I’m always on the lookout for companies that are not acting in the best interests of shareholders.
Indeed, as shareholders are ultimately owners of the businesses they invest in, management teams should, at all times, act in the best interests of shareholders.
But in many cases, management ignores this fundamental goal.
And there are signs that Gulf Keystone Petroleum (LSE: GKP) and Shell’s (LSE: RDSB) executives have made this fatal mistake.
Not impressed
When Shell announced that it was planning to buy BG Group last month, opposition to the deal started to build immediately.
And over the past 30 days it has become increasingly apparent that the market does not support Shell’s decision to buy its smaller peer. For example, over the past 30 days Shell’s shares have fallen by 5.7%, underperforming the FTSE 100 by 4.6% and the wider oil & gas producers sector by 1.7%.
Over the same period, BG has only underperformed by 1.0%.
Long-term drag
The market is concerned that Shell is overpaying for BG. Shell’s offer is essentially an enormous multi-billion dollar bet on the price of oil.
If the oil price recovers, the deal will make sense. However, if the price of oil continues to languish, as many forecasters are predicting, the BG acquisition could prove to be a drag on Shell’s earnings for years to come.
What’s more, BG is trying to grapple with numerous operations problems. Including concerns within Egypt and to production problems within Brazil. Also, the company is exposed to the Petrobras scandal, as Petrobras is BG’s primary partner in Brazil.
Petrobras issue
As Brazil’s state oil company, Petrobras takes a stake in almost all of the country’s oil & gas projects. So, BG has to work closely with the group.
Petrobras is the sole operator of five pre-salt oilfields in the Santos Basin, offshore Brazil. BG has a stake in each of these five fields, all of which are highly sought after assets.
Unfortunately, this exposes BG to Petrobras’s troubles. There are concerns that Petrobras won’t be able to fulfil its obligations to BG due to its on-going corruption scandal.
Without Petrobras’ support, BG’s Brazilian assets could become a thorn in the company’s side.
Burning cash
The market is concerned that Shell is wasting time and money on its acquisition of BG.
Meanwhile, Gulf Keystone is burning through cash as it tries to keep the lights on.
According to the Financial Times, Gulf Keystone’s CEO John Gerstenlauer has reported that the company is burning through cash at a rate of $8m to $10m a month.
In addition, the company is still owed around $330m by the Kurdistan authorities for its share of oil sales.
Gulf Keystone conducted a placing at the end of March to raise just under $41m. Prior to the placing, the company’s cash balance amounted to $86m, including the placing cash, at the end of March Gulf Keystone had around $127m in cash available to it.
At present cash burn rates, excluding any additional repayments of oil revenues owed, Gulf Keystone has around 11 months of cash left before it has to tap the market for more funding.