12 May Karoon CEO schmoozes investors, but activists aren’t backing down

Source: Financial Review

By: Sarah Thompson, Kanika Sood and Emma Rapaport

Karoon Energy chief executive Julian Fowles is a busy man. Fresh off Karoon’s United States roadshow, Fowles made a surprise appearance at the Macquarie Australia Conference on Thursday before jumping on a sell-side analyst call on Friday to field questions as the stock continues to slide.

But if Karoon is trying to put a lid on activist concerns about further acquisitions, it’s going about it in a funny way.

Fowles spent a good chunk of his Macquarie presentation telling the packed room that inorganic opportunities have “been de-prioritised” as the mid-cap oil and gas producer focuses on production issues. But it was the Q&A portion where ears pricked up, as he acknowledged putting acquisitions on the backburner means none this year, but maybe next.

“We don’t have a deal that we’re doing at the moment,” he told energy analyst Mark Wiseman. “I would point to end of the year, early next year, assuming we were to find something in the short term. Who Dat took two years, so I don’t see anything before the end of the year to be absolutely frank.”

Karoon’s activist consortium Samuel Terry Asset Management and Sandon Capital leapt on the comments. The pair is urging the company, which they say has evolved from explorer to producer, to return capital to shareholders via dividends or buybacks and railing against recent acquisitions like Who Dat and the capital raises to fund them.

They hope to convince shareholders to vote against five of the nine resolutions tabled at the company’s annual general meeting on May 23.

“They can’t make an acquisition right now, but it’s clear they intend to do it soon,” Sandon’s Gabriel Radzyminski told Street Talk.

“If their Who Dat drilling program bears fruits, take that as carte blanche they’ll go make another acquisition. Plus now they have this new debt facility. With companies that have ambitions to make acquisitions, shareholders can relax if they don’t have the money. Ambition, plus money – then you have to worry.”

Dividend push

Fowles directly addressed capital management concerns in his presentation saying further detail would be provided at the incoming AGM and half-year result, but activists are not having a bar of it, describing the comments as “stalling tactics”.

“We’re very aware that this is a key topic for many of our shareholders and we absolutely intend to address that,” Fowles said. “…we still have a couple of board discussions to go forward, but it is absolutely the intention of Karoon, as we set out strategically in 2021, that part of our capital allocation framework includes returning capital to shareholders.”

Radzyminski responded: “They’ve been considering dividends since 2022. Considered in 2022, then continued to consider in 2023 and now 2024 said to be considering capital management. To me, what they’ve said in today’s presentation is a stalling tactic.”

Woollard added that he was “deeply disappointed that the Karoon Board continues to kick the can on shareholder returns”.

“While expectations have now been set about an announcement at the upcoming AGM, Samuel Terry and Sandon have already provided a very credible way forward so nothing short of a significant capital return will be tolerated,” he told Street Talk.

Street Talk understands engagement with its troublesome 5.6 per cent activist consortium has been limited to a letter of acknowledgement.

No formal meeting between the two warring sides has been set but there’s plenty going on behind the scenes to corral voters, on both sides.

In an email to Karoon’s entire shareholder register, sent on Friday and seen by Street Talk, Sandon implored shareholders to join them in sending a clear message to the board of dissatisfaction.

“We’re confident we know what the company thinks – last week’s presentation said it all. But we want to know what shareholders think,” Radzyminski said.

Proxy problems

Activists have a tough fight on their hands with the AGM falling in less than two weeks. Karoon’s register is highly diversified with no individual shareholder controlling more than 5 per cent of the vote. Some may have taken solace in Thursday’s messaging that the board is considering capital management at this month’s meeting.

Sources also told Street Talk that four major proxy firms – ISS, Ownership Matters, ACSI and Glass Lewis – have said they intend to tell their influential client base to vote in favour of all nine resolutions.

What they have working in their favour is a tough quarter for Karoon with production at Who Dat falling below expectations due to delays in bringing development wells on stream. Fowles was quick to acknowledge this and revealed the project operator had decreased gas production without consulting the joint venture which “led to a few phone calls”.

Citi analyst James Byrne told clients on Friday he believed Karoon had indeed lost its right to empire build, estimating the company could pay out an average of 25 per cent dividend yield for the next five years. He suggested the board should consider a small buy-back in the short term to win back the market’s trust.

“With the company losing its M&A mandate for now, capital management should be explored and it appears this has dawned on the company,” he said.

“At today’s low share price, it is likely a better outcome for the board to buy back the company’s scrip over M&A.”