Be careful what you wish for.
When Encana Corp. decided to change its name to Ovintiv Inc. Ovintiv and relocate the headquarters to Denver from Calgary, it did so aiming to take advantage of larger pool of passive investment.
On that count, it appears to have succeeded; several U.S. equity indexes have added the company this year, meaning its shares are included in more exchange-traded funds. But now, Ovintiv also finds itself in the crosshairs of at least one American investor that is anything but passive and is looking to paint it as a symbol of all that is wrong with the governance of U.S. shale oil producers.
If the company’s board and activist investor Kimmeridge Energy Management Co. LLC are unable to see eye to eye on such thorny issues as making changes to executive pay and director stock ownership, chief executive Doug Suttles and his fellow board members could have a good, old U.S.-style proxy fight on their hands in 2021.
“We look at it as the poster child of what’s gone wrong from a governance perspective within the industry,” says Mark Viviano, managing partner and portfolio manager at New York-based Kimmeridge. “And we think there’s simply a lack of accountability and alignment at the CEO and board level.”
His beefs include the steady drop in the company’s stock, even before the COVID-19 pandemic crushed oil prices, and an increase in Mr. Suttles’s compensation. Last year he took home US$12.57-million. In addition, Mr. Viviano points out the CEO owns fewer than 100,000 shares and as a whole the board owns just 0.1 per cent of the company.
“From our perspective, if [the directors] don’t believe in the company enough to hold a reasonable size position, then let’s find some who do,” Mr. Viviano says.
In a recent filing, Kimmeridge had about five million Ovintiv shares, representing a little less than 2 per cent of the total. That position is larger now, Mr. Viviano says.
For its part, Ovintiv says it welcomes feedback from its shareholders, but takes issue with Kimmeridge’s assertions about compensation and governance. “Our focus today is very clear – reduce debt, maintain scale, drive efficiencies and return cash to our shareholders,” the company said in an e-mailed statement.
The pandemic’s brutal impact on energy markets brought into the open serious weaknesses in U.S. shale production, including high debt and the tendency of output to drop off quickly when drilling slows.
It has triggered a wave of insolvencies, as well as mergers and acquisitions. Kimmeridge published a white paper on the industry this week, saying weak corporate governance has only made fundamental problems worse. At the heart of the complaints are small percentages of ownership by insiders, rich executive pay regardless of corporate performance and little threat of dismissal.
Also, U.S. companies have been lax in actions to reduce greenhouse gas emissions as the transition to cleaner energy progresses, Mr. Viviano says. Short-term incentives for executives should be partly based on achieving targets on this front, he says.
As Encana and Ovintiv, the company has been plagued by poor timing. It spent US$9-billion on U.S. shale plays just before oil prices tumbled in 2014. Four years later, it surprised investors by shelling out US$5.5-billion for Newfield Exploration, a deal that weighed on the stock. It completed its corporate Americanization early this year and within weeks, the bottom dropped out of energy demand, and U.S. shale companies were among the hardest hit as investors fled.
Since the start of Mr. Suttles’s tenure in mid-2013, the stock is down more than 85 per cent. To be fair, some factors have been out of his control, including two oil-price crashes, the latest just seven months ago.
The company has not been a lightning rod for shareholder activism. A few years back, Elliott Management Co., which is known for activism, bought a stake but there were no fireworks. Last year, Montreal-based Letko, Brosseau & Associates Inc., one of the largest shareholders, went public with its opposition to the U.S. move, but backed off after shareholders voted in favour of it.
According to a recent report, Ovintiv is looking to sell its Eagle Ford assets in Texas. Mr. Viviano says he applauds moves to reduce debt, but “we’re trying to address the underlying issues around alignment and compensation to make sure the path forward looks very different.”
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