One thing to start: Spain’s Iberdrola has made a big move into the US power sector, spending $8.3bn to add New Mexico-based electricity supplier PNM Resources to its North American business.
Energy Source’s main story this week is still the shake-up in shale. We spoke to Scott Sheffield, head of Pioneer Natural Resources, to discuss his deal to buy Parsley Energy. That’s our top item. Our second notes a nuclear deal between the US and Poland — and the confusion about how much, if anything, it is worth.
Thanks for reading. Please get in touch at email@example.com. You can sign up for the newsletter here. — Myles
Pioneer’s Scott Sheffield talks deals, growth and governance
Pioneer Natural Resources’s $7.6bn deal to buy Parsley Energy was the second big transaction in the shale patch this week — and the fourth since crude prices crashed this year. ES talked with Pioneer boss Scott Sheffield after the deal was announced.
Mr Sheffield struck a bullish tone: oil prices will bounce back; he will start deploying more rigs again before the year is out and ramp up output from next year; and US oil production will grow steadily for the next decade — unless Joe Biden upsets the apple cart.
But the “rash” of consolidation in the sector may have run its course for now, he said, with the prize targets all spoken for.
Here are some of the key takeaways from our chat:
On his optimistic outlook:
Oil prices should recover next year, said Mr Sheffield, allowing US output to return to modest growth over the next decade.
“I’m confident we’ll get back to $50 Brent by the second half of 2021 when demand starts coming back after vaccines are distributed throughout the world,” he said.
US production would then climb by around 2 per cent a year for the next 10 years before reaching a peak, he said — though that could be disrupted by a Biden administration (see below).
Pioneer plans to start redeploying more rigs in the final months of the year and to grow production by 5 per cent from next year, Mr Sheffield said. In the long run, he expects Parsley — which is currently holding output flat — to do likewise.
Should Joe Biden win the US presidency and push ahead with plans to ban new drilling on federal lands, US oil production would immediately begin to slide, said Mr Sheffield.
“He said he’s not going to ban fracking now, but he’s also saying that he’s not going to allow any new permits on federal lands,” said Mr Sheffield.
“That means no new drilling on existing leases in New Mexico. That means no drilling in the Gulf of Mexico. So if that does happen, then I think you will not be growing at 2 per cent a year — you’ll be declining maybe about 3 per cent a year,” he said.
On hurdles to further consolidation:
Two deals in two days this week suggests the industry’s consolidation is gaining pace. But the dealmaking may be set to fizzle out, according to Mr Sheffield.
“Concho and Parsley are gone and when you dip below that most of the companies still have very poor balance sheets,” he said.
As things stand, there are now only four investable independents in the US shale patch, Mr Sheffield said: EOG, ConocoPhillips, Pioneer and Hess.
“Most companies are below a $10bn market cap. And so most investors are not going to look at the small companies to invest in, especially with the changing world in regard to ESG and probably reaching peak oil demand over the next 10 years.”
Scaling up through M&A could allow others to join the “investable” club, Mr Sheffield said. But further dealmaking will depend on companies cutting their debt, he said.
“Consolidation will happen. [But] I think most of it will happen later as companies de-lever. There’s too many US independents — there’s 75 public independents, we probably need to only have 10 or less.”
On buying his son’s company:
Parsley was set up in 2008 by Mr Sheffield’s son Bryan, who is its current chairman. So Pioneer’s decision to swoop for its rival has raised a few eyebrows in the shale patch, with many wondering whether it breaches governance norms.
But Mr Sheffield (Snr) said both he and his son remained firmly outside the talks. “I’ve been completely walled off from my executives and from the board on any negotiations. Bryan the same way at Parsley.”
In fact, a key consideration in the tie-up was that, because of the family connection, Pioneer shouldn’t be seen to be overpaying for its rival.
“One of the critical things I think is the premium that was paid,” said Mr Sheffield. “I said, I think it will look really bad if we were paying a 15 per cent premium. And so that was one of our board’s key points — to announce a sub 10 per cent premium. And so we announced a 7.9 per cent premium.”
