Investors Who See ‘Froth’ in Market Go All In for Oil

Joseph Gladbach and his fellow bankers at Jefferies Group field three to five calls a day from investors eager to park their millions in energy stocks or bonds in the worst down cycle in 30 years.

They’re no dummies, Gladbach says. One of the biggest mysteries of the oil market crash is why the money hasn’t dried up. The collapse in crude prices was supposed to devastate companies and spook investors after wiping more than $200 billion off the balance sheets of U.S. and Canadian producers. It didn’t.

As industry luminaries gather at the IHS CeraWeek Energy Conference in Houston this week to ponder the implications of $50-a-barrel crude, the money keeps piling into oil, with hedge funds, buyout firms and asset managers rushing to claim a spot at the table.

 “There is just so much money,” said Gladbach, who noted that more than $100 billion has been raised and set aside for energy investments by the likes of Blackstone Group LP and Carlyle Group LP.

Many of the investors are newcomers to the industry, drawn by the hope of turning a quick profit on market fluctuations. Some are seeking a haven from inflated assets in other industries, or positioning themselves to take over distressed companies, according to interviews with more than a dozen investors and bankers that have helped energy companies raise money this year.

High Interest

The structure of many debt offerings has put new investors near the front of the line should any of the companies fail. These new investors may be able to take over assets that could increase significantly in value in a recovery. And in the meantime, the loan pays off on higher-than-average interest.

Private equity and hedge fund groups with long experience in energy see the downturn as an ideal time to buy in cheap to strong assets and management teams.

“It’s a natural place for investors to evaluate, where there has been a clear correction in a world where other assets are fairly to fully priced,” said Eric Scheyer, head of the energy group at hedge fund Magnetar Capital, who oversees a team that manages more than $4 billion.

EIG Global Energy Partners spent $3.6 billion on energy companies in a six-week shopping spree earlier this year, including a $1 billion deal with Breitburn Energy Partners LP in March.

“It’s been a very active period,” said Bill Sonneborn, president and chief executive officer of the Washington-based private equity firm. “They all relate to similar themes, which is the energy sector under fire.”

Preferred Equity

EIG stepped in to help Breitburn repay a loan after its bank tightened credit limits. As part of the arrangement, EIG bought $650 million in bonds that pay 9.25 percent interest and $350 million of preferred equity that gave EIG an 18 percent voting stake in the oil producer and a seat on the board.

By comparison, the $500 million of senior unsecured notes of larger producer EOG Resources Inc. that mature in 2025 pay 3.15 percent.

EIG hedged its bet by demanding convertible preferred equity instead of Breitburn’s common stock. The preferred equity acts more like a bond in that it pays 8 percent interest, gives EIG a minority interest in the company and puts EIG ahead of common shareholders if the company goes bust and needs to be liquidated. It also gives EIG the option to convert it into common equity later if the stock price recovers.


Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.