01 May Karoon chairman in activists’ firing line over pay

Source: Financial Review

By: Jonathan Shapiro

Activist target Karoon Energy has been accused of sustaining an inappropriate and “flawed” executive pay scheme, compelling shareholder Sandon Capital to vote against its remuneration report at Karoon’s upcoming annual meeting.

Sandon wrote to chairman Peter Botten on Wednesday arguing that Karoon’s incentive structure had insufficient regard for shareholder value and elements of it were crudely structured such that executives were rewarded simply for making acquisitions.

Activist fund managers Samuel Terry and Sandon teamed up this week to push for an overhaul of the board of $1.5 billion oil and gas producer, disclosing on Tuesday a combined holding of 5.6 per cent, with Samuel Terry holding the bulk of the investment.

The pair have vowed to vote against five of the nine resolutions tabled at the company’s annual general meeting on May 23.

Central to their thesis is that Karoon has the capacity to improve shareholder returns via dividends.

‘Unsuitable and unsustainable’

Samuel Terry argues if the company changes its strategy, it could pay an annual dividend of 40¢ to 50¢ – equivalent to about a 20 per cent yield at current prices.

“We consider that Karoon is paying lip service to concerns about shareholder value and may be hoping shareholders have missed this change,” Sandon managing director Gabriel Radzyminski wrote in his letter to Mr Botten, who is a former chief executive of Oil Search.

He also chaired AGL Energy, from which he resigned when the company’s largest shareholder, Mike Cannon-Brookes, made his own activist play in May 2022, defeating a proposed break-up of the utility.

“Given what we see as conflicting statements about dividends, capital management and Karoon’s objectives, we consider the current remuneration structure as unsuitable and unsustainable. The objectives it seeks to support, particularly in respect of shareholder value, are vague and unclear,” Mr Radzyminski wrote.

The funds are undecided on whether to support the election of Melissa Holzberger and Joanne Palmer and Sandon requested a meeting with both candidates to inform how it would direct its proxies.

With respect to Karoon’s short-term incentives, “we do not consider Karoon’s existing STI [short term incentive] framework to be appropriate to its status as a producer”, the letter said.

Sandon pointed to the fact the Baúna project accounts for more than 75 per cent of Karoon’s revenue, yet only 55 per cent of short-term bonus criteria is apparently tied to the Brazilian asset.

“We note that ‘production’ only had a 20 per cent weighting in the 2023 STI scorecard, despite the vastly greater significance of production to potential shareholder returns relative to almost any other item on that scorecard,” the fund manager said.

It was even more critical of long-term incentives, saying the 50-50 allocation based on relative and absolute total shareholder returns was too easy a hurdle.

“The relative TSR [total shareholder return] performance condition does not include a positive return criteria,” the letter said.

“This means that Karoon executives would have part of their LTI vest on the basis that Karoon shareholders only lost less than the peer group,” and advocating for a minimum return of zero per cent to act as a floor.

Capital allocation concerns

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

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

Both managers said they had shared similar concerns for some time.

Karoon Energy is an oil and gas explorer and producer that has been listed on the ASX for 20 years.

The company raised $480 million via a placement in November at $2.05 per share to finance the Who Dat acquisition. They closed 3.3 per cent lower on Wednesday, to $1.88.

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