© Photographer: Norm Betts/Bloomberg
Ovintiv formerly Encana Corp. natural gas well near Alix, Alberta, Canada.
(Bloomberg) -- Kimmeridge Energy Management Co. said it's prepared to nominate directors to the board of Ovintiv Inc. if the oil and gas producer fails to take the necessary steps to improve its performance and restore investor confidence.
The private equity firm, which said it owns a 2.4% stake in Ovintiv, argues in a new 18-page presentation that the company is falling behind its peers as a result of its misguided spending, expensive acquisitions, poor governance and inadequate environmental stewardship. Kimmeridge also outlines a strategy to address investor concerns by better aligning executive compensation with performance, selling non-core assets and shifting spending to the Permian Basin, among other measures.
"There's a lack of alignment, a lack of accountability and frankly, there doesn't seem to be any acknowledgment that this company is owned by its shareholders and not the management team," Mark Viviano, Kimmeridge managing partner, said in an interview. He said the firm has a slate of three directors in mind.
"If we don't see the right degree of progress and receptivity, we are going to nominate directors," he added.
Kimmeridge first went public with some of its concerns around Ovintiv's executive compensation in November. Ovintiv, formerly known as Encana Corp., said at the time that it disagreed with the private equity firm's characterization of its governance and compensation programs. In November, Ovintiv said it named Meg Gentle to the board to replace long-serving director Fred Fowler.
Doug Suttles, Ovintiv's chief executive officer, said in a statement that the company has generated free cash flow in each of the last three years and is starting 2021 with "strong momentum." The company announced preliminary fourth quarter earnings last week that showed debt reduction ahead of schedule, capital investment below guidance, and stronger-than-expected production, he added.
"The Ovintiv board and management team is focused on sustainable value creation for its investors." he said in the emailed statement. "We have a clearly defined plan to reduce debt through driving efficiency gains and disciplined capital allocation to generate free cash flow."
Shares in Ovintiv rose 2.7% in trading in New York as of 3:16 p.m., giving the company a market value of $4.6 billion. The stock had fallen 20% in the past year through Wednesday's close.
It drills for oil and gas in a handful of basins, including Canada's Montney formation and the Bakken, Anadarko, Permian and Eagle Ford shale fields in the U.S. It lost $5.5 billion in the first nine months of 2020, after earning $240 million in the same period a year earlier, according to its latest earnings report.
Even before crude's historic plunge, oil and gas drillers were rapidly falling out of favor with investors after embarking on a wild spending spree that failed to boost returns and left them struggling with unsustainable levels of debt. The oil crash added to their woes, leaving energy stocks as the worst performers in the S&P 500 benchmark last year.
Kimmeridge has issued three white papers around what it says is ailing the sector, and believes Ovintiv ticks most of those boxes. In its presentation Thursday, a copy of which was seen by Bloomberg, Kimmeridge said Ovintiv's total shareholder returns over Suttles's tenure as CEO have been negative 85%. Over the same period, Suttles, who was appointed CEO in 2013, has seen his compensation rise from $6.7 million in 2014 to $12.6 million in 2019. He also only owns roughly $1.6 million Ovintiv shares, Kimmeridge said.
Kimmeridge argues the company needs to establish a pay-for-performance compensation strategy, and refresh Ovintiv's board in order to restore investor confidence.
The firm also argues that Ovintiv is "addicted to debt," and that the acquisitions of Athlon Energy Inc. in 2014 and Newfield Exploration Co. in 2019 were done at the "wrong time, wrong price" and erased billions of dollars in value.
Ovintiv continues to invest heavily in its assets in the Anadarko basin, which were acquired in the Newfield deal, despite industry experts concluding they were not economically competitive, Kimmeridge argues. It wants the company to shift that spending into the Permian Basin of West Texas and New Mexico, where returns are better, and to sell off non-core assets to pay down debt.
Kimmeridge also slams the company's environmental record, and urges it to improve that by setting emissions targets in line with the Paris Agreement on climate, among other measures.
"There is just this track record of value destruction that led to a crisis of confidence for investors," Viviano said. "So, now they're fighting for relevance."
Kimmeridge was founded in 2012 as a private investment firm focused on U.S. unconventional oil and gas assets. The firm previously ran an unsuccessful proxy contest in 2019 at PDC Energy Inc.
(Updates with company comment in sixth paragraph.)
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