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 Corvex Management, Elliott Associates and ValueAct Capital are among
the largest and most prominent activist firms that have seen the
value of their energy holdings tumble in step with sliding crude
prices and remain exposed to the price rout.
Activists, a growing class of mostly hedge fund managers who buy up
minority stakes in companies and push for major changes,
historically steered clear of stocks exposed to the volatile
commodity sector. Such funds often operate with a shorter time
horizon than most investors, making them more vulnerable to sharp
price swings.
But beginning around five years ago, some activists saw
opportunities in the energy sector that seemed to outweigh risks
when oil traded at around $100 per barrel. With oil now around $30,
the balance of risks and rewards has reversed.
Thirteen activist investors with the largest fund exposure to the
energy sector have suffered a combined $9.2 billion in unrealized
paper losses in 2015, according to quarterly filings analyzed by
hedge fund data firm Symmetric.io. (Graphic:
http://tmsnrt.rs/1LvQTg4)
"This is a cyclical industry. Everyone knows it comes back. But not
everyone has the time to wait it out," said Kai Liekefett, a partner
at law firm Vinson & Elkins who is head of its activism practice.
"The problem is that activist hedge funds have to answer to their
own investors, and the question is whether they will give them the
time."
The sum of the one-year losses includes a $2.8 billion drop in the
value of Carl Icahn's on seven energy industry investments,
Symmetric.io data show. While that is the biggest loss for any
activist investor, Icahn invests his own money and can ride out the
oil downturn for as long as he wants. Others do not have that
luxury.
Southeastern Asset Management, an investment management firm and
occasional activist, has seen the value of its energy bets fall $2.7
billion in the last year, which include holdings in Chesapeake
Energy Corp and Consol Energy. Southeastern and Icahn declined to
comment.
While the larger activists, with billions of dollars under
management, may be able to grind through the energy downturn,
smaller funds are fighting for survival. One, Orange Capital, is
already shutting down in part because of its exposure to a Canadian
oil and gas driller.
To be sure, investors can hedge their positions to cushion losses
from a stock decline. And last year's performance numbers do not
include the gains that funds locked in before oil prices cratered.
Early last year some activists saw the battered sector as a great
buying opportunity, convinced at the time that the crude market has
seen the worst of its losses.
The problem for hedge funds, many of whom have investors who can
demand their money back on a quarterly basis, was that many just had
not foreseen such a long, steep fall in crude prices even after they
began their slide in June 2014.
"It is possible that certain activist investors in oil and gas
stocks misjudged the severity and speed of the drop in oil and gas
prices," said Osmar Abib, global head of oil and gas banking at
Credit Suisse.
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FALLING KNIFE
Corvex's $1 billion holding in natural gas pipeline company Williams
Companies, worth around 14 percent of the firm's total portfolio,
represents the largest current exposure of any activist fund to a
single energy stock, according to quarterly filings.
Corvex's stake in Williams - which has an agreement to be purchased
by pipeline rival Energy Transfer - lost $1.1 billion over last
year, filings show. Corvex declined to comment.
The second largest exposure is Elliott's $863 million stake in oil
and gas company Hess Corp, which is worth around 10 percent of
Elliott's portfolio, according to filings. The stake was valued at
as much as $1.7 billion in the third quarter of 2014, filings show.
Elliott declined to comment.
Activist investors usually avoid tying up more than 10 percent of an
investment fund's assets in a single stock.
Activist Fir Tree Partners held to that rule last year, though its
energy investments - including Williams - still helped it rack up
$259 million in paper losses, Symmetric.io data show.
"In an environment characterized by uneconomic production and
scarcity of capital, the tools normally available to activist
investors are not applicable in a reasonable way," said Bobby Tudor,
CEO of Tudor Pickering Holt & Co.
In November 2014, Halliburton announced it would buy oil and gas
services rival Baker Hughes in a cash and stock deal worth $34.6
billion at the time. The deal was supposed to close in the second
half of last year but has since hit anti-trust delays.
ValueAct, a shareholder in Halliburton since 2012, disclosed last
January that it bought a stake in Baker Hughes, saying at the time
that its belief in the deal was underpinned by the drop in oil
prices.
The two holdings together comprise nearly 10 percent of ValueAct's
total portfolio and lost a combined $656 million in value in the
course of last year, Symmetric.io data show. ValueAct declined to
comment.
(Editing by Tomasz Janowski)
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