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Activism in energy sector creates obstacles for M&A

By Michael Erman

NEW YORK (Reuters) - When hedge fund TPG-Axon launched its activist campaign at U.S. oil and gas company SandRidge Energy Inc last year, the activist investor laid out hopes that the company could explore a sale.

But an outright sale of the company has not happened. Paradoxically, that is at least in part because of a surge in activism in the energy sector this year, bankers and analysts said.

According to Thomson Reuters data, there have been 13 activist situations involving publicly traded energy companies in the first eight months of 2013 alone. That is the same number of activist campaigns launched against energy companies for the period spanning 2003 to 2007.

Activist investors have pushed oil and gas companies to simplify their structure, by selling or spinning off non-core businesses. That has made executives and boards less willing to consider large corporate deals, which would defuse that focus and make them targets for activist investors, bankers said.

"The kinds of deals that would cause activists to be concerned aren't being done today," said Citigroup's global head of energy investment banking Stephen Trauber. Trauber said energy companies are currently unlikely to buy a diverse company without plans in place to exit some of the new businesses.

Deals in the energy space are down 34 percent in 2013, compared with the same period last year, Thomson Reuters data shows.

Low natural gas prices and their effect on land values have played a big role in keeping the energy sector's deal flow subdued, but so has management's worry that empire-building would attract activists.

"The market likes simpler stories and is not valuing integrated or diverse companies as well," said Deutsche Bank's head of energy mergers and acquisitions for the Americas Gregory Sommer. "The market has rewarded those companies that have separated assets. Activists get that. In some respects, activists have picked up on that and forced changes."

BREAKUPS, NOT TAKEOVERS

Activist investors have in recent years successfully prodded large companies like Hess Energy , Chesapeake Energy and Oil States International into selling off assets or considering spin-offs.

Other companies like ConocoPhillips and Marathon Oil Corp have split off large refining businesses without the intervention of activists.

Activism "clearly has gotten the attention of all of the CEOs and boards of directors," said Citigroup's Trauber. "We spend a lot of time talking about it with our clients, particularly if their stocks have underperformed compared with their peers."

Energy companies have been less willing to take risks as a result of the rise in shareholder activism, particularly in their investments in assets that are not already producing oil and gas, according to Phil Weiss, chief investment analyst at Baltimore-Washington Financial Advisors.

Weiss believes it has made some companies too focused on short term results, to the detriment of long-term shareholders.

"If you have an E&P business, you have to find new reserves. If you're not doing that, maybe right now you look OK, but eventually that could be a problem," he said.

Investment bankers said the focus of activist investors on the energy industry would likely continue for some time to come.

"Even if you're the best performer over some period of time, you still have to be concerned about activism," said Deutsche Bank's Sommer. "Everybody is aware that nobody is immune."

(Reporting by Michael Erman; Editing by Paritosh Bansal and Marguerita Choy)

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