By Jeanine Prezioso
NEW YORK Feb 10 A group of minority
shareholders in oil driller Continental Resources is
suing chief executive Harold Hamm, alleging that Continental's
nearly $100 million investment in a pipeline being built by
another firm he controls will benefit him at their expense.
Continental is providing partial funding for Hiland
Partners, a Hamm-owned pipeline and gas plant operator, to build
the $300 million Double H crude oil pipeline. The 450-mile
(724-km) line from North Dakota to Wyoming is expected to start
up later this year and to eventually ship up to 100,000 barrels
of oil per day.
A pension fund has filed suit in Oklahoma state court
seeking damages and the return of profits and other benefits
derived from the pipeline transaction to the company.
The suit comes at a time when more investors are
scrutinizing big energy companies for potential conflicts of
interest, especially involving companies like Continental that
were founded and part-owned by influential chief executives.
A Reuters' analysis of Continental's U.S. Securities and
Exchange Commission (SEC) filings since 1996 shows the
investment in Double H is one of many contracts Continental has
entered with other Hamm-owned energy and logistics firms. The
total value of the contracts exceeds $550 million.
As a wildcatter, Hamm helped discover North Dakota's Bakken
shale, where Continental is a leading driller. He now owns more
oil in the ground than any other American through his 68 percent
stake in Continental worth more than $13 billion, industry
Last April, Continental said it would pay $95.8 million for
a five-year option to ship 10,000 barrels per day on the Double
H pipeline, which will connect with a third-party pipeline that
ships crude to Cushing, Oklahoma, a massive oil storage hub.
In September, the Pennsylvania Laborers District Council
Construction Industry Pension Fund, which owns an unspecified
number of Continental shares, filed the lawsuit against Hamm,
six of Continental's directors, and Hiland entities.
The plaintiffs are asking, among other things, that Hamm and
the other defendants surrender to the company any profit or
benefit related to Continental's investment in Double H.
The Hiland pipeline transaction "enriches Hamm at the
company's expense," says the claim, reviewed by Reuters. Hamm
and related parties breached their fiduciary duties by not
fairly evaluating the transaction, and by agreeing to fund an
"excessive and inequitable amount" of the pipeline's development
costs while only getting a fraction of the benefits, the claim
Continental said the lawsuit had no merit.
Double H was "fully and adequately reviewed by the full
Board's disinterested and independent directors," Continental's
General Counsel Eric Eissenstat said in an email. They
"expressly found it to be in the best interests of the company"
as pipeline infrastructure in and around North Dakota catches up
with booming oil production there.
Continental declined to make Hamm available for an
Pension funds are lead plaintiffs in a small portion of
shareholder lawsuits, many of which are either dismissed or
settled, legal experts said.
A backlash from shareholders over alleged self-dealings
contributed to the departures last year of energy CEOs including
Aubrey McClendon at Chesapeake Energy and Tom Ward at
SandRidge Energy, two other Oklahoma-based drillers. The
boards of both companies said they found no wrongdoing by either
SEC filings show that Continental has paid Hamm-affiliated
firms for services such as oil and gas processing or
transportation. Most payments - around $300 million - have
occurred since Continental went public in 2007.
In the filings, Continental says that business with other
Hamm-owned firms could lead to conflicts of interest that may
not be resolved in Continental's favor.
Eissenstat told Reuters the firm's payments to other
Hamm-affiliated firms since 2007 constituted less than 2 percent
of the company's total expenses during that period.
There is no question that Continental shareholders have been
richly rewarded. The company's shares have risen more than
sevenfold since its 2007 initial public offering, as Hamm
transformed Continental into a leading driller in North Dakota,
where a boom in Bakken production has helped push U.S. oil
output to near 25-year highs.
The lawsuit questions why the driller would need access to a
pipeline it may not use. Hamm has said railroads are the firm's
preferred mode of shipping Bakken crude to market.
Representatives of the Pennsylvania pension fund and
attorneys handling the case declined requests for comment.
The lawsuit is not likely to discourage investors who are
bullish on Continental's oil production growth, say analysts.
CONFLICTS OF INTEREST
The disclosure of related-party business in SEC filings is
not enough to protect a company like Continental from lawsuits,
a corporate governance expert said.
"Whether you disclosed it or not, the question remains: Were
the transactions injurious to the shareholders?" said Roy Smith,
a finance professor at the Leonard N. Stern School of Business
at New York University.
Alleged conflicts of interest have sparked previous lawsuits
by minority shareholders in Hamm's firms.
In 2009, Hamm was sued by other shareholders in Hiland
Partners, who alleged he struck a deal to repurchase publicly
traded shares of the firm at depressed prices.
That suit was dropped in 2010 after Hiland increased the
purchase price of the shares. Attorneys representing Hamm denied
the legal action prompted the move.
In 2012, minority shareholders in Continental sued after the
company approved a $340 million deal to buy well interests owned
by Hamm and another Continental executive, through a company
called Wheatland Oil. The lawsuits alleged the purchase price
Two outside firms that analyzed the Wheatland transaction
found it to be "fair and accretive to the company benefiting
minority shareholders," Eissenstat said.
A federal case was dismissed in May 2013, but a lawsuit in
the District Court of Oklahoma County in Oklahoma on the
transaction is still pending.