3 Tips for Distressed Energy Investing in This Crazy Market
An article in Financial News today proposed a new reality for distressed investors:
“The difference this time around is that they will need a bigger dose of resilience and expertise to source profitable deals in a crowded, volatile environment,” the article says.
And few sectors are more primed for an increase in distress deals than energy. With oil prices recently dipping into sub-$30-per-barrel territory, opportunity could arrive quicker than anyone could have imagined when oil prices began to decline in late 2014.
Yet it’s still a guessing game, so I rounded up some recent perspective from experts with broad experience in the sector. Here’s what they had to say.
Not as Frothy as You Think
Pine Brook’s Claire Harvey recently told Privcap that public markets bailed out energy E&P companies in 2015.
That might delay a reckoning, but not avoid it.
“It hasn’t been as frothy as many expected,” she adds. “I wouldn’t say there are cheap assets out there right now, but the longer that [oil] prices stay below $50 per barrel, the greater the opportunity will be in late 2015 and 2016; companies’ hedges are rolling off, cash flows are decreasing based on limited drilling and completion activities, and debt holders are going to force companies to do something. That something will likely cause assets to hit the market.”
Offshore Means Less Distress
Arclight Capital’s Lucius Taylor says that in offshore deals, cycles are longer, and fluctuations in commodity prices are offset by the underwriting of projects that produce high returns.
“You have to take a longer, thematic view of the commodity. Most operators can’t afford to cut investment halfway through project cycles.” He continues, “As a result, we’re seeing investment opportunities that aren’t necessarily immediate.”
Avoid the “Bear Trap”
Cliffwater LLC’s Pete Keliuotis said in a recent video interview it still early to find distressed deals, with prices still coming down.
“A lot of people got caught up maybe in something of a bear trap when oil prices moved back up in the ’60s. Now, they’re back down again, so for people who were thinking that was going to the best time to start investing in distressed, they got caught a bit flatfooted.”
Here’s the full video:
http://privcap.wistia.com/medias/30xj1fcqrr?embedType=async&videoWidth=700
A recent perspective from experts with broad experience in the sector.
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