Investment firm Kimmeridge has released an open letter to Devon Energy's incoming board, ahead of its anticipated May 4 merger with Coterra Energy, urging prompt action to maximize shareholder value. Kimmeridge, which holds about 1.4% of Devon, supports the strategic rationale of the merger but emphasizes the need for a decisive, shareholder-focused strategy post-merger to avoid a "conglomerate discount."
Kimmeridge's recommendations include an accelerated program of non-core asset sales, clearer capital allocation strategies, and the establishment of minimum return thresholds for new investments and acquisitions. The firm believes that without a clear articulation of its post-merger strategy, the combined company risks being undervalued by investors.
The activist investor also highlighted concerns about executive compensation, advocating for 100% performance-based long-term incentives. Kimmeridge pointed out that under Devon's current plan, only 60% of long-term incentives are performance-based and are tied to relative Total Shareholder Return (TSR), which it claims rewarded poor performance, noting that 2022 performance units paid out at 75% of target despite Devon ranking eighth out of twelve peers in TSR.
The $58 billion merger is expected to create a significant U.S. shale producer. Kimmeridge believes that implementing its suggestions could help the combined entity close an unwarranted valuation gap and lead to billions in increased market value. Mark Viviano, Managing Partner at Kimmeridge, stated that the merger has the potential to set a new standard for the sector, provided the board acts with clarity, discipline, and urgency.
