Activist investors brave enough to have ventured into the volatile energy sector are paying a heavy price for their courage, stuck with hefty paper losses and no near-term recovery in sight.
Corvex Management, Elliott Associates and ValueAct Capital are among the largest and most prominent activist firms that have seen the value of their energy holdings tumble in step with sliding crude prices and remain exposed to the price rout.
Activists, a growing class of mostly hedge fund managers who buy up minority stakes in companies and push for major changes, historically steered clear of stocks exposed to the volatile commodity sector.
Such funds often operate with a shorter time horizon than most investors, making them more vulnerable to sharp price swings.
But beginning around five years ago, some activists saw opportunities in the energy sector that seemed to outweigh risks when oil traded at around $100 per barrel. With oil now around $30, the balance of risks and rewards has reversed.
Thirteen activist investors with the largest fund exposure to the energy sector have suffered a combined $9.2bn in unrealised paper losses in 2015, according to quarterly filings analysed by hedge fund data firm Symmetric.io.
“This is a cyclical industry. Everyone knows it comes back. But not everyone has the time to wait it out,” said Kai Liekefett, a partner at law firm Vinson & Elkins who is head of its activism practice.
“The problem is that activist hedge funds have to answer to their own investors, and the question is whether they will give them the time.”
The sum of the one-year losses includes a $2.8bn drop in the value of Carl Icahn’s on seven energy industry investments, Symmetric.io data show. While that is the biggest loss for any activist investor, Icahn invests his own money and can ride out the oil downturn for as long as he wants. Others do not have that luxury.
Southeastern Asset Management, an investment management firm and occasional activist, has seen the value of its energy bets fall $2.7bn in the last year, which include holdings in Chesapeake Energy Corp and Consol Energy.
Southeastern and Icahn declined to comment.
While the larger activists, with billions of dollars under management, may be able to grind through the energy downturn, smaller funds are fighting for survival. One, Orange Capital, is already shutting down in part because of its exposure to a Canadian oil and gas driller.
To be sure, investors can hedge their positions to cushion losses from a stock decline.
And last year’s performance numbers do not include the gains that funds locked in before oil prices cratered. Early last year some activists saw the battered sector as a great buying opportunity, convinced at the time that the crude market has seen the worst of its losses.
The problem for hedge funds, many of whom have investors who can demand their money back on a quarterly basis, was that many just had not foreseen such a long, steep fall in crude prices even after they began their slide in June 2014.
“It is possible that certain activist investors in oil and gas stocks misjudged the severity and speed of the drop in oil and gas prices,” said Osmar Abib, global head of oil and gas banking at Credit Suisse.
Corvex’s $1bn holding in natural gas pipeline company Williams Companies, worth around 14% of the firm’s total portfolio, represents the largest current exposure of any activist fund to a single energy stock, according to quarterly filings.
Corvex’s stake in Williams – which has an agreement to be purchased by pipeline rival Energy Transfer – lost $1.1bn over last year, filings show. Corvex declined to comment.
The second largest exposure is Elliott’s $863mn stake in oil and gas company Hess Corp, which is worth around 10% of Elliott’s portfolio, according to filings.
The stake was valued at as much as $1.7bn in the third quarter of 2014, filings show. Elliott declined to comment.
Activist investors usually avoid tying up more than 10% of an investment fund’s assets in a single stock.
Activist Fir Tree Partners held to that rule last year, though its energy investments - including Williams - still helped it rack up $259mn in paper losses, Symmetric.io data show.
“In an environment characterised by uneconomic production and scarcity of capital, the tools normally available to activist investors are not applicable in a reasonable way,” said Bobby Tudor, CEO of Tudor Pickering Holt & Co.
In November 2014, Halliburton announced it would buy oil and gas services rival Baker Hughes in a cash and stock deal worth $34.6bn at the time. The deal was supposed to close in the second half of last year but has since hit anti-trust delays.
ValueAct, a shareholder in Halliburton since 2012, disclosed last January that it bought a stake in Baker Hughes, saying at the time that its belief in the deal was underpinned by the drop in oil prices.
The two holdings together comprise nearly 10% of ValueAct’s total portfolio and lost a combined $656mn in value in the course of last year, Symmetric.io data show. ValueAct declined to comment.