Good news for Pioneer shareholders but it may not please their Parsley counterparts so much.
(Myles McCormick and Derek Brower)
The $18bn Polish nuclear deal that wasn’t
It was with great fanfare that the Trump administration announced on Monday the signing of a groundbreaking energy deal with Poland that would see Warsaw spend at least $18bn on US nuclear technology over the coming years.
US energy secretary Dan Brouillette described the deal on a call with journalists as “the next step in a historic partnership with Poland” and said it would be a boon for a host of US companies including Westinghouse, Bechtel and Southern Company.
But there was a (not insignificant) hitch: the figure came as a surprise to the Polish government. An official from the office of Piotr Naimski, the Polish government’s chief strategic energy adviser who is due to sign the agreement later today, said that it was definitely premature to talk about concrete sums.
What explains the confusion?
With less than two weeks to go before the US presidential election, the Trump administration is keen to chalk up wins and seems to have jumped the gun on what is in fact quite a high-level strategic agreement.
A multibillion nuclear deal with Poland would not only be a “win” for US companies, but would also support the US government’s goal of weaning eastern European countries off their reliance on Russian energy.
Last month, Poland’s climate ministry put forward a $40bn plan to develop a national nuclear programme, with the first plants set to come on line in 2033. As well as helping cut Poland’s dependency on Russian gas, this would also help the country wean itself off coal, which still supplies more than 70 per cent of its electricity.
“Our entire goal is to lessen their dependence on Russia — and Gazprom in particular,” said Mr Brouillette. “The LNG agreements that we have reached with Poland I think complement this agreement.”
So what has actually been agreed?
The actual agreement is far less ambitious — and specific — than what the energy department suggested.
In a joint statement, the countries said:
“The Agreement provides that over the next 18 months, the United States and Poland will work together on a report delivering a design for implementing Poland’s nuclear power program, as well as potential financing arrangements. This will be the basis for US long-term involvement and for the Polish government to take final decisions on accelerating the construction of nuclear power plants in the country.”
Westinghouse and Bechtel welcomed the announcement but referred ES back to the Department of Energy for details on the $18bn.
Pressed on the figure a senior DoE official acknowledged it was a “best estimate” by the US side and not a “set, formally agreed upon number in the agreement”.
(Myles McCormick and James Shotter)
Joe Biden has pledged to rejoin the Paris climate accords should he win the US presidency next month. That involves keeping the global temperature rise this century to “well below” 2C: an outcome with big implications for the US energy matrix.
“The share of fossil fuels in the US energy mix would need to decline from nearly 85 per cent today to just over 50 per cent by 2050,” said Mark Mozur, an analyst at S&P Global Platts Analytics, which has modelled what would be required.
While this would have a big impact on oil and gas usage, lower overall energy demand means there is not a huge difference in the annual increase in renewables under the two scenarios: 5.3 per cent in the Paris-aligned case versus 4.4 per cent in the base case.
“When you replace oil as an energy carrier in transportation (gasoline, diesel, etc), you end up getting more bang for your buck,” said Mr Mozur. “Electric vehicles, as an example, get three times greater [miles per gallon] than your average combustion engine, so in these types of scenarios what you end up seeing is that you get more non-fossil energy to meet smaller top-line energy demand.”
Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London, and Gregory Meyer in New York.
Hedge fund manager Hohn pays himself $479m
Billionaire hedge fund manager Sir Christopher Hohn has paid himself a dividend of $479m, one of the largest-ever annual personal payouts in the UK, after profits at his firm more than doubled last year.
Hohn, who is founder of Mayfair-based TCI Fund Management and one of the UK’s biggest philanthropists, made the payment to a company he controls during the year to February 2020, according to regulatory filings.
TCI, which manages more than $45bn in assets and tends to bet on rising rather than falling prices, has been a big winner from the bull market of recent years. During 2019 it made $8.4bn worth of profits for investors, according to LCH Investments, profiting from gains in stocks including Alphabet, Charter Communications and Canadian Pacific Railway.
