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Public E&Ps Weigh Pros, Cons of Privatization

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In the month since Continental Resources founder and chairman Harold Hamm made his all-cash offer to take the E&P private, some other publicly held firms have begun eyeing the potential benefits of pursuing a similar transformation.

“We’ve had a number of public companies talk to us recently about the right way to go private and whether that makes sense,” Travis Wofford, the Houston corporate department chair for law firm Baker Botts, told Energy Intelligence.

Privately held firms enjoy some advantages over their publicly held peers. In explaining his rationale for his privatization bid, Hamm lamented a lack of “freedom” for public companies due to their obligations to shareholders and more stringent regulatory oversight.

Those constraints are particularly poignant in the current environment, in which large public E&Ps are largely refraining from chasing production growth amid soaring oil and gas prices due to demands by investors to prioritize capital discipline and shareholder returns over upstream expansion.

"We have determined that the opportunity today is with private companies [which] have the freedom to operate and are not limited by public markets," Hamm said in a letter to Continental shareholders explaining the rationale for the privatization bid.

Austin Lee, an oil and gas acquisition and divestment specialist with Houston-based Bracewell law firm, told Energy Intelligence that being private "in many ways allows you the ability to take advantage of strategic options that public companies can’t pursue, as long as you have the capital to do it.”

Seeking Value

Along those lines, some in the industry also feel that financial investors are undervaluing E&Ps and are constraining their access to capital, particularly in the current high commodity price environment.

“There is a disconnect between people who understand the commodity cycle and institutional investors,” suggests Baker Botts' Wofford.

Some equity analysts felt that Hamm was looking to take advantage of that undervaluation with his bid, which was valued at roughly $70 per share.

“We agree that equity markets are under-appreciating the duration of the current price cycle, but don’t believe Mr. Hamm’s proposal sufficiently rewards minority shareholders,” Piper Sandler analyst Mark Lear said in a Jun. 14 note.

Bill Smead, owner of Smead Capital, the largest Continental shareholder at 2% after Hamm and his family, was a bit blunter in a Jun. 28 interview on CNBC.

“Harold Hamm is trying to steal the rest of the company away from us minority shareholders because he doesn’t think he’s being treated well in the stock market,” Smead said.

At the time of Hamm's privatization bid, Truist analyst Neil Dingmann estimated that the company was worth at least $95/share to a buyer. He also speculated that Hamm's offer was intended as bait to attract a larger buyer.

“Importantly, the offer is not binding and [Continental’s] board plans to evaluate the offer before moving forward, which we expect is an intentional strategy to potentially open the doors to competing bids from large-cap public peers,” said Dingmann. “We would not be surprised if a process ultimately resulted in a sale.”

Escaping ESG

Private firms can also avoid much of the increased scrutiny on the oil and gas industry regarding carbon emissions and environmental, social and governance (ESG) concerns.

Hamm in particular has frequently complained about the growing burden of decarbonization expectations and requirements posed by public markets. In an interview with the Financial Times earlier this year, Hamm likened the industry's more aggressive pledges for emissions reductions to "cut[ting] their [own] throat."

Hamm did not cite such considerations in his offer to take Continental private, but the company does generally lag peers like Devon Energy, Pioneer Natural Resources and EOG Resources in both disclosure and reduction targets.

No Walk in the Park

Despite the apparent benefits, however, taking a publicly held company private is no easy feat. According to Bracewell's Lee, Hamm’s bid is a special case given his already large position in a company he founded. Other organizations attempting to go private could end up trading one set of problems for another.

Simply buying out all the other shareholders can be a long and potentially costly process, should any shareholders dispute the effort. A privately held company can also become dependent on a few key investors, who would then have a less liquid offramp should they want to cash out.

The takeaway, said Lee, is that despite certain advantages to going private, he didn’t expect Hamm's bid to kickstart a wave of E&P privatizations.

The window for any kind of privatization trend is also narrowing. Baker Botts' Wofford said that such a wave would need to come soon due to inflation and rising interest rates.

“A main driver is the cost of debt capital,” said Wofford. “The cost of taking a company private goes up as the [US Federal Reserve] pushes up interest rates.”

Topics:
M&A, Corporate Strategy , Equity and Debt Markets
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