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The Chilling Thing Blackstone Said about the Oil Bust
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
Regardless of how troubled oil and gas companies are, “if the assets are good, someone will own them,” explained David Foley, senior managing director of Blackstone Energy Partners.
He expected companies to buckle under the load of junk debt and kick off a long series of bankruptcies and assets sales at rock-bottom prices. The question was when.
That was in February. Private equity firms – the “smart money” – have been out in force for months, raising tens of billions of dollars, with the promise to their investors that they would pick up assets of all kinds on the cheap. They’ve been circling like vultures, waiting to swoop down and pick the best morsels off the carcasses soon to be strewn about the oil patch.
“The timing of having that capital available now really couldn’t be better,” Blackstone CEO Steve Schwarzman said at the time. He expected that it would take one-and-a-half years before oil and gas companies would be completely drained of cash and would get into serious trouble. But some of the service companies could run out of money and topple “very, very quickly,” he said. Over the next couple of years, there would be “all kinds of shakeouts.”
PE firms expected valuations to plunge much further as assets would hit the auction block. And so Blackstone president Tony James said that his people were “scrambling” to invest over $10 billion. They were all singing from the same page.
And PE firms continued raising money for their energy funds. A week ago, EnCap Investments in Houston closed its Energy Capital Fund X after having raised $6.5 billion. It had been “significantly oversubscribed,” the firm said; investors are clamoring for this sort of bottom-picking action by the smart money.
Blackstone, Carlyle Group, Apollo, and KKR together have raised about $30 billion for energy investments, according to Bloomberg. Walburg Pincus, Riverstone, and many others – they all have been raising billions of dollars each. The piles in dry powder grow by the day.
This is the “smart money.” The oil bust had wiped tens of billions of dollars from their energy portfolios, including KKR’s disastrous investment in Samson Resources. Someday, they’re going to get this right. That’s the idea.
Then something unexpected happened. Other investors were despairing with negative yields in Europe and ludicrously low yields in the US, and they saw stock markets at precarious heights, and nothing looked appetizing. And maybe they wondered, “What the Fed is going on?” as Ryan Litfin wrote in Money from Heaven, Path to Hell.
But these investors saw one sector where risk had – very painfully – reentered the price calculus: energy. So they held their nose and began scooping up beaten-down energy stocks and junk bonds, and prices perked up. Seeing this, companies began to issue new junk bonds and even new equity, thus funding their permanently cash-flow negative operations for a while longer. Investors gobbled it all up. The whole sector began to levitate.
“These stocks are pricing oil for $75 to $80 a barrel – something I believe the market won’t see at least until the 2nd quarter of next year at the earliest,” wrote Dan Dicker, an oil-trader veteran, on Friday in Oil & Energy Insider (behind paywall): And he added:
Ok, I know what is fueling a lot of this: sector rotation. Money managers are sitting at their desks looking at huge multiples in major sectors of tech and healthcare, and they’re thinking, “Well, I know one sector that has massively underperformed in 2014 and is due for a correction.” And that sector is energy. But now Conoco Philips is at close to $70 [a share], which represents almost no downside at all from its stock price in September last year when oil was trading at $90 a barrel. Sure, the majors have a bit more resilience because of their downstream assets, but really – pricing for $90 crude? No thanks.
With new money pouring in and bidding up the prices of all kinds of assets, even energy companies with their backs against the wall have begun to balk at dumping assets at fire sales.
Which leaves PE firms in a peculiar situation: assets are suddenly too expensive. And the good folks at Blackstone are no longer “scrambling” – as Tony James had put it a few months ago – to buy them.
“We thought there would be a lot to do,” Mr. James explained on Thursday. “That really hasn’t developed. We haven’t put as much new money out as we hoped or expected.”
Oil producers have been able to “raise a lot of debt and, in some cases, equity publicly at values that we wouldn’t touch,” he said. These companies ended up not having to dump their assets at fire-sale prices, and didn’t need the costly rescue money PE firms were eager to offer. “Public markets took away a lot of opportunity,” he said.
“There’s still a lot of optimism oil prices are going to bounce back, and sellers are sort of biding their time in the hopes that they don’t have to face the music,” said James. So, Blackstone has invested more in conventional and renewable power projects, he said, instead of chasing after once again overpriced and oil and gas investments.
And that’s a chilling warning for the bottom pickers in the energy sector: if PE money, which has driven the sector ever higher during the boom, fails to jump in with both feet, the rally in asset prices may not be sustainable and may have run its course.
That is not to say that yield-desperate investors won’t get even more desperate, given the punishment the ECB has in store for them, with yields in Europe dropping further and further into the negative. Read… Strange Things Are Happening in European Bond Markets
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Schwarzman, sounds like a common tribal vulture.
Retail LOVES energy almost as much as they love bottom-picking (catching falling knives)...this is a match made in heaven.
