Time for dividends, says Karoon Energy founder as investor anger mounts

Source: The Australian

By: Tansy Harcourt

Karoon Energy founder Bob Hosking said it’s time for the under-fire oil and gas company to start paying shareholders a dividend.

After two decades on the ASX but under the radar of most investors, Karoon has shifted from explorer to a producer generating over $US200m of free cash flow. Activist investors are campaigning for it to start returning capital to shareholders and the founder agrees.

“The company needs to pay a dividend and keep its books balanced with cash in the bank,” Mr Hosking told The Australian.

As Karoon’s longest-term investor, Mr Hosking cannot be written off as a short-term player wanting a quick hit from dividends.

Karoon is targeting growth to 50,000 barrels of oil per day over the next three years and on Wednesday tried to quell investor concerns that it may put reaching that target via an acquisition ahead of capital returns.

In a letter to shareholders, chairman Peter Botten said the company would “announce its framework for shareholder returns in July” with “the application of this approach” to occur with the half-year results in August.

“Work is being finalised on the key factors and constraints that impact the development of a robust and sustainable dividend policy,” wrote Mr Botten. “This includes Australian profit availability, balance sheet, credit strength, tax planning, availability of franking credits, scenario planning, contingent payment consideration and production reliability sensitivities, together with share buyback considerations.”

Activist investment firm Sandon Capital fears the company will use a recently locked-in $US690m debt facility to purchase another oil asset before this time, which would negate the need for a capital return.

Karoon has faced shareholder dissent since last year when it sold new shares to fund the acquisition of Who Dat in the Gulf of Mexico, which diluted existing shareholders by 40 per cent.

Mr Hosking said he remains supportive of the direction Karoon is travelling, apart from the lack of dividends and also some concerns over debt at the firm he founded and ran for 16 years.

“It’s my baby,” Mr Hosking said of Karoon. “We took it a long way, we floated the company with $7m in the bank and now it’s got a market cap of $1-2bn.”

Mr Hosking himself left after shareholder grumblings about executive pay four years ago and the firm is now run by a number of former Oil Search executives, with Mr Botten formerly the managing director and Julian Fowles having run several businesses there.

“They’ve got professional people running the production,” Mr Hosking said. “It appears to be in good hands. All I can say is that the company needs to pay a dividend and keep its books balanced with cash in the bank.”

Oil companies as an industry are a returning rivers of cash to their investors despite mounting fears about the future of fossil fuels.

More than $US100bn was paid out last year in dividends and share buybacks by Shell, BP, Exxon Mobil and Total Energies combined, according to data by the Institute for Energy Economics and Financial Analysis (IEEFA).

Karoon, with 35,000 barrels per day production, is not in that league and Mr Hosking said the company needs to handle its growth aspirations with care.

“If you want to go out on a limb and take huge risks, it’s not the right thing to do. One has to be careful not to drive down shareholder value,” Mr Hosking said.

The 50,000 barrel target is a case in point.

“As long as it can be done in three years, then great, but you know, maybe it’s gonna take four years and maybe you wait a little bit longer and take debt out and build the cash balance, so you don’t have to take as much debt. The balance of being patient and building up a good cash account is important. And so it’s got to be balanced with that,” Mr Hosking said.

Karoon’s annual general meeting will be held next Thursday and Sandon Capital and Samuel Terry – which hold 5.6 per cent of the shares – have said they will vote against five of the nine resolutions.

Mr Fowles said the major proxies are in support of all the resolutions that will be put forward.

Mr Botten wrote: “The board believes that its current strategy is strongly aligned with the interests of the majority of Karoon’s shareholders, particularly those who have long-term perspective and an interest in Karoon remaining a competitive and stable participant in the international oil and gas sector.”

For Mr Hosking who started the company all those years ago and remains a shareholder, none of those factors mean it should not start paying a dividend.

“It’s time,” Mr Hosking said.

Karoon shares fell 1.3 per cent on Wednesday to close at $1.88. Its shares are down 9 per cent this year.

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