The Wall Street Journal’s ($) Ann Davis reports from Houston on the funny money flowing into oil and gas investment opportunities, even those that do not own any oil and gas yet:
Barry Kostiner traded electricity and natural gas for eight years on Wall Street. Last fall, he reinvented himself — as a Texas oilman.
With no assets beyond plans to buy oil and gas fields, he set up shop as Platinum Energy Resources Inc. He had never worked in the oil industry or managed a company. Yet he carried out an initial public offering of stock and within two months persuaded several New York hedge funds to buy a large chunk of the shares, raising $115 million in all. . .
Energy-related endeavors of all kinds are a magnet for cash these days, thanks to the gravity-defying rise of oil prices and the recent boom in investment pools that cater to deep-pocketed institutions and the wealthy. Some energy investments, to be sure, are relatively low-risk and involve industry veterans. But private-equity firms, hedge funds and other professional speculators are also pouring billions into unconventional loans, management teams with limited track records and IPOs on lightly regulated stock markets.[. . .]
The fevered pitch reminds some of the Silicon Valley boom a few years back. “Energy’s about as hot right now as tech was in 2000,” says Ben Dell, an energy analyst with Sanford C. Bernstein & Co. [. . .]
One popular trend: management teams with virtually no assets other than big and costly ideas.[. . .]
Exotic new loan markets are another energy investment trend. Some energy companies that don’t yet have positive cash flow are borrowing from hedge funds or others at double-digit interest rates. The loans are sometimes called “second-lien” loans because in the event of trouble the hedge funds have to line up behind more-traditional lenders that have first rights to any collateral.
I began practicing business law during the late 1970’s-early 80’s boom in the oil and gas business, and cut my teeth in insolvency and reorganization law while unraveling and putting oil and gas deals back together again during the prolonged bust that followed that boom. Although this boom is different in material respects from that earlier run-up in the oil and gas business, that prior experience compels me to listen more to the following advice of former Exxon CEO Lee Raymond from an earlier WSJ interview than the sharpies quoted in the latest WSJ article:
Q: What do you think of [the current boom in the oil and gas business]?
A: I can never remember an industry consolidating at high prices. But I can remember an industry consolidating at low prices.
Q: Some people think prices will keep going up.?
A: Maybe. I’ll bet they’ll be lower at some point.
Let me go back to the last time we went through something like this, which started when the shah of Iran was around. [The shah went into exile in 1979.]
A lot of people don’t remember, but we went through a period of relatively high oil prices, which by today’s standard would be very high oil prices, that lasted for almost five years. It was at that time that we got into our first stock-buyback program.
As today, we had very strong cash flows. There were a lot of people that were talking about buying other companies. Although we didn’t say it directly at that time, we had a view that the price structure could not last — that it was fundamentally unstable, and that it was just a matter of time. And so we concluded that the cheapest oil we could buy was our own. But because of the stock-buyback program, we were roundly criticized on Wall Street. There were no opportunities. We were liquidating the company. All that kind of stuff.
But the facts are that, behind the scenes — we were not going to say it publicly, obviously — we just felt that the price structure couldn’t persist. And, come along December of 1985, it just collapsed. Went from $28 to $10 in two weeks. So when people ask today, what are you going to do with the money, my answer is: We’re not going to do anything stupid. We’re going to manage it like we’ve managed everything else.
Q: What is Exxon planning to do with all its cash?
A: First of all, we’ll sort through it. And secondly, why in the world would we ever tell anybody in advance what we were going to do with it anyway?