TCI Fund Management’s profits for the year to February 2020 jumped 108 per cent to $670.9m. The $479m dividend was then paid to a separate firm TCI Fund Management (UK). Both companies are controlled by Hohn.
TCI declined to comment. The payment was first reported by The Guardian.
While the payout beats the £323m paid to Bet365 boss Denise Coates in 2018, much of it has been reinvested in TCI funds, filings show. It is also far from the biggest-ever hedge fund payday, being dwarfed by sums such as the $3.7bn earned by US manager John Paulson in 2007 thanks to bets on the subprime crisis.
In 2014, during testimony in his divorce battle with estranged wife Jamie Cooper-Hohn, Hohn described himself as “an unbelievable moneymaker”. A High Court judge later awarded Cooper-Hohn a $530m divorce payout.
Hohn, who grew up in Surrey and is the son of a Jamaican car mechanic, is known as one of Europe’s most aggressive activist investors. A backer of climate group Extinction Rebellion, he has been vocal in recent years in pushing companies to improve their climate policy, for instance threatening to sue coal-financing banks and warning his fund will vote against directors whose companies do not improve pollution disclosure.
In October Spanish airports operator Aena bowed to pressure from Hohn’s fund, becoming the first company in the world to give shareholders an annual vote on its climate policy.
Through his charity The Children’s Investment Fund Foundation, which in 2019 approved $386m of charitable payouts, he wrote to seven of the world’s biggest asset managers, urging them to put pressure on companies over climate policy.
Last year TCI was one of a number of funds looking to raise fresh assets from investors after suffering losses during the pandemic. It was also one of the big winners from betting against collapsed German payments group Wirecard, making as much as €193m in a week, according to data group Breakout Point.
Hohn’s fortune was estimated last year at £1.3bn by the Sunday Times Rich List.
FCA first alerted to concerns over Neil Woodford’s business in 2015
The Financial Conduct Authority was warned about problems within Neil Woodford’s investment business less than a year after it opened in 2014 but did not intervene for almost another two years, according to several people briefed on the process.
Woodford recently announced plans to relaunch his career at a time when the regulator faces pressure from politicians and campaigners critical of its oversight of the stockpicker’s failed business — and over how long it is taking to investigate his downfall.
The onetime star fund manager was forced to suspend his flagship £3.7bn investment fund in June 2019, trapping the savings of hundreds of thousands of investors in the biggest British investment scandal for a decade.
But concerns over its investment strategy were raised within the first year of its operation, when two of the company’s founding partners — chief operating officer Nick Hamilton and chief legal and compliance officer Gray Smith — resigned after falling out with Woodford and chief executive Craig Newman.
Given their senior roles in such a high-profile business, Smith and Gray were asked to discuss the reasons for their departures in exit interviews with the FCA in January 2015. The FCA did not act on the information they presented, according to those familiar with the regulator’s dealings with the company.
The four founders had clashed openly over the company’s compliance culture and the level of due diligence carried out on Woodford’s investments in private companies, according to former WIM staff members.
Hamilton and Smith were especially concerned with the amounts being committed to unlisted companies.
In response to FT questions over the exit interviews, the FCA said: “Where we receive information relating to concerns about firms or individuals we follow up and take action where appropriate. But we do not conduct our supervision of firms or individuals in public.”
Smith and Hamilton declined to comment. Several former staff at WIM said they were unable to talk publicly about their departure from the company.
A spokesman for Woodford said: “It is true that the FCA did not approach us after the interviews, and I am sure would have approached us had there been any concerns raised from the interviews.”
The spotlight falls on the FCA at a tricky time for the regulator as it seeks to draw a line under a spate of industry controversies during the tenure of its previous chief executive Andrew Bailey, now governor of the Bank of England.
A recent review of its handling of the £236m collapse of mini-bond issuer London Capital & Finance found repeated failures by the watchdog to act on external warnings. “The FCA’s handling of information from third parties . . . was wholly deficient,” the review concluded. “This was an egregious example of the FCA’s failure to fulfil its statutory objectives”.
