Energen’s Would-Be Permian Buyout — Are 2 Activist Investors Better Than 1?

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It’s one issue to have a well-known activist investor out calling for change and action in a company. It’s a completely different issue when you get two activist firms nipping at your heels. This is where the independent oil and gas exploration outfit Energen Corp. (NYSE: EG) enters the fray.

Elliott Management has built up a core position in Energen, according to reports from Dow Jones. What matters here is that the energy exploration company has already been under continued pressure from Elliott Management and by Corvex Management to sell itself.

Elliott now reportedly holds a stake of 4% to 5%. Corvex disclosed on August 14 that its stake is now at 10.1%, making its efforts even more closely watched by investing and securities laws since crossing the 10% shareholder threshold, and Corvex has sold options as well. Having a stake that size could allow the group to call for a special meeting and nominate up to six board members, which was also in the filing showing the options sale.

The key issue is Energen’s land in the well-to-do Permian Basin. It is this region that has drawn the most active buying and selling in a troubled oil and gas sector, with active deal-making and drilling due to easier drilling access and lower drilling costs.

A second issue is that Energen has been buying assets of its own. Its statement from the July earnings release noted that its bolt-on acquisition program has added approximately 19,000 net acres in prime Delaware and Midland basin locations over the past year and a half. Its average price was about $17,600 per acre. That figure includes roughly 9,700 net acres acquired in the first six months of 2017 for approximately $215 million (or about $22,000 per acre). The company also showed that it purchased 690 net mineral acres in the Delaware Basin in the first six months of 2017 for a cost of about $20 million.

Energen already has undergone major changes over the years. The company used to be the public utility called Alabama Gas, but it eventually sold off its utility. Prior to that utility sale, Energen had been buying up land and natural gas resources in the Permian basin over the past decade.

Here is where one problem comes into play. Energen doesn’t want to sell itself. The company has a value of just under $5 billion, and the period after a strategic review has the company noting that staying independent is in the cards. It appears to be the current price of energy that led the company to its decision to stay independent.

One feather that may now be in Energen’s cap is that the company has already increased its production guidance to growth of almost 30% from a year ago. New well technology and cost maintenance were what allowed for such strong guidance.

Analysts on Wall Street vary over how much Energen should really be worth. Just last week, after earnings, Energen shares were raised to Neutral from Sell with a $46 price target at Seaport Global. That target actually was under the $48.80 share price at the time. And this week we have seen two more analysts chime in: Citigroup has a Neutral rating but its target was cut to $56 from $58, and Barclays maintained its Equal Weight rating but raised its own target to $57 from $54.

According to Energen’s website:

As of December 31, 2016, the company has identified 3,545 net engineered, unrisked, potential drilling locations in the Wolfcamp, Spraberry, and Cline formations with an estimated 2 billion barrels of oil-equivalent, net, undeveloped resource potential. Energen’s proved reserves at year-end 2016 totaled 316 million BOE.

It was also back in July that Energen added a Wall Streeter to its board of directors. The company announced at that time that Lori A. Lancaster was joining its board effective July 21, 2017. Lancaster is a former Managing Director of the Global Energy Group at UBS Securities and was in the Global Natural Resources groups at Nomura Securities International and Goldman Sachs. Her background in M&A is in the energy sector.

Now Energen shares were last seen up 3.2% at $49.65 in late-Thursday trading. The company has a 52-week range of $46.16 to $64.44, and it has a consensus analyst target price from Thomson Reuters of $63.17.

Some activists are successful in pressing companies into seeing things their way. Whether this will be a success remains to be seen. Many of Energen’s acres have just recently been purchased. A new buyer might not want to pay up an even higher price than what Energen just paid in the first half of 2017, at least not this quickly. Investors love to buy stocks at close to their 52-week lows. Companies do not necessarily like being sellers of their company at those low prices.