Spent last ~12 years trading converts (retail and institutional). I bet 80+% of retail trading in the asset class was in the energy space.
These yield hogs are in for a rude awakening. Same for all the USO and single-name energy equity buyers. There are a ton of walking dead in the US and Canadian oil patch. Tick tock, tick tock...
Buy the sectors that rely on cheap oil. As long as markets are willing to pay you to take their oil, take it. The transports have gotten beaten down. If oil prices will stay low they should recover some. Airlines should hold up. I'm not saying these are smart investments, but perhaps lesser fool?
Some how cheap gasoline is helping the sector...not sure how, but lately the answer to everything else has been "cheap gasoline" so I'm going with it here.
Issue Junk that you know is going to default so investors can pick up equipment at fire sale prices? So the bondholders take a huge haircut to get cheap equipment? Who signs up for this fucking shit?
There is too much money out there with nowhere to go.
Veel inwoners van de Jemenitische hoofdstad zijn geraakt door het feit dat ze niet veel plezier hebben gehad van hun scudraketten.
http://nos.nl/artikel/2031415-doden-bij-zware-bombardementen-op-jemen.html
Donderdag heeft EU-President Donald Tusk de regeringsleiders en staatshoofden van de 28 EU-landen bijeengeroepen om te praten over problematiek met betrekking tot de invoering van het systeem 'Leven en Laten Leven'. Veel Tweede Kamerleden in Nederland hebben al in de gaten waarom netwerk @MinPres moest zwijgen over de 'wiskundige definitie van de absolute waarheid', omdat ...?!?!?
http://www.volkskrant.nl/dossier-4-uur-nieuwsbreak/lilianne-ploumen-we-m...
Het overleg tussen VVD en PvdA over de volgende fase van de 3e SpinozaGolf gaat vanavond vanaf 21.00 uur over hoe de Nederlandse bevolking moet worden ingelicht dat een wetenschappelijke doorbraak verantwoordelijk was dat het systeem 'Liegen om te Leven' moet worden ontmanteld. Op het departement van vicepremier Lodewijk Asscher (PvdA), zal worden besloten dat iedere fractie afzonderlijk zijn script met betrekking tot de voorgenomen ParadigmaCHANGE mag bespreken. Op die manier wil de PvdA en VVD allebei recht doen aan “alle betrokken partijen en betrokken belangen”.
http://www.nrc.nl/nieuws/2015/04/20/overleg-over-bed-bad-en-brood-vandaa...
Obama should just mail every man, woman, child and illegal $500 the way Bush did. It would boost consumer demand, and would help companies move some of their shitty inventory.
Yes, particularly when you consider that what we call "Money" is actually debt. The Big Boys have so many debt coupons they have to put them somewhere, as an ever-increasing share of the debt cannot ever be repaid. They have to earn more on secondary uses of the debt, to make up for the inevitable non-performance of the primary debt. It's like cornering the market on popsicles on a hot day; you better sell out fast or all you've got is sticky slush.
i am shocked that the fed allowed anyone on that list to lose money
Classic "mal-investment" right straight out of Austrian Economics, caused by near-infinite money created by the central bank to suppress interest rates. This has caused such a collapse in yields that people are desperate for ROI and have to look to capital investments instead of debt instruments to get it.
This will not end well. It will be far more likely result in loss of capital and a loss to the economy as a whole than any other outcome.
Correct. This schmuck thinks that somehow this is the fault of the energy producers?
Look folks, without calories that are available for consumption you are fucked and you won't actually do or make shit, including dinner.
The bankers and financiers need to repay us, tick tock motherfuckers.
We would already be changing our lifestyles out of necessity if it weren't for the financiers distorting the shit out of anything that can be financialized.
the party would have kept going if the Saudi's hadn't fucked it up for everyone.
Don't up remember it was peeps in our gov who went to the Saudis (as since u know how much our gov likes overseas cartels) and asked them to crash the oil market.
The oil market crashed our gov got scared the rest of what isnt much of an economy would fail... So we now stuff channels like its the way markets work and it's a good thing when our gov promised not to do that when they put the strategic oil reserves in..... And voila price of oil goes up.... since it is too numb for war to do so.... And it isn't the political time to use war as an excuse of want Hillary has done next to fill all gores pockets with money.
Sometimes, even though people at the party are still having some fun, you just want people to get the f*ck out of your house and go home.
This is the real root cause of the decline in oil prices.
Yea too and that other article here was good... But don't u remember the actual move in the gov to beg the Saudis to crank up that production. Like the financial idiots our gov be.... Where money grows on trees.
From the story it seems like the root cause for the drop in oil prices explained in the link in my above comment are still very much in play.
I liked your blog post. Too many times I read analysis that provides a pat answer, when the question "Why?" hasn't yet been answered. Raising small children is a good exercise in explaining things. If one is at all intelligent, a 4 year-old's incessant "Why?" imposes good intellectual discipline.
As usual, Timing is Everything.