You can add a lot of value for your investors to cut through all the BS and just look for people who can, on a long term basis, identify and produce resources cheaper than anyone else.
-Bryan Lawrence of Oakcliff Capital, talking about what matters most when analyzing an energy business.
The energy sector is certainly a place where a great CEO can make all the difference. It is one of the places I'm most actively screening for these rare men. The latest CEO that fell victim to my analysis is Greg Ebel of Spectra Energy Corp (SE).
Track record is a very important factor when evaluating the value of a CEO to investors. To arrive at an objective evaluation I'm going to review the company's numbers from 2009-2013 on a pre-determined set of variables*: RoE, RoC, Book Value, Margins, Asset Turnover and Capex Trends. To put these in perspective I will contrast them to those posted by a large competitor Kinder Morgan (KMI).
|Greg Ebel @ Spectra Energy Corp||return on capital||return on equity||book value (per share)||margin profile||asset turnover||capital expenditure trends|
When reviewing the numbers I'm impressed with the rate at which Ebel is redeploying capital and the excellent returns on equity he is achieving at Spectra. Although the data is fairly limited, the growth in tangible book value appears to accelerate at Spectra from 2009, further illustrated by the chart below:
SE Tangible Book Value (Annual YoY Growth) data by YCharts
When reviewing the return on equity chart, it is easier to see that Ebel did quite well after taking over at the helm of Spectra Energy.
SE Return on Equity (TTM) data by YCharts
It's true that the data on his predecessor is limited and of course comparing a CEO to his predecessor is very difficult. It's like comparing lap times of race car drivers, driving the same car, but on a different track. A CEO review is an inexact science at best. To add additional perspective let's compare Ebel to the CEO of an important competitor. I select the competitors to review against by looking at the largest competitors in the industry and picking one where another CEO reigned uninterrupted over the same period.
In this case I selected Rich Kinder CEO of Kinder Morgan to compare records too. This is quite unfortunate for Ebel as Kinder is an immensely successful and respected CEO. Morningstar even writes the following about him:
We think Rich Kinder is the rarest kind of visionary. Not only did he see the potential for a hard assets business within Enron's asset-light culture, but he has a focus on execution that has enabled him to build one of the largest pipeline companies in the country bit by bit.
We think so highly of Kinder we've awarded him CEO of the Year in the past.
|Rich Kinder (Kinder Morgan, Inc. KMI)||return on capital||return on equity||book value (per share)||margin profile||asset turnover||capital expenditure trends|
Greg Ebel actually achieved remarkable good results compared with the master capital allocator Kinder. The data is a little handicapped because Kinder Morgan was only taken public in 2008 but it still provides an interesting picture.
KMI Return on Equity (TTM) data by YCharts
Both CEO's appear effective at finding places to redeploy capital. A very important trait of great capital allocators. If Ebel can keep achieving these kinds of RoC while redeploying cash flow at this rate, that bodes quite well for shareholders.
Surprising as it may be, over the reviewed period, Ebel's performance compared to Kinder is quite excellent.
Results vs. S&P 500
The results vs. the S&P 500 are very much influenced by all kinds of outside factors but a CEO review wouldn't be complete without it. Investors appear to be pleased with the way Ebel is running the company:
^SPXTR data by YCharts
This is backed up when we pit Spectra Energy against the iShares Dow Jones U.S. Energy ETF (IYE) over the period under Ebel's leadership.
IYE Total Return Price data by YCharts
Ideally investors like to see CEO's that rely for the majority of their wealth on their ownership in the company they run. Ebel is not an ideal CEO from this perspective. He did increase his position in Spectra Energy over the past twelve months but the market value of his shares are only $10 million. With his yearly salary having rocketed up from $3 million to $8 million, ideally he should hold more shares. With $50 million invested, his interests would be more clearly aligned with minority shareholders.
Greg Ebel appears to be a very capable CEO. He didn't serve as a CEO for a very long period but so far his record puts him firmly on the promising talent list. Given his track record, I'd be more inclined to invest into a company, at least in the energy sector, headed by Ebel than one headed by a random experienced manager. This is surely a CEO to watch. A more extensive track record as CEO and further outstanding results, would help to raise my confidence in his ability even further.
*Inspired by an excellent chapter in The Manual of Ideas, called Jockey Stocks: Making Money alongside Great Managers, I put together a spreadsheet as a basis for analysis. Although I'm using slightly different metrics, as those proposed in The Manual of Ideas, to base my analysis on.