Market Apathy To Shale Pushes Continental To Go Private

Chairman Harold Hamm wants to take the company away from meddling shareholders.

Liam Denning

14 Jun 2022, 11:11 PM IST

Market Apathy to Shale Pushes Continental to Go Private

(Bloomberg Opinion) -- Harold Hamm, the outspoken founder, chairman and majority owner of shale pioneer Continental Resources Inc., has decided that all publicity isn’t necessarily good publicity. On Tuesday, he surprised markets with an offer to buy out the 17% of the company his family doesn’t control for $70 a share.

That’s just a 9% premium to Monday’s closing stock price, but overwhelming majority ownership has its uses. The $70 mark is more interesting because it’s not far short of the all-time peak in that heady summer of 2014 before the face-off between shale and OPEC crashed the price of oil.

The big difference between now and all of eight years ago is that, at a similar stock price, Continental’s discount to the market is more than 60% compared with less than 10% back then. And remember, that’s with the S&P 500 Index having just plunged into a bear market and with oil trading above $120 a barrel.

Hamm made another bold move in the fall of 2014, selling all of Continental’s oil-price hedges on the expectation that OPEC would blink and save the market. That didn’t work out. In this case, his implicit bullishness feels more warranted. On the same morning the offer was announced, President Joe Biden announced a forthcoming visit to Saudi Arabia to meet with the de facto ruler he had tried so hard to avoid, Crown Prince Mohammed bin Salman. With inflation bearing down on Americans and imperiling Democrats’ midterm election prospects, and with the Ukraine crisis threatening worse to come, Biden is crossing a personal rubicon in hopes of taking the edge off oil prices.

Clearly, though, the public market isn’t buying the narrative as it used to. Hence, Hamm’s offer to take Continental private. He actually said he was thinking about it as recently as December, telling Bloomberg TV that private oil companies “have more freedom than we do,” meaning freedom to drill more. His explanation was a little odd, because he also claimed less than a year’s worth of Biden’s policies was the thing holding back US oil production rather than the market having finally taken umbrage at years of financial recklessness, as exemplified by moves such as that hedge-book sale in 2014. Hamm was, it should be recalled, a big supporter of former President Donald Trump’s “energy dominance” agenda even though, if you thought about it for a minute, that was the last thing an undisciplined shale industry needed from an investor’s point of view.

Yet he was clearly correct in saying that publicly held oil companies were having more discipline imposed on them by investors. So far this year, the number of wells drilled by privately held producers has jumped 68% compared with just 27% for public companies.

Besides financial discipline, environmental scrutiny of oil and gas is far more intense now than in 2014. Assuming Continental’s ticker disappears, the company can dispense with catering to the growing ESG investment movement, which will likely soon be backed by specific regulations adopted by the Securities and Exchange Commission. Clearly, plenty of banks are still willing to lend enough money for a shale buyout. But investors’ indifference — a reflection of bad memories, uneasiness about the future and the return of higher yields — means being public has simply ceased to be useful to Hamm. And who knows: Maybe his declaration of intent will push one of his rivals to conclude the public market is leaving Continental on the table for the picking. Certainly its shares trading up to $74 on Tuesday morning suggests some expectation of that.