Karoon Energy, an Australian oil and gas producer, encountered significant shareholder unrest at its Annual General Meeting (AGM) on 23 May 2024.

The company received a “first strike” against its remuneration report, with a substantial portion of shareholders opposing the board’s proposed pay packages.

Leading the charge were investment firms Samuel Terry Asset Management and Sandon Capital, which collectively hold a 5.6 per cent stake in Karoon Energy.

These firms have been advocating for a higher dividend payout ratio and a greater return of cash to shareholders.

Specifically, Sandon Capital announced its intention to vote against the re-election of director Peter Turnbull, a board member since 2014, and against the proposal to increase directors’ fees.

The firm criticised the board for lacking clarity on dividend payments and capital management strategies.

While Macquarie analysts had forecasted that Karoon would propose a 30 per cent payout ratio of its net profit as dividends, the activist investors are pushing for a payout closer to 40-50 per cent of profits.

This demand has been deemed unsustainable by some, considering the company’s future growth plans.

The “first strike” against Karoon’s remuneration report indicates that if the company receives another strike next year, it could trigger a board spill motion under Australia’s “two-strikes” rule.

This rule mandates that if 25 per cent or more of shareholders vote against the remuneration report for two consecutive years, a resolution to spill the board must be put to shareholders.

This shareholder revolt underscores the increasing pressure from activist investors on energy companies to prioritise shareholder returns over growth ambitions.

The primary dissatisfaction stems from the investors’ belief that the company, chaired by Peter Botten, has been prioritising acquisitions over dividends.

This sentiment was heightened after Karoon’s chair defended the company’s strategy and performance ahead of the AGM, refusing to commit to the higher dividends demanded by the activists.

Karoon CEO Julian Fowles has been actively engaging with investors to address their concerns. Following a United States roadshow and a debt raise with advisors Deutsche Bank and Macquarie Group, Fowles appeared at the Macquarie Australia Conference and participated in a sell-side analyst call.

During his presentation, Fowles emphasised that the company had de-prioritised inorganic growth opportunities to focus on production issues.

However, he hinted that acquisitions could still be on the table in the future, stating, “We don’t have a deal that we’re doing at the moment. I would point to the end of the year, early next year, assuming we were to find something in the short term.”

Despite these efforts, the activist investors remain steadfast in their demands.

They argue that higher capital returns through increased dividends should take precedence over the company’s focus on acquisitions and reinvestment of profits.

This ongoing tension highlights a broader trend of shareholder activism within the energy sector, as investors seek to ensure that their interests are aligned with those of the companies in which they invest.

Karoon Energy now faces a critical juncture.

To avoid further shareholder dissent and a potential board spill, the company will need to engage more effectively with its shareholders and possibly reconsider its dividend policy and capital allocation plans.

The outcome of this conflict will likely influence the company’s strategic direction and its relationship with investors in the coming years.