Harold Hamm Blazes the Trail
In 2018, when I started writing the #hottakeoftheday, I said some really controversial stuff. I said that companies shouldn’t grow production and should instead generate free cash flow to pay down debt, buy back stock and pay dividends. What?!?? How could you? In 2020, I said that in 3-5 years, there would be 10 large publics left and a few privates like Hilcorp. We will never win in the court of public opinion, only in the courts, and size matters when it comes to managing ESG. I predicted the industry would lose 50% of the existing jobs as a result, and that as sad as that was for employees, it would be better for the industry as a whole. The horror!!!
As the industry has evolved, specifically pricing and ESG, I have evolved my thinking as well that perhaps most of the publics should be privates. No companies are actually raising public capital. Funds with 0.03% of the stock are becoming activists, getting people who have no business being on their boards on boards, and government officials constantly berate you for buying back your stock (Google, anyone??) when you literally can’t spend more money on capital activity due to supply chain issues with casing, sand and everything else.
Enter Harold Hamm. He and his family already own 83% of Continental stock. Why bother being public as they are already effectively private. So, he made an offer at $70/share to buy out the remaining shares he doesn’t own. Timing wise, I love the move. It positions them to use only debt to further consolidate in the Permian (as they inevitably grow their position there). It frees them from the public eye of increasing dividends as they blow down their Bakken position. It frees them from ever having to do anything that Wall Street says (grow production!! No, no, we meant free cash flow! No, no, we meant grow production AND free cash flow!!).
Obviously, Continental is a special case, majority owned by a billionaire and interests fully aligned with the founder. BUT, as oil and natural gas prices stay high, companies with excessive free cash flow will be able to massively reduce their outstanding share count and buying back stock is far more tax efficient than returning cash to shareholders in the form of dividends (capital gains vs. income tax). Consolidation will continue. I continue to believe the best merger out there is Exxon buying EOG and turning US operations over to the EOG folks. Devon will consolidate in the Permian, and I still love the merger with Marathon for them. And Oasis will help COP and Exxon reduce their footprints in the Bakken as they focus on Permian and international exploration as Tier 1 inventory depletes in the US.
Harold Hamm has always been a trail blazer. Elon Musk should think about following in his footsteps as he continues to sell Tesla stock until it’s fairly valued below $83/share (the split adjusted “funding secured. $420/share offer).