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The Deal: Activist Investors Target Oil Industry

Stocks in this article: DVN RIG XOM OIS SD CVI NBR CHK OXY HES APA

NEW YORK ( TheDeal) -- Oil and gas has long been a primary object of scorn from environmental activists angered by Exxon Mobil (XOM)'s Valdez oil spill in Prince William Sound in 1989 and more recently with BP (BP)'s Deepwater Horizon explosion in the Gulf of Mexico in 2010.

However, activists of a different sort -- that is, activist investors -- have increasingly tried over the past year to force change at several oil and gas companies. Targets have included Occidental Petroleum (OXY) Nabors Industries (NBR), Chesapeake Energy (CHK), Transocean (RIG), Hess (HES), CVR (CVI) and SandRidge Energy (SD).

The latest is Houston's Oil States International (OIS). The activist has been Barry Rosenstein's Jana Partners LLC, which holds a 9% stake in Oil States, and is urging the company to spin off its lodging business into a separate company or a real estate investment trust, better known as a REIT.

Speculation has heightened that Swiss-based Weatherford International Ltd. may be next after missing earnings targets for the past three quarters. Another potential target is Oklahoma City-based Devon Energy (DVN), which is attempting to raise cash by putting its gas gathering and processing assets into a master limited partnership.

What's the reason for all this attention from activist investors?

Simmons & Co. International analyst Bill Herbert wrote in a recent report that "full-throttled aggression" by shareholder activists is due to the largely uninspired results for energy companies, and the "ongoing intransigence" of the industry to more sensibly allocate capital and improve corporate governance.

"What is interesting, however, is the degree to which activists have been emboldened and are now pursuing agendas with previously unassailable management teams," the report said, noting the Oil States case. "Prior exemplary track records are not deterrents if the perception is that managements are being unresponsive to seemingly legitimate shareholder agendas."

New Orleans-based Global Hunter Securities LLC said activists are urging not only asset changes for capital needs or better focus to wholescale management changes. The call for replacing top executives extents from the general cause of increasing shareholder value to anger with overpaid managers, entrenched boards and old-fashioned mismanagement.

"We believe other underperformers, APA Apache (APA) a chief example, are pre-emptively looking to shed some noncore assets and even buy back shares to stave off potential activism," the firm said.

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