If the past week or so is any guide, then E&P companies had best know one thing: Investors aren’t playing.
Consider Denbury Resources Inc. The specialist in enhanced oil recovery this past weekend announced a cash-and-stock offer for Penn Virginia Corp., which operates in the Eagle Ford shale basin in Texas, worth $1.2 billion, or $79.80 a share. Or at least it was worth that based on Friday’s closing prices. Investors have wiped 29 percent off Denbury’s stock since then. Remarkably, having been offered a nominal premium of 18 percent, Penn Virginia’s shareholders are now being enticed with a 6 percent discount on the stock they owned heading into the weekend.
On Tuesday, Chesapeake Energy Corp. announced its own foray into the Eagle Ford, with a deal for WildHorse Resource Development Corp. worth about $4 billion including assumed debt. Before the market opened, the offer implied a premium of as much as 24 percent. By mid-morning, the slump in Chesapeake’s stock had taken that below 10 percent. And that’s despite Chesapeake simultaneously unveiling earnings that beat forecasts handily.
In both cases, the acquirers may be wondering exactly what they did to cause offense. Denbury’s deal provides exposure to a shale play outside its core business, with an option to potentially apply its enhanced-recovery skills in a new area. Chesapeake’s deal, meanwhile, accelerates its shift away from natural gas production toward more valuable liquids and claims hefty synergies, worth perhaps half the transaction cost at the upper end of assumptions (on a 10 times multiple).
The problem is that, while the E&P sector never lacks for good stories, investors really aren’t listening. They’re long facts on the ground. They’re short stories.
The most glaring example of recent yore is EQT Corp., which has dropped 21 percent since reporting earnings last week (the sector’s down 4 percent). EQT took the, er, opportunity to reset its medium-term growth story lower. On one level, this is actually welcome for a producer in the woefully oversupplied U.S. natural gas market.
But on another level — the one where most investors hang out, apparently — EQT may as well have been talking about 2123, not 2023. It made the cardinal mistake of raising its capital expenditure budget for this year while simultaneously reducing production guidance. This is as close to taboo as it gets in E&P investor circles these days, having been scarred by years of go-go growth expectations that helped foster a crash in energy prices, high debts and poor returns (see this).
Like EQT, while Denbury and Chesapeake no doubt see medium-to-long-term opportunities in their approach, investors see surprises and risks for which their tolerance has shriveled. While Denbury has yet to announce third-quarter results, both Chesapeake and EQT notably reported negative free cash flow again in their results.
It is perhaps unfortunate for EQT that its results arrived the same day as those of ConocoPhillips. Besides beating expectations, Conoco stuck doggedly to its established message of low costs, spending restraint and payouts. Free cash flow increased more than a third versus the second quarter, and was positive for the fourth quarter in a row. There were more references to — and, importantly, evidence of — “discipline” in Conoco’s earnings announcement and analyst call than your average “Fifty Shades” novel.
And that seems to be what the punters want.