Famously, ExxonMobil could predict demand within a percentage point 20 years out, but had to admit it could not forecast oil prices. For decades it focused on performance, delivered the results, and didn’t care much for public opinion. If you’re that big and that good, you can get away with it, but not the rest of the industry. Even ExxonMobil softened up under Tillerson.
If a company has no control over pricing and consequently their performance, what can IR/PR do about it? Bradley summed it up this way,
“a downturn might not be your fault, but it is your problem.”
With WTI back over $70, this isn’t a problem today, but it is the right time for Oil & Gas PR and IR departments to make the investments needed to be ready to ride out the inevitable drop in prices that can come anytime. Good companies can’t rely solely on execution discipline and financial results to keep investors interested. Good IR will help build the right investor base and guide expectations in good times so investors stick with the company during the next downturn.
So who are the right investors? If you segment investors using traditional methods, you probably have only a shallow understanding of their motives and behavior; growth, value, retail, institutional, hedge fund or activist, may be the wrong segmentation.
In Communicating with the right investors, McKinsey & Co defines the “right investor” as an “intrinsic investor” and lays out how and why these investors should be the focus of your CEO’s attention. Summarizing the McKinsey article, they break down investors into three types:
With the surge in passive investing over the past few years, a huge percentage of the total equity in the United States sits in purely mechanical investment funds of all kinds. Because their approach offers no real room for qualitative decision criteria, such as the strength of a management team or a strategy, investor relations can’t influence them to include a company’s shares in an index or quant fund.
Traders control about a third of US equity holdings. Such investors don’t really want to understand companies on a deep level—they just seek better information for making trades. Executives therefore have no reason to spend time with traders and IR shouldn’t waste time tailoring their communications to this group.
“Intrinsic” investors, base their decisions on a deep understanding of a company’s strategy, its current performance, and its potential to create long-term value. They are also more likely than other investors to support management through short-term volatility. Executives who reach out to intrinsic investors, leaving others to the investor relations department, will devote less time to investor relations and communicate a clearer, more focused message. The result should be a better alignment between a company’s intrinsic value and its market value, one of the core goals of investor relations.
In interviews with more than 20 intrinsic investors, we found that they have concentrated portfolios—each position, on average, makes up 2 to 3 percent of their portfolios and perhaps as much as 10 percent; the average position of other investors is less than 1 percent. Intrinsic investors also hold few positions per analyst (from four to ten companies) and hold shares for several years. Once they have invested, these professionals support the current management and strategy through short-term volatility. In view of all the effort intrinsic investors expend, executives can expect to have their full attention while reaching out to them, for they take the time to listen, to analyze, and to ask insightful questions. These are the investors you want, so what next?
Focused communication is critical, avoid boilerplate answers, differentiate and personalize.
Don’t oversimplify your message - Intrinsic investors have spent considerable effort to understand your business, so don’t boil down a discussion of strategy and performance to a ten-second sound bite for the press or traders.
Interpret feedback in the right context - When questioned, don’t provide simple summaries from interviews with the media and sell-side analysts, covering everything from strategy to quarterly earnings to share repurchases. Intrinsic investors are sophisticated and looking for differentiation in your value proposition to your peers, their feedback will reflect a deeper knowledge of O&G and respect for their request for detail will be payoff.
Prioritize management’s time - Per McKinsey, intrinsic investors think that executives should spend no more than about 10 percent of their time on investor-related activities, so management should be actively engaging with 15 to 20 investors at most…. Executives should talk to equity analysts only if their reports are important channels for interpreting complicated news.
I recommend you take a page from CPG marketing’s playbook. They routinely segment customers by the decision processes those customers use and tailor the corporate image and media campaigns to the most important ones. Oil & Gas companies can benefit from a similar kind of analytic rigor in their investor relations.
Now is the time to build a solid analytics framework into your PR/IR programs and provide metrics your leadership will respect and support. The Three Tenets of IR are
Be consistent with shareholder communications
Highlight the strength of your management team
Be absolutely transparent
This is the time to recommit to those principles while the times are good, so the programs, budget, best practices, management and investor support are there when the times get bumpy. IR is not PR but when the times are difficult, they have to work together to ensure liquidity and a good valuation to preserve access to capital and deals.
Once again from Bradley, “Weathering an economic storm is an instance where IR must take the communications lead,” he says. “The DNA of IR is built for long-term messaging and results. IR has the patience for slow recovery.”
But does IR really matter?
Yes, it does, but we’re doing the research to set the facts straight. Beginning with local exploration and production companies here in Colorado, our equity research group will be publishing their analysis and observations, including the hard and soft factors (like IR) that affect performance.