Activist Insight Vulnerability Report | July 29, 2021
Activism’s coming home
This article was first published on Activist Insight Vulnerability on July 29, 2021. For more information about the module, click here.
U.K.-based Parkmead Group is believed to have strong oil and gas assets, but an erratic development strategy, serious corporate governance concerns, and simmering shareholder discontent have made its stock extremely undervalued. After speaking with a shareholder, Activist Insight Vulnerability reporters believe the company is vulnerable to an activist incursion.
Activism in the oil and gas sector remains relatively depressed, with the number of companies targeted over the last 18 months 20% lower than the peak seen in 2018. However, recovering oil and gas prices could again boost the attractiveness of the sector. So far this year, as of July 13, 17 oil and gas companies have been subjected to activist demands worldwide, versus 16 during the same period last year. Two of those companies were in the U.K.: Hurricane Energy and Block Energy.
Parkmead is an upstream oil and gas company led by Tom Cross, who serves as chairman and CEO. Cross is well regarded in the U.K. oil and gas industry after building Dana Petroleum via acquisitions to a 1.4-billion-pound-revenue company that was eventually sold to Korea National Oil in 2010.
Cross came to Parkmead in 2011 and has been trying to replicate the same model, making a series of oil and gas field acquisitions early during his tenure, including Netherlands onshore fields and U.K. offshore fields like Perth, Dolphin, Lowlander, and Athena. The low-cost Netherlands gas assets are the only ones generating cash.
Parkmead’s shares trade at around 49 pence, giving the company a market capitalization of around 53 million pounds, despite having net cash on the balance sheet of 24.5 million pounds and tax assets to the tune of 128 million pounds. Finncap Research analysts believe the company has a net asset value of 1.62 pounds per share.
The undervaluation appears to be largely due to a lack of substantial developments since 2016, when the halting of production in part-owned Athena oilfield led to a 13-million-pound writedown and a negative catalyst for the stock price. The slow progress in developing the strategy, poor corporate governance practices, and unusual related-party transactions, as well as strong potential for stock price appreciation, could prompt an activist to get involved.
Parkmead could be more aggressive in buying revenue-producing oil and gas fields from major corporations like Shell and BP, which are willing to sell at attractive prices, a shareholder in Parkmead has told Activist Insight Vulnerability. Meanwhile, the company could strike partnerships to develop its current fields quicker, the investor added. Parkmead’s peer Serica Energy has followed a similar strategy and its shares are up more than 1,000% over the past five years, while Parkmead’s stock is flat during the same period.
Another option could be a premium sale to a deep-pocketed private equity firm or larger peer that would be able to develop the company’s fields quicker.
An activist investor could level criticism that Parkmead has not been using its free cash flow in the best interests of shareholders. Last year, the company bought the Pitreadie farm in Scotland from Cross himself, and announced plans to install wind turbines and solar panels as part of a strategy to move into renewables.
While the plan is laudable, Activist Insight Vulnerability understands that a large shareholder was frustrated with how the deal was structured. The firm issued 10 million new shares to finance the transaction, diluting existing shareholders, and assumed 3.6 million pounds in debt. Cross’s stake in the company increased from 19% to 26% as a result of the deal.
And this is not the only concern. In 2017, Parkmead made a 2.9-million-pound loan at an interest rate of 2.5% per year to Energy Management Associates, a consultancy owned by Cross. In 2021, Parkmead extended the loan for another 24 months. Furthermore, Parkmead leases its offices from Tilestamp, a company where Cross serves as a director and is a shareholder. The annual rents charged by Tilestamp increased from 261,000 pounds in 2016 to 409,000 pounds in 2020, despite the number of employees falling from 25 to 21.
Cross’s annual salary might also be criticized by an activist. The CEO received 506,000 pounds in 2020. Serica CEO Mitch Clegg’s salary was 400,000 pounds in 2020. However, Serica’s market capitalization is eight times higher than Parkmead’s.
Partly, these issues have happened because board oversight has been rather weak. Parkmead’s board has only four members: Cross himself; Ryan Stroulger, Parkmead’s finance director; Robert Finlay, a former head of corporate finance at Canaccord Genuity; and Colin MacLaren, a lawyer who was a partner at U.K. law firm Brodies LLP.
An activist could question whether the board has enough experience in the oil and gas sector to challenge Cross’s judgment. Serica, for instance, has six directors on the board and all have at least some experience in the oil and gas sector.
Parkmead’s annual meeting typically takes place in December, but U.K. rules allow investors with 5% of the stock to call special meetings.