Sempra Isn’t Rolling Over to Elliott Just Yet: Liam Denning

In the struggle over the future of Sempra Energy between the company and Elliott Management Corp., we have reached the truce stage. The final settlement remains a ways off, though.

Back in June, Elliott launched a public effort criticizing Sempra as an undervalued conglomerate that needed to overhaul its strategy and management. With customary tact, the activist’s slide deck turned Sempra’s own logo against it. Since then, the company has acceded to some of Elliott’s demands, such as putting its U.S. renewable-energy assets on the block. But on other fronts, particularly divesting South American utility assets and the Cameron liquefied-natural-gas business, Sempra has shown less interest.

Which is why Tuesday’s agreement looks more like a way-station than a final destination. Sempra will cooperate in getting two Elliott nominees onto its board. That isn’t the six Elliott originally wanted, and two out of 16 directors doesn’t sound like much.

However, the other part of the agreement concerns Sempra’s board committee overseeing the LNG business, the “LNG Construction and Technology Committee.” This will be renamed to shift the emphasis to “business development,” and Elliott’s two directors will take seats on an expanded committee of five. Business development can mean pretty much whatever you want it to mean. In this case, though, it’s essentially a strategic review, with the committee’s updated charter allowing it to hire outside advisers with a deadline of reporting to shareholders by the end of March.

Elliott’s announcement in June reversed a decline in Sempra’s valuation relative to the sector, which may also create some pressure for action.

The two-year forward valuation is especially pertinent, as Cameron is supposed to begin operations by the end of 2019. Much of the debate over Sempra’s potential valuation centers here, with Elliott’s standalone value implicitly incorporating more credit for potential growth versus utilities analysts, who tend to focus on the 20-year supply contracts already signed.

Sempra’s stock now trades broadly in line with the sector on 2020 earnings multiples, as opposed to a mid-teens discount before Elliott showed up. That could suggest investors expect a strategic shift on the LNG business, growing confidence in its prospects, or a mixture of the two.

But it is hard to imagine that, six months from now, the new committee will conclude everything’s just hunky dory as it stands. While it will probably be a few weeks before we find out who Elliott’s nominees are, it’s a fair bet they will come with some expertise on both the midstream gas side and the utilities side, with a strong possibility of the latter being C. John Wilder, the turnaround specialist who also teamed up with Elliott to remake NRG Energy Inc. (NRG’s stock has more than doubled since they showed up). And the mere announcement of a strategic review creates anticipation for action.

Yet the past few months have shown Sempra isn’t simply rolling over. It is worth noting that amid all the soothing language of cooperation in Elliott’s press release on Tuesday morning, the fund manager’s head of activism, Jesse Cohn, had his name attached to a statement about “continuing the collaborative relationship” with Sempra’s management. The latter, no doubt thrilled, should expect some intensive collaboration as we roll into 2019.