HOUSTON – One of the biggest shareholders of Houston oil producer Swift Energy says the market has lost confidence in leadership at the company as its debt has ballooned to nearly $1.2 billion.
Swift, worth $342 million on the stock market Friday, “requires a drastic change in strategic direction,” Baker Street Capital Management said in a letter sent to Swift’s board of directors on Thursday. Baker Street is the latest activist investor to push for changes at a U.S. energy company, a trend that led to the ouster of a handful of executives and more restraints on spending in the past two years.
“The accumulated debt from poor capital allocation policies, lagging operational execution and a reckless lack of an effective commodity hedging program demonstrate that Swift is suffering this overhang as a result of entirely self-inflicted wounds,” the investment firm said. Baker Street owns about 10 percent of the company.
In a statement on Friday, Swift said its board of directors and managers “regularly evaluate the company’s strategic priorities and allocation of capital expenditure.”
“The company works toward the goal of enhancing value for all shareholders by taking the right steps to manage the business while focusing on strategic initiatives to position Swift for long-term success,” the firm said.
Baker Street pointed to the company’s rise in net debt from $500 million in 2011 to $1.2 billion in the second quarter of 2014, reflecting financing for “wells drilled at higher costs than peers.” At the end of June, Swift had cash and cash equivalents of $564,000, down from $11.3 million at the end of June 2013, according to regulatory filings.
Baker Street said Swift has outspent its cash flow for years. In the first half of 2014, Swift collected $170 million in cash from operations and invested $209 million, according to regulatory filings.
Swift owns acreage in the Eagle Ford in South Texas and in Louisiana. At the end of last year, it had 219 million barrels of oil equivalent in proved reserves, about 53 percent of which was oil and natural gas liquids.
Baker Street said Swift shares should trade at $15 based on its assets’ value. On Friday, its shares traded for less than $8 on the New York Stock Exchange. The investor questioned the incentive structure of the company’s board, arguing its directors own less than 1 percent of Swift’s outstanding shares.
In the letter, the investment firm called for the company to add three new directors to join the board, and said the company should cease buying acreage until its financial position has improved. Baker Street also said Swift should hire an investment bank to explore asset sales.
“We believe there are currently producing properties that can deliver significant value if some into master limited partnerships, royalty trusts, or similar structures,” the firm wrote.
Swift shares fell 70 cents to $7.38 in Friday trading on the New York Stock Exchange.
Share this: