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Financial Times: Activists target oil

Published: March 3 2008 02:00 | Last updated: March 3 2008 02:00

The archetypal oilman is the “wildcatter”, smelling out opportunities below the surface. Activist fund managers, who also like to think of themselves as mavericks, see a chance to strike it big in the US energy sector. Both Icahn Partners and Jana Partners have raised their stakes in the likes of Anadarko Petroleum and Hess Corp; mid-sized oil and gas companies with a market capitalisation each of about $30bn.

Commodity prices are one attraction. Oil bobs around $100 a barrel and natural gas costs $9 per thousand cubic feet, but exploration and production stocks imply long-term prices closer to $70 and $6 respectively.

It seems unlikely activists are just betting on the forward curve, though. One angle may be to force E&P companies to emulate the majors: prioritise free cash flow over investing for growth. Tudor Pickering Holt, an energy focused bank, calculates that, assuming an average 2008 gas price of $7, 17 of the 23 E&P companies it tracks will outspend their operating cash flow this year. Activists could demand investment be reined in, undeveloped properties sold and mature fields run for cash.

One reason for those big budgets is the changing landscape of the US gas sector. The buzz these days is about unconventional resources such as “tight gas”, which, like tar sands in the oil sector, are tricky to exploit and require big upfront investment. Against that, however, they offer long-life reserves that are, crucially, at home rather than in some highly taxed, unwelcoming foreign jurisdiction.

Such big, complex projects ought to be the natural preserve of the majors. That they are not currently reflects decades of focusing on overseas growth. Recent presentations from the likes of ExxonMobil suggest Big Oil may be reconsidering on that front. For the activists, the possibility that the majors might want to buy their way into bigger US gas businesses provides another reason to stake out a position.

Copyright The Financial Times Limited 2008

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