Bailey took over as head of the FCA in 2016, after the contract of his predecessor Martin Wheatley was not renewed, and led it during both the Woodford and LCF collapses.
In February he told MPs on the Treasury select committee that when he joined the FCA it had “no system for extracting information” from warnings or tip-offs. “I’m not hiding things that went wrong,” Bailey said. “There should have been a mechanism to alert supervision and enforcement.”
Nikhil Rathi, the FCA’s current chief executive, and Charles Randell, its chairman, will be quizzed by the committee on Monday about its handling of LCF.
While giving evidence to parliament in June 2019, Bailey said the FCA’s first intervention with WIM was at the end of 2016 when the regulator spotted a conflict of interest in the business’s valuation process. By this point WIM managed almost £10bn and was the UK’s sixth best-selling fund manager.
The FCA has been dogged by questions over its oversight of WIM having approved the business to start trading just months after it found funds managed by Woodford at his former employer, Invesco Perpetual, exposed investors to higher levels of risk than they had been led to expect.
Invesco Perpetual was fined £18.6m for the breaches, which also involved several funds not managed by Woodford, in what was a record penalty imposed on a UK fund manager.
Woodford is still approved by the FCA to act as an executive director of an investment company, having updated his status in December 2019.
Ten days ago Mel Stride, chair of the Treasury select committee, called on the FCA to conclude its investigation into WIM’s implosion, saying: “As the FCA’s investigation still continues over 18 months after the fund was suspended, the reports of the new fund may understandably be of concern to investors who previously lost out.”
Owen Walker’s ‘Built on a Lie: The Rise and Fall of Neil Woodford and the Fate of Middle England’s Money’ will be published by Penguin on Thursday
Staying private: the booming market for shares in the hottest start-ups
In 2014, an Austrian entrepreneur offered investors a rare chance to purchase shares in Jumio, his fast-growing and profitable payments company. The deal was not a typical venture capital transaction. Instead of purchasing new shares, investors could buy out earlier shareholders, in what are known as private secondary transactions.
Daniel Mattes, who calls himself a “visionary” on his Instagram page and has been a judge on the Austrian version of Shark Tank, the American reality TV series for entrepreneurs, told at least one prospective buyer he had no plans to reduce his own stake in the business, according to a US Securities and Exchange Commission complaint filed in 2019. Mattes also signed off on documents that, according to the complaint, claimed Jumio made a small profit and revenues of more than $100m in 2013 — a significant sum for a three-year-old company.
Two years later, Jumio filed for bankruptcy, and the company’s shares became worthless. In reality, according to the SEC, Jumio had only made one-tenth of the revenues it claimed, and Mattes had bypassed his board of directors to sell about $14m of his own shares.
Jumio’s case highlighted the risks of an opaque but fast-growing corner of finance: the global market for shares in private start-ups such as TikTok owner ByteDance, Elon Musk’s SpaceX and payments company Stripe. In 2019, the market was estimated to host almost $40bn in lightly regulated trades, according to one participant, more than doubling its volume from 2014.
Recently, the market has been hotter than ever. Though private companies have largely tried to restrict trading, brokers say hedge funds, mutual funds and other institutional investors have begun pouring in, buying large blocks of existing shares in start-ups that are nearing initial public offerings or big acquisitions. Often, the investors receive scant rights to information on financial performance.
Technology upstarts and financial institutions including big banks have rushed to capitalise on the interest by brokering deals and forming trading venues, setting up a battle that could fundamentally alter the market’s structure and potentially allow companies to stay private indefinitely.
The boom reflects how cash-flush investors are clamouring for stakes in fast-growing businesses, with low interest rates pushing non-traditional funds deeper into private markets. To meet the demand, brokers now face two key challenges: increasing the supply of shares in desirable companies while preventing fraud and manipulation in a competitive market.
Until recently, private secondary markets resembled “that guy with a trenchcoat that’s selling you watches in Times Square”, says Inderpal Singh, who leads a private secondary market project at the start-up marketplace AngelList. “In the last year, there’s been a big shift.”
