Harold Hamm made headlines last month with his $4.3 billion cash acquisition of Continental Resources Inc. that would take the U.S. shale giant private.
Despite Hamm explaining his rationale for the deal was a lack of love by the market, some have speculated that his real motives were to escape from the “leash” of ESG requirement. Other industry thinkers wonder if Continental Resources’ decision will spur a chain reaction of privatization as ESG continues to be a hot button topic.
Oil and gas companies going private could be detrimental for ESG disclosure proponents, according to a partner with consultancy Baker Botts.
“It’s less about the substance and more about disclosure,” Baker Botts partner Clint Rancher told Hart Energy speaking broadly about take-private offers. “Everyone is subject to the same substantive rules regarding regulation of the environment.”
Hamm’s take-private agreement will give Continental “greater freedom to operate, particularly in areas such as exploration,” Cowen & Co. managing director and senior analyst David Deckelbaum wrote in a research note when the acquisition was announced on Oct. 17.
Though analysts and industry experts speculated what Hamm’s motivations for the take-private offer were, one theory was his contempt for ESG constrictions, having been quoted saying in an interview in regards to Wall Street’s ESG movement: “a climate change ‘religion’ had gripped investors and companies.”
Regardless of Hamm’s intentions, the acquisition subjects the company to more freedom in its resource allocation. As a private company, Continental will not be required to disclose ESG statistics under the U.S. Securities and Exchange Commission (SEC)’s proposed disclosure legislation.
“If you are a private company, you would not be subject, for example, to the SEC’s proposed climate disclosure rules, which I think shocked many people in the industry and really in all industries with their specificity,” Rancher said. “It’s a very onerous set of rules that will be very costly to comply with. And so, a private company can save those resources that would be otherwise devoted to reporting on GHG [greenhouse gas] emissions and devote them to the business.”
To companies who are willing to sacrifice access to public capital for ESG privacy, going private can be an attractive option. And with continued growth in private equity, Rancher said, there are very few downsides to exiting the public space.
“The assumption is that if you are irresponsible with your emissions or your other aspects of your ESG program, then you will be punished by a lower valuation and fewer investors,” he continued. “But…focused on ESG disclosure, there is really no downside to being a private company because you can choose to disclose as much or as little about your environmental, social and governance program as you choose to.”
“A private company can save those resources that would be otherwise devoted to reporting on GHG [greenhouse gas] emissions and devote them to the business.”—Clint Rancher, Baker Botts
Although Rancher pointed out that there are much fewer public oil and gas companies today versus 20 years ago, he added that this could be attributed to a growth in private equity as opposed to a disdain for ESG reporting.
“Generally, if you are an early stage company today, your calculus on whether or not to become a public company has dramatically changed based on the regulatory atmosphere,” he said. “You have alternate sources of capital in private equity, and you can avoid some of the headaches that we've been talking about in terms of regulatory oversight and governance and the relentless focus on quarterly earnings, all of which come along with being a public company.”
The SEC’s role
In March 2022, the SEC proposed more stringent guidelines for companies reporting ESG metrics, specifically more clearly defined rules for reporting Scope 1 and 2 emissions.
The SEC has been going into “overdrive” with ESG disclosure regulations, Rancher said, ranging from cyber disclosure rules to proxy regulations that could affect retaining talent to board composition rules. For some companies, if they have enough capital, this overabundance in regulations could be the final straw.
All of this, according to Rancher, can open the companies up to greater litigation risks.
“Ultimately the question I think for regulators will be,” he said, “as we add more regulation, we’re going to get fewer public companies and if we have fewer public companies, there’s going to be fewer options for regular retail investors to invest in.”
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