up with rival midstream players.

That prompted two different activist investors — Corvex Management and Soroban Capital Partners — to accumulate $2.5 billion worth of WMB stock[6] back in February.

According to the activists, WMB “has a strong competitive position in an attractive industry with tremendous growth opportunities.” However, it just hasn’t met with expectations. To that end, the duo has been looking at a “strategic combination” (read: an outright sale or merger) of WMB to another larger midstream firm.

While that might be a tall order considering Williams’ $28 billion market cap, a merger of equals could happen. Longer term, that could be a great thing for its shareholders.

Energy Stocks on Activist Investors’ Hit Lists: EnCana (ECA)

Encana185 4 Energy Stocks on Activist Investors' Hit ListsCanadian natural gas superstar EnCana (ECA[7]) spun off its heavy oil division at absolutely the wrong time. The original plan was that by placing all of oil assets into Cenovus Energy (CVE[8]), ECA would be a pure play on rising natural gas prices.

Unfortunately, fracking made fools of us all and prices for the fuel went south in a hurry. That caused EnCana to stumble badly, and activist investors started to crowd.

Moody’s estimates ECA to be a future activist target as it isn’t growing its liquids portfolio as fast as its rivals. ECA’s latest capex budget should have the firm producing roughly 30% more oil and natural gas this year. Sadly, that 75,000 barrels of oil equivalent (BoE) or so isn’t really anything when you consider EnCana’s large size.

This poor liquids growth[9] is strike one against the energy firm.

The second strike is that ECA’s capex spending is aligned with cash flows. That means there isn’t much left over for investors. That’s evident by EnCana’s recent dividend cut from 20 cents quarterly to 7 cents. The yield now sits around 1.3%, where it had been roughly 4% before.

ECA might feel pressured to begin selling off natural gas properties in an effort to improve its production mix. But, that could boost ECA stock down the line.

Energy Stocks on Activist Investors’ Hit Lists: Talisman Energy (TLM)

TalismanEnergy185 4 Energy Stocks on Activist Investors' Hit ListsUnlike EnCana, fellow Canadian producer Talisman Energy’s (TLM[10]) issue isn’t that it’s too focused … its actually too spread apart.

Having assets all over the world is OK if you’re the size of Exxon Mobil (XOM[11]), but when you’re only a midsized producer, it can be a big headache. Specifically, TLM has been struggling for years under the weight of poor production growth, inefficient operations and an overall high cost profile.

Enter Carl Icahn.

The activist investor announced via a tweet[12] that he had taken a huge stake in the small independent E&P firm. Icahn has pushed for board seats and revitalization of the Talisman’s strategy. So far, that has resulted in a series of asset sales, with TLM raising about $2.2 billion last year. Another $2 billion worth of noncore sales is in the works for 2014.

The ultimate goal for Icahn could be to slim down the firm enough that it’s a prime candidate for a buyout. Many of the projects sold were natural gas based.

Based on this strategy, “analysts estimate Icahn can unlock anywhere from $500 million to $8.8 billion US in value”[13] from struggling Talisman.

That certainly would be a welcome sign for struggling TLM stock.

Energy Stocks on Activist Investors’ Hit Lists: Cameron International (CAM)

CameronInternational185 4 Energy Stocks on Activist Investors' Hit Lists[14]It’s not just energy stocks in the E&P sector that are seeing rising activist interest. The oil services players are getting the nod as well.

And that includes industry stalwart Cameron International (CAM[15]).

CAM is one of the largest makers of subsea equipment[16], and that market is booming as energy firm’s dive deeper to exact hydrocarbons. However, sales of its other well completion products haven’t been up to snuff as of late. That caused a significant decline (15%) in Q3 profits, as well as a pair of earnings misses across the past four quarters.

To that end, Jana Partners[17] initiated a huge position in the firm and has been pressing for noncore asset sales.

So far, CAM has bowed to pressure, dumping product lines and facilities that don’t meet with its core business of subsea equipment. That included selling its natural gas gathering and processing equipment business to General Electric (GE[18]) for around $550 million. Cameron also recently boosted its buyback program[19].

Given that Cameron’s issues were “self-inflicted, temporary and remediable,” Jana’s meddling in the shares could result in streamlined and outperforming oil service stock going forward.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2010/11/Icahn_1063525001-e1291056531509.gif
  2. hotbed of activist activity: http://fuelfix.com/blog/2014/03/11/moodys-many-energy-companies-on-investors-hit-list/
  3. noncore assets: http://investorplace.com/2014/03/chk-stock-chesapeake-ipo-sse/
  4. WMB: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMB
  5. WPZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=WPZ
  6. to accumulate $2.5 billion worth of WMB stock: http://blogs.wsj.com/corporate-intelligence/2014/02/26/a-quick-win-for-activists-as-williams-rolls-over/
  7. ECA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ECA
  8. CVE: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVE
  9. poor liquids growth: http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/encana-looks-to-grow-natural-gas-liquids-production-by-30-next-year/article15867028/
  10. TLM: http://studio-5.financialcontent.com/investplace/quote?Symbol=TLM
  11. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  12. via a tweet: http://www.thestreet.com/story/12061389/1/carl-icahn-tweets-stake-in-talisman-energy.html?puc=yahoo&cm_ven=YAHOO
  13. “analysts estimate Icahn can unlock anywhere from $500 million to $8.8 billion US in value”: http://www.bnn.ca/Blogs/2013/10/08/Growing-reasons-to-get-back-to-the-greenback.aspx
  14. [Image]: http://investorplace.com/wp-content/uploads/2013/02/CameronInternational185.jpg
  15. CAM: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAM
  16. subsea equipment: http://investorplace.com/2013/03/3-picks-to-play-the-year-of-subsea/
  17. Jana Partners: http://fuelfix.com/blog/2014/01/24/investor-to-push-cameron-to-sell-more-assets/
  18. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  19. recently boosted its buyback program: http://www.zacks.com/stock/news/127408/cameron-international-hikes-share-buyback

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