In addition to AngelList, JPMorgan and the software start-up Carta have begun facilitating trades in private companies. They compete with established players like Nasdaq and Forge Global, which purchased the rival marketplace SharesPost in a $160m deal last year, as well as scores of smaller independent brokers.
Carta and some other intermediaries have advocated that the SEC relax restrictions on who can purchase shares in private companies, potentially opening up the market to a broader swath of investors.
But some observers remain sceptical that the growing market can protect investors against bad actors. Mattes, who paid $17m to settle the charges, did not admit or deny the SEC’s allegations, though he resigned from Jumio in 2015 following an internal investigation. The entrepreneur did not respond to questions sent to his personal website.
The rush to expand trading could lead to fraud and manipulation, says Stephen Diamond, a professor of law at Santa Clara University who has studied private secondary transactions.
“All too often in Silicon Valley, people want to basically ignore the consequences of unhealthy market structures,” Diamond says.
The Facebook episode
The debates reflect a decade-long shift in capital markets as companies grow larger than ever in private — securing billion-dollar valuations and “unicorn” status while pushing back their public debuts. As a consequence, start-ups, investors and employees have accumulated trillions of dollars’ worth of shares that cannot easily be bought and sold, barring a public listing or acquisition.
Private secondary markets grew in importance in the lead-up to Facebook’s initial public offering in 2012. Investors rushed to buy the social media company’s shares, creating a frenzied market where independent brokers facilitated thousands of trades with little oversight from the company.
The trades created headaches. One Facebook executive left the company after he reportedly purchased stock ahead of a big funding announcement. Facebook sometimes lost track of who owned its shares, complicating preparations for its IPO.
Facebook’s struggles caused many start-ups to adopt strict clauses in their legal documents that prevented employees from trading shares without company approval. Some companies have gone even further, requiring sellers to receive approval from boards of directors months in advance of any transaction.
Though the restrictions have made trading difficult, brokers say the market has been busier than ever in the past 12 months, with big investors such as Tiger Global Management hunting for shares in start-ups that look like sure bets for blockbuster public listings.
Tiger Global has used secondary sales to gain stakes in companies such as China’s ByteDance and the software group Snowflake, according to fund documents and people familiar with the trades. Other hedge funds and mutual funds routinely purchase new stakes in companies worth tens of millions of dollars, brokers say.
On the other side of the trades, existing shareholders such as venture capitalists have sought to unload stakes in highly-valued companies as they delay public listings. The market can also be an important source of cash for start-up employees, who receive a large portion of their pay in stock options.
Several new entrants, such as Carta’s private stock exchange CartaX, now hope to formalise the market and capture trading fees that have been spread between dozens of independent brokers.
“There is now, in the past few years, not a push to go all the way back to the days of strict prohibitions on secondary trading, but a push to have more avenues for organised liquidity,” says Cameron Contizano, a partner at law firm Goodwin Procter who works on secondary transactions.
Meanwhile, investor demand has pushed up prices for companies such as ByteDance, SpaceX and Stripe. Barrett Cohn, chief executive of the private securities broker Scenic Advisement, says he advised companies on twice as many secondary transactions in 2020 compared with the previous year. Of the last dozen deals Scenic worked on in the past few quarters, only one resulted in shares being sold at a discount to a company’s most recent stock price, he says.
Competing for business
The rise in trading volumes and the rush to capture the market will shape the way private shares change hands. San Francisco-based Carta, a company best known for selling shareholder management software to start-ups, has become a lightning rod in debates about the market’s direction. Its 45-year-old chief executive, Henry Ward, has set out an ambitious goal to build the “private stock exchange” for tech start-ups.
Ward wants the CartaX marketplace to compete with the Nasdaq exchange, providing a listing venue where companies could potentially stay private indefinitely. The exchange uses an auction model that Ward says will result in superior prices for sellers.
