09 May Karoon Energy misses the mark with activist investors over acquisitions, dividends

Source: The Australian

By: Tansy Harcourt

Oil and gas company Karoon Energy has sought to ease shareholder concerns about poor capital management, announcing it was “not even close” to buying another asset before admitting a purchase could come by year’s end.

“We are not on the cusp of doing another deal,” said CEO Julian Fowles. “We are not even close … I would point to the end of the year or early next year assuming we find something.” Karoon has been under pressure after diluting shareholders to fund its Who Dat acquisition in The Gulf of Mexico last year.

The company had largely flown under the radar for Australian investors despite two decades on the ASX, but now it has shifted from explorer to producer, activist shareholders want a similar shift from reinvesting cash to rewarding investors.

“They are now a serious producer and producers in the world of oil and gas pay dividends,” said Sandon Capital’s Gabriel Radzyminski. “They are generating over $US200m ($304m) of free cash flow on a market cap of $1.5bn. Every other oil major around the world says returns to shareholders come in the form of dividends.”

Karoon has two main assets, the Bauna Project in Brazil, and the recently purchased Who Dat. Investors fear it will continue to acquire rather than reward the patience of investors, after “stalling” on any capital management plan such as a dividend.

“They raised 40 per cent of the shares on issue to fund that acquisition so their licence to acquire has been revoked based on that,” said Mr Radzyminski.

Mr Fowles told investors at the Macquarie Australia Conference that the company was discussing the option of dividends and would probably provide an update at its annual general meeting in two weeks.

“We’re very aware that this is a key topic for many of our shareholders … the board is very well progressed in discussing capital returns. I’m not able to say specifics on that today. We have an AGM coming up in about two weeks. I think the chairman will be positioned to provide more colour around that at that point,” Mr Fowles said.

“This board is stalling,” Mr Radzyminski responded.

“It seems as though they’re hoping they’ll find some M&A opportunity while ‘actively considering capital management’. If that happens, they’ll have to keep ‘considering’ capital management, because they might not have the spare capital to manage.”

Fellow activist investor Fred Woollard from Samuel Terry said the company needed to change its short-term incentive structure for executives so that they are not incentivised to make acquisitions.

“One of our key concerns is that the hurdles for STIs are wrong and need changing,” said Mr Woollard. “The CEO is incentivised to make an acquisition because 20 per cent of his STI is to make an acquisition. No qualifiers, nothing about it being accretive. Just make an acquisition.”

Sandon and Samuel Terry hold 5.6 per cent of the shares in Karoon combined and will vote against five of the nine resolutions at the AGM being held on May 23.