Activist funds to push Karoon Energy on dividends

Source: Financial Review

By: Jonathan Shapiro

Activist fund managers Samuel Terry and Sandon Capital have teamed up to push for an overhaul of the board of $1.5 billion oil and gas producer Karoon Energy.

The investment firms disclosed on Tuesday they had created “a limited association with respect to the affairs” of Karoon in a substantial shareholder notice lodged to the Australian Securities Exchange.

The combined holding of the two funds is 44.7 million shares, or 5.6 per cent, with Samuel Terry holding the bulk of the investment.

Attached to the substantial shareholder notice was a declared intention to vote against five of the nine resolutions tabled at the company’s annual general meeting on May 23.

Specifically, they intend to vote against the re-election of Peter Turnbull to the board, to vote down the remuneration report, an increase to the director fee pool, a performance rights grant to Dr Julian Fowles and a refresh of their placement capacity. 

The funds said they were undecided on whether to support the election of Melissa Holzberger and Joanne Palmer. Karoon is chaired by former Oil Search chief executive Peter Botten.

“Our concerns are primarily about the capital allocation,” Samuel Terry’s Fred Woollard told The Australian Financial Review.

“We believe the company should be prioritising dividends and buybacks rather than acquisitions and development.”

Mr Woollard said if the company changed its strategy, it could pay an annual dividend of 40¢ to 50¢ – which would represent a 20 per cent dividend yield based on the current share price.

“We intend to discuss our views with as many shareholders as we can. We also believe management incentives – which we will be voting against – are inappropriate and incentivise suboptimal behaviour,” he said.

Sandon Capital’s Gabriel Radzyminski said both funds had “similar concerns about Karoon for some time” and the pending AGM was “an opportunity for shareholders to collectively express their views on the board’s stewardship”.

Mr Radzyminski said Karoon had indicated that as it evolved into a fully fledged producer it would consider paying dividends to shareholders.

“Last year’s acquisition of Who Dat, the accompanying capital raising and, more recently, statements by the company in the notice of meeting and its sustainability report seem to have put an end that prospect.

“Yet, with significant free cash flow, Karoon could deliver a very high-yielding return to its shareholders, with far less risk than continuing to consider exploration and potential acquisitions.”

Karoon Energy is an oil and gas explorer and producer that has been listed on the ASX for 20 years. Its main assets are the Bauna Project in Brazil and the Who Dat assets in the Gulf of Mexico.

The company raised $480 million via a placement in November at 2.05 per share to finance the Who Dat acquisition.

But the shares have fallen since then and currently change hands at $1.88.

The company is currently in the process of raising $US400 million ($611.4 million) in the United States bond market and has been assigned a “B” credit rating.

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