But the project has already drawn strong responses from rivals and market participants. Some brokers and start-ups say CartaX amounted to an attempt to monopolise the market, and the company is naive to think it could unseat public exchanges. Scenic’s Cohn says Carta has made it increasingly difficult for its clients to export their shareholder data for use in other kinds of secondary transactions, such as tender offers.
“We’re not trying to make the New York Stock Exchange go away,” says Kelly Rodrigues, chief executive of the brokerage Forge, which has begun offering software that companies can use to manage secondary transactions. Forge also bills itself as the “stock market for private companies”.
Others say the most desirable start-ups would not want to use CartaX because few private companies want to subject their shares to monthly or quarterly auctions marketed by the exchange.
Eric Folkemer, head of Nasdaq Private Markets, says it has already set up a similar marketplace with price discovery tools for companies such as the workplace collaboration company Asana that want to facilitate trading in their shares before going public.
“We have it,” says Folkemer. “The question is, does the market want it?”
JPMorgan has put its money behind Zanbato, a private share trading system that is taking a different approach from Carta, acting as a central matchmaker for more than 100 banks and brokers executing orders on behalf of clients.
Nico Sand, chief executive of Zanbato, says the exchange has made a conscious choice to focus on trades between large, qualified buyers with more than $100m in assets, who regulators assume have high amounts of financial expertise and require less oversight.
Zanbato has applied for a patent for a trading system with “firm orders”, a legal contract that forces buyers and sellers to transact shares in a private company after they have submitted orders with desired prices and quantities, says Sand.
He says the concept, which is standard in public markets, is necessary for creating efficient trading in private shares. “At the end of the day, it comes down to formalising the market structure in a way it’s not currently formalised.”
‘The third configuration’
So far, Carta is the only company that is listed for trading on CartaX. This month, investors purchased almost $100m in shares following the company’s first auctions on the exchange, in trades that valued the company at $6.9bn — more than double the valuation it received from venture capitalists less than one year ago.
Marc Andreessen, the Netscape co-founder and Carta board member, said in a blog post that he would encourage start-ups backed by his venture capital firm Andreessen Horowitz to consider listing on the exchange. He also said the firm would buy shares in companies on the exchange.
“The third configuration — beyond the false binary of simply private or public — is here,” Andreessen wrote.
But Ward has set targets for the exchange that some people familiar with its workings described as overly ambitious.
Ward told investors he expected CartaX to generate about $1.1bn in annual revenues by 2024, according to a presentation viewed by the Financial Times. Under the most optimistic scenario, the marketplace would bring in $3.9bn in revenues that year, the presentation said. Carta declined to comment for this article.
CartaX charges 1 per cent fees to both buyers and sellers, implying it would need to facilitate about $55bn in trades a year to reach Ward’s expectations.
Those volumes would require about 3 per cent of the shares in all billion-dollar start-ups to change hands every year, according to Financial Times analysis of data from CB Insights, which estimates that 546 “unicorns” hold a collective value of $1.8tn.
Platforms like CartaX may struggle to meet their targets if private companies remain selective about who owns their shares. SpaceX, one of the most active companies in secondary trading, already hosts an internal marketplace where employees and venture capitalists can sell stock to invited investors.
“They have a lot of demand from buyers,” says Hans Swildens, chief executive of Industry Ventures, which has invested in Carta. “The question, like all the other marketplaces, is supply.”
Venture capitalists say the new exchange could also face competition from an unlikely source — special purpose acquisition companies (Spacs), which have recently lured relatively young start-ups to public markets.
CartaX would force companies to share two years of financial statements prepared using generally accepted accounting principles, in order to comply with a securities exemption the exchange is using to allow participation from an unlimited number of accredited investors.
Lawyers and governance experts say the requirement could help solve inconsistencies in information disclosure in private markets. But others say it would be a burden for young companies, which often remain private to avoid sharing their financial information to a broad audience of investors, reflecting a central tension in the market as brokers and traders attempt to capitalise on the surge of interest in secondary transactions.
“The ‘move fast and break things’ culture of start-ups militates precisely against this,” says Diamond at Santa Clara University. “That, to me, is the fundamental paradox here.”
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