Snowcap takes aim at Santos, CEO Kevin Gallagher’s $6m bonus
The energy giant’s ‘reckless and misguided’ growth plan and ‘perverse’ incentives have been slammed by the UK activist investor, who played a key role in scuttling AGL’s demerger.
Activist environmental, social and governance investor Snowcap Research, which played a role in AGL’s scuttled demerger plans, now has energy giant Santos in its sights as well as CEO Kevin Gallagher’s $6m bonus.
The group, led by UK-based 20-something twins Chris and Henry Kinnersley, lobbed a letter to the energy giant’s board overnight because ‘Santos has lost its way’.
Calling for sweeping reforms, Snowcap said it was blaming Santos’ “aggressive growth capex plan” for its “drastic underperformance” in share price, which is says is now the “lowest returning exploration and production peer over a one-year, two-year, and 10-year time frame”.
“Santos’ stock has meaningfully decoupled from oil prices and currently trades at a significant discount to both peers and fair value,” the letter stated.
Snowcap took particular aim at Mr Gallagher’s one-off bonus incentive – a stick point for investors since it was announced in April 2021.
“As far as we can tell, Santos’ growth ambitions appear to be driven by a series of perverse executive incentives, which reward absolute growth, even where it destroys value for shareholders,” the letter stated.
“Front and centre of these is the one-off $6 million Growth Projects Incentive awarded to Santos’ CEO in 2021, which has remained in place despite substantial criticism
from shareholders and proxy advisers.”
The group is calling for reforms, including reinstilling “capital discipline”, reducing upstream capex, increasing capital returns to shareholders, improving environmental and safety performance, realigning incentives and refreshing its governance.
“We believe that a reformed Santos has the potential to unlock 30-50 per cent of upside for shareholders and create a stronger, safer, and more responsible company.”
Shares in the $24bn Santos are up 1.1 per cent to $7.40 at 1.40pm AEDT.
In a separate statement, Snowcap partner Chris Kinnersley said: “Mr Gallagher originally led a successful turnaround at Santos based on many of the same principles that we are arguing for today; namely capital discipline”.
“But the company’s aggressive ramp up in upstream growth spending has undone much of that good work.”
He said the group has “great respect” for Santos, its employees, and the important role played by the company in the Asia-Pacific economy.
“Our investment is underpinned by a high conviction that with the right strategy, oversight, and incentives, Santos can be repositioned to the benefit of all stakeholders.”
“We look forward to engaging with the board and other shareholders in order to help chart the right path forward for a stronger, safer and more responsible Santos.”
Snowcap said Santos’ growth strategy was “reckless and misguided” with the group’s target to spend 83 per cent of its operating cash flow on capex over three years the most aggressive plan compared to any major listed E&P company globally.
“By stark contrast, US peers are increasingly focused on capital returns rather than growth, amid an inflationary cost environment and uncertain long term demand for fossil fuels.
“Santos’ growth projects appear to lack any special merit and have been poorly delivered to the market.”
It also said Santos has “failed to take climate action seriously; setting tokenistic short term emission targets while simultaneously planning to increase production output by up to 30 per cent”.
Santos is yet to respond to Snowcap’s actions.
Last month, Santos boosted its final dividend by 78 per cent after more than tripling full year net profit to $US2.1bn.
Snowcap’s actions come close on the heels of activist investor Market Forces, which holds a small stake in Santos, moving to build support for a vote against the group’s remuneration policy at the annual general meeting on April 6, triggering a second strike.
A formal statement has been filed on behalf of over 100 shareholders, urging all investors to vote against Santos’ remuneration report on climate risk grounds, said Market Forces’ acting executive director Will van de Pol.
“Santos’ rampant pursuit of new fossil fuel production, sanctioned by the board and incentivised with big executive bonuses, represents an abject failure of corporate governance.”
Santos recorded a ‘first strike’ against its remuneration report with 25.32 per cent votes cast against the resolution at its 2022 AGM.
Last year in February, Snowcap wrote to AGL’s board asking it to abandon the then at-play demerger and abandon the demerger and pursue an aggressive strategy to transition AGL’s coal assets by 2030. The demerger was eventually suspended and the business refocused in the push led by now majority AGL shareholder, tech billionaire Mike Cannon-Brookes.
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