June 15, 2022

Breakingviews: Harold Hamm’s deal ushers in oil’s last hurrah

by Breakingviews.

Oil’s last hurrah wouldn’t be complete without Harold Hamm planting his flag on some of its mounds of cash. The shale pioneer wants to buy the remaining 17% of Continental Resources his family doesn’t already own, valuing the entire firm at some $25 billion. The small premium – and outlook for oil prices in the medium term – means he can be a huge beneficiary of wells pumping cash as fossil fuels’ future wanes.

Companies like Continental, that slice through rock with sand and water to squeeze out oil and gas, have come into the firing line from investors who want to own more climate-friendly companies. Describing his bid in a letter to employees, Hamm said that private markets are a better place for companies like Continental, and there’s something to that sentiment. With U.S. President Joe Biden and others chastising industry executives for their business, it’s going to be hard to both make money and stay out of the limelight as a public firm.

It helps that the math of the deal works solidly in Hamm’s favor. Continental is expected to churn out $5 billion of net operating profit next year, according to Refinitiv. That means minority shareholders, with their 17% stake, have a claim to about $670 million of profit after tax, conservatively assuming they pay a 21% tax rate. That works out to a roughly 15% return, based on the price Hamm is paying.

Hamm may have to increase his offer. Continental shares were trading above the offer price of $70 a share Tuesday morning. Plus the premium is a miserly 9% to Friday’s close. While there’s no assurance oil prices will remain high, the return is nearly twice Continental’s cost of capital, according to Morningstar, leaving plenty of padding. Plus investors in larger firms like Chevron and Exxon Mobil are strongly encouraging oil firms to return cash, rather than invest it in new projects. This restraint supports higher oil prices and benefits firms like Continental.

Exploration and production companies are meant to mint more than $830 billion in free cash flow this year, a 70% increase from last year according to Rystad Energy, even assuming oil prices drop from their current level. Hamm and his wildcatter buddies aren’t going to want investors, authorities, or politicians dictating how they can spend that cash – or keep it for themselves. The best way to have the freedom to make those decisions is outside of the purview of the public market.

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