Nexen is being pressed to sell or spin out parts of its diverse operations after share performance lagged that of its peers. So far, management and the directors at the $17-billion company have resisted these calls, and the hedge funds are now making formal approaches. About 40 per cent of Calgary-based Nexen's holdings are in the North Sea, along with stakes in Yemen, the Gulf of Mexico, the Alberta oil sands and Canadian natural gas.
“We had a cordial discussion with Nexen and we all agreed that the company is undervalued,” said one hedge fund manager who owns the stock. “Where we disagree is over what to do about the fact it's undervalued.”
Funds pushing for a shakeup are said to include Salida Capital Corp., a Toronto-based money manager, and Halcyon Asset Management LLC, a $13-billion (U.S.) New York-based fund. A $188-million, public arm of Salida posted a 35.8-per-cent return last year.
“Pure plays such as Suncor and integrated companies such as Imperial Oil have a defined strategy. Nexen's like a pizza, it's a bit of everything, and it's better off sliced up,” said one institutional shareholder.
Analysts have calculated that by some industry measures, the oil company is trading at a 20-per-cent discount to peers.
Nexen executives said two weeks ago they have no plans to sell assets. The company did not respond Thursday to a request for comment.
One source close to the company said chief executive officer Charlie Fischer has been receptive to the hedge funds, but pointed out strategic problems and onerous tax issues associated with their ideas. That has not quieted critics.
“The activists are lining up, letters are being written to the board, and to date, Charlie Fischer has not shown that he is willing to move,” said one brokerage executive who is working with the hedge funds. He added: “There's a sense that now is the time to move on asset sales, because Exxon and Total are lined up to buy properties in Yemen.”
The activists also say that global energy companies, flush with cash generated by $90-a-barrel oil, would also pay a premium for Nexen's oil sands and North Sea holdings.
Nexen is vulnerable in part because its single largest shareholder, the Ontario Teacher's Pension Plan, has been steadily selling a stake acquired in 2000, when the Canadian company was spun out of Los Angeles-based Occidental Petroleum. Teachers now holds just 10.2 per cent of Nexen.
The activists are also circling because Nexen stock has gone sideways over the past year, while rival EnCana Corp. rose 26 per cent. And within the Calgary community, the idea of breaking up a company is viewed favourably, in the wake of the successful dismantling of conglomerate Canadian Pacific in 2001.
Investment banks are fanning the activist flames by publishing reports showing that Nexen is worth less than the sum of its parts. Last month, well-regarded RBC Dominion Securities analyst Gordon Gee said in a report: “If Nexen's share price continues to stay at current levels, we believe that the valuation gap may be appealing to a potential acquirer or require a restructuring by the company to unlock value.”
The energy company had the misfortune of stumbling on oil production – it first forecast production of as much as 305,000 barrels a day for 2007, but will likely come in at around 250,000 barrels – at a time when hedge funds are redeploying their enormous financial firepower to back restructurings, or “event-driven arbitrage,” as it's known in the financial community.
Until last summer, hedge funds had billions of dollars tied up in playing takeovers, or what's known as “risk arbitrage.” The summer's credit crunch brought an end to what was a record-breaking number of mergers and acquisitions. As opportunities to profit on takeovers dry up, hedge funds are looking for new places to invest, and aggressive funds are willing to initiate the “event” that gives rise to event-driven arbitrage.
