I’m a bear on the E&P companies as I believe oil prices are likely to stay down for a long time. However, as long as Hamm is in the picture there is no circumstance in which I would want to be a Continental shareholder regardless of oil prices . A major take-away from reading his divorce trial documents is that despite Continental having gone public long ago, Hamm still runs it as his personal company and conflicts of interest abound.
An example would be Hamm’s activities with Wheatland Oil.
Hamm and Jeff Hume formed Wheatland Oil in 1987 to pursue various drilling activities. Wheatland was owned 75% by Hamm and 25% by Hume. In March 2012 Hume negotiated the sale of Wheatland’s assets to Continental for $340 million worth of Continental stock. (Wheatland had no debt at this time).
The court records notes:
“Jeff Hume ultimately negotiated the sales price for Wheatland assets with Continental. Harold Hamm minimized his involvement in the negotiations at the time of the sale because the sale was a related party transaction with Continental”.
This is rather amusing. Just who exactly is Jeff Hume? According to Continental’s website Jeff Hume is Continental’s Vice Chairman of Strategic Growth initiatives and
“Previously, Mr. Hume was President from November 2009 and Chief Operating Officer from October 2008. He has also served as Continentals’ Senior Vice President of Operations, Senior Vice President of Resource and Business Development from October 2005, Senior Vice President of Resource Development from July 2002 and Vice President of Drilling Operations from 1996. Prior to joining Continental Resources in May 1983 as Vice President of Engineering and Operations, Jeff held various engineering positions with Sun Oil Company, Monsanto Company and FCD Oil Corporation. “
I’d like someone to find me the person who had the job of negotiating against the financial interests of Mr. Hume and Mr. Hamm at Continental. Somehow I doubt he tried very hard.
Mr. Hamm owns many businesses that enter into relationships with Continental. On the one hand it is perfectly reasonable for an E&P company to not want to be in the real estate, transportation, or pipeline businesses. A complete look of Hamm’s behavior, however, shows that Continental’s philosophy is more about “what benefits Harold Hamm”. A few examples stand out:
In March 2011 Continental fronted Hamm 23 million dollar to buy the building (owned by Hamm) that how houses Continental’s headquarters in Oklahoma City.
The most egregious example, however, has to do with an entity called Highland Partners.
Highland Partners was created in 2004 as a Continental Subsidiary to own pipeline assets. It was spun off in 2005. In 2009 it was taken private by Mr. Hamm. In 2012 Continental and Highland entered into an agreement whereby Continental agreed to pay over 95 million dollars over five years to Highland for the rights to use a proposed new pipeline, weather Continental ever used such rights or not. On the basis of this deal Hamm was ultimately able to raise the financing for the new pipeline. As of just this month, Kinder Morgan has agreed to pay 3 billion for Highland (Hamm clears 2 billion, as 1 billion was assumption of debt).
So, now, when Continental is reeling from oil price declines we see Hamm cashing out 2 billion dollars on a deal which could have and should have been Continental’s, but instead Continental was left in the role of simply propping up Hamm’s investment when needed in the initial stages.
Interestingly enough, the judge valued Highland in the sub-400 million range for the purposes of the divorce. One wonder what the judge will make of Hamm telling the him the asset was worth one thing while attempting to sell it for another.
The argument can and has been made that Continental has an independent board of directors with fiduciary duties which approves these deals, and that therefore they are in the interest of shareholders. We know from the court records, however, that Continental is operating on behalf of Hamm even though it has no real interest in who owns it’s shares theoretically. For example, court documents show that Continental relentlessly fought and stalled on discovery request made by Ms. Arnal for documents she needed to advance her case. The legal fees expended by Continental on this ultimately futile quest in no way benefitted Continental Shareholders.
The employees and directors of a billion dollar company wish to please its majority owner and act in his interests is not something that anyone should take as a surprise.
Given the evidence, I simply would not entrust my money with company that operates in the interest of some shareholders over others.