NEW YORK and DENVER, Feb. 27, 2020 /PRNewswire/ -- Kimmeridge Energy Management Company, LLC ("Kimmeridge" or the "Firm"), a private equity firm focused on upstream energy, with an investment philosophy underpinned by fundamental research, today published a white paper entitled, "Preparing the E&P Sector for the Energy Transition: A New Business Model."
As noted in the White Paper, the U.S. E&P industry is in a time of crisis. Low equity returns have caused capital to flee the space. E&Ps are the worst performing sector in the market over the past decade and energy now represents less than 4% of the S&P Index, an all-time low. The industry's response so far has been to hunker down, change little about the business model, and hope for a cyclical recovery. Kimmeridge believes this is a mistake. What is happening is more than a cyclical low, it is the result of a decade of poor capital allocation choices made with a mindset of growth for growth's sake, which has hurt public equity investors and the environment.
To find a playbook designed to fix the problem, Kimmeridge examines two different sectors that radically pivoted their business models in the face of similar challenges: refining and tobacco. Both the refining and tobacco sectors, for different reasons, have entered periods where reinvestment opportunities do not present attractive return scenarios and where growth is not going to be rewarded. The solution for both industries has been lower capital reinvestment rates, higher distributions to shareholders and better alignment.
Kimmeridge believes that to make the sector investable again, E&Ps must:
- Provide visibility into returning 100% of the enterprise value to shareholders through dividends and buybacks within ten years.
- Commit to reinvesting less than 70% of cashflow at strip pricing and place a cap on annual reinvestment rates at 80% in the case of better price environments.
- Reduce balance sheet leverage targets to 1.0x ND/EBITDA or below.
- Align management compensation with the interests of shareholders through lower cash base salaries, higher equity ownership, pay for absolute share price performance and tiered change of control payments that reward selling and consolidation.
- Make capital allocation decisions with an understanding of the environmental impact, including: the discontinuation of freshwater use for fracking, zero gas flaring and a commitment to carbon neutrality. Plan to achieve net zero emissions.
For more details, please download the full White Paper here.
Founded in 2012 by Ben Dell, Dr. Neil McMahon and Henry Makansi, Kimmeridge is a private equity firm focused on making direct investments in unconventional oil and gas assets in the U.S. The Firm is differentiated by its direct investment approach, deep technical knowledge, active portfolio management and proprietary research and data gathering. In addition to its New York headquarters, Kimmeridge maintains a fully-staffed, in-house operating and geology team in Denver, with experience across all major upstream functions and disciplines. For additional information on Kimmeridge and its proprietary research, please visit www.kimmeridge.com.
Daniel Yunger / Simone Leung / Hallie Wolff
SOURCE Kimmeridge Energy