Shareholder Activists See Gains As They Pressure Penn Virginia Management
Here you go STL. Which way to the Administration Building?
Attica!!! Attica!!!
Two groups of shareholder activists reported progress last week in their separate efforts to get Penn Virginia Corp.’s (NYSE: PVA) directors and management to take a more serious look at their proposals for the Radnor, Pa., independent producer.
BP Capital Energy Equity Fund L.P.’s latest request was for Penn Virginia’s directors to redeem the company’s shareholder rights plan, or poison pill, and schedule a management-led shareholders’ forum. It came a week after Daniel S. Loeb, managing member of Third Point Management Co. LLC in New York, asked to meet with Penn Virginia President and CEO James A. Dear love to discuss a possible sale of the company with a potential buyer.
Loeb finally received a response. “Penn Virginia has agreed to meet with me in September,” he said last week. Penn Virginia did not return Petroleum Finance Week’s telephone calls for this story. However, Bob Stillwell, a managing partner at Dallas-based BP Capital, and Loeb separately suggested that institutional investors may have started to pressure Penn Virginia to improve shareholder value. They said that State Street Research and Management Co.’s Form 13D filing with the Securities and Exchange Commission (SEC) on Aug. 19 signaled a change from a passive to active investor. “Not too many of these institutional investors go that route. They prefer to be passive,” Stillwell said. “A couple of weeks ago, State Street apparently contacted Penn Virginia’s management, wasn’t pleased with what was going on and decided to change its filing. That’s as interesting as the more open activities of Third Point and us. It was the kind of thing we were hoping would happen – that other shareholders would get involved, and do it publicly.” “I think it’s significant,” Loeb told Petroleum Finance Week. “Now, it’s not just Third Point and Boone Pickens. You have a respected mutual fund that is calling on Penn Virginia to maximize shareholder value. If I were Jim Dearlove sitting in a room, I would wonder if the walls were starting to close in on me.”
Pickens, who leads BP Capital, has re-emerged as a shareholder activist 20 years after mounting attempted takeovers of one multinational and three domestic oil companies. He was one of several financiers in the 1980s who built large equity positions so they could press companies across American business to adopt their proposals. This led many companies to adopt poison pills – plans that distribute share rights to other stockholders once an acquiring person or entity’s stake reached a specific level (usually 15 percent of the total outstanding common shares). Companies said that poison pills were designed to keep someone mounting an unsolicited takeover from demanding a premium buyout of his shares, a tactic that was called “greenmail.” Pickens never used this approach, but simply profited when share prices increased as the market sensed an imminent takeover.
On June 25, BP Capital, which holds about 7.5 percent of Penn Virginia’s outstanding common stock, offered to buy the company for $40 cash per share and were rebuffed the following day. Less than a month later, BP Capital presented a plan to recapitalize Penn Virginia by giving all of Penn Virginia’s stockholders an opportunity to exchange their common shares for $100 million of new senior preferred stock. Penn Virginia directors rejected that plan about a week later.
This was not the first time in 2002 that Pickens and BP Capital had proposed restructuring an independent producer in which they held stock. On May 15, they recommended that Vintage Petroleum Inc. (NYSE: VPI), which planned to sell its California heavy oil holdings and some of its Latin American properties, sell all of its U.S. assets and form an income trust with its Canadian properties instead.
BP Capital held about 8.9 percent of the Tulsa independent producer’s outstanding common stock at the time. Stillwell told Petroleum Finance Week that Vintage’s recent divestitures are a modified version of BP Capital’s proposal, and the group is evaluating their results.
Loeb has been criticizing Penn Virginia’s management publicly since late February, when Third Point filed its first 13D on the company with the SEC. He contended that Penn Virginia overpaid substantially when it bought Synergy Oil and Gas for $112 million in 2001. Loeb applauded Penn Virginia for separating its coal and timber assets and forming a master limited partnership (MLP), Penn Virginia Resource Partners L.P. (NYSE: PVR), with them. He urged Penn Virginia to take proceeds from the MLP’s initial public offering, along with money that would be saved by reducing drilling drastically and selling some or all of the oil and gas assets, and buy back Penn Virginia common stock.
Instead, Loeb wrote in a June 27 letter to Dearlove, Penn Virginia directors and executives gave themselves what he termed “an overly generous and, in our view, undeserved options package, gave yourselves egregious golden parachute agreements and concurrently lowered the trigger on the poison pill from 15 to 10 percent.” Penn Virginia’s actions since Third Point and BP Capital’s initial 13D filings had reduced the company’s stock price from $42 per share to the low $30s, he continued.
“Since our involvement last February, I have heard repeated reports that you have characterized Third Point in essence of being ‘quick buck artists’ who are not committed to their investment in the company. Were that true, and given the low basis for our shares, one would have expected us to ‘cash in our chips’ in the recent rally in your shares. On the contrary, we have added 100,000 shares to our position, bringing our total stake to 600,000 shares or 6.7 percent,” Loeb continued. In its latest 13D filing, Third Point listed ownership of 707,600 Penn Virginia shares, or a 7.93 percent stake. The group’s only other reported oil and gas investment is 125,123 shares, or about a 0.5 percent interest, in Patina Oil and Gas Corp. (NYSE: POG).
Coincidentally or not, this revival of oil and gas shareholder investment activism came as public sentiment turned increasingly against corporate management and directors following the collapse of Enron Corp. (NQB Pink Sheets: ENRN) and other large companies. Neither Loeb nor Stillwell thinks that this could set the stage for activists to overturn poison pills, however. “In recent years, the courts have upheld them overwhelmingly around the country,” said Stillwell. “If they were challenged, it would be on a case-by-case basis. Poison pills are pretty much part of the corporate landscape, and Penn Virginia is a textbook study. We know of several shareholders who have expressed a desire for some value enhancing transaction. But we’re precluded from getting involved with them. Even if shareholders are of like minds, they have to act independently. We can’t get together. It’s the main reason we asked Penn Virginia to convene a shareholders’ forum.” Loeb maintained that the poison pill won’t even become an issue in Penn Virginia’s case. “Management, for whatever reason, has left itself open to an attack on its board of directors through a proxy contest,” he told Petroleum Finance Week. “I think it realizes this, and sometime between now and proxy season, management will come to its senses and sell the company. If not, there will be a new board in place.”
–Nick Snow, Financial Editor, Oil and Gas Investor
