Buying something because it is cheap relative to all-time highs in no way implies it cannot go lower.
Of course the rewards for getting in at historic lows AND holding tight through the inevitable ups and downs, is usually enough to make the hardest man quake, can be EPIC.
A super human feat, BUT had one bought and held from 2000 to 2008 they would have achieved an 8,000% return;
The beauty of a boom cycle is the ability for a company to ‘acquire’ revenues and earnings through M&A.
Take a look at how two other Resources co.’s increased their liabilities from 2008 onwards to fuel M&A! (I have no economic interest in either of these).
When the punch bowl is removed … in this case a supply glut leading to lower Energy prices … it leads to the inevitable bust.
And when it comes to picking up the pieces and buying distressed assets away from public equities, here are 3 rules we abide by:
Public markets are emotional beasts. Oscillating at the whims of human emotions. Thus, stock prices adjust rapidly and in many cases long before the enterprise’s economics change.
So anyone looking for distressed energy purchases should know that it would take at least 2 years for hedges to roll off, offtake agreements to expire and debt maturity walls to be breached.
Thus the dislocation in energy that began mid-2014 may finally be mature enough for debt gorged E&P companies to start getting REAL … which is why we focused our scouting talents on that great country we call Texas to see what bargains may be found.
But the team has to have the pedigree, the know-how, the access and the awareness of where the bodies are buried so to speak.
The magic occurs when excellent stewards of capital meet world class operators which happen more readily when the music stops and the actors get reshuffled based on talent.
Both gentleman, with decades of experience as investors, structuring transactions in the upstream energy industry.
[yeah – ok that’s an Oil Pump not a Gas Well – but a great pic nonetheless along my travels in the Eagle Ford]
Bonsai Inc. was one such listed entity which owned as non-core (read as neglected), the non-contiguous rights to an 8,000 acre Gas field in the Eagle Ford basin in South Texas.
Originally, vertically drilled out by BP in the 1980s these Giant Producing fields had been flipped a few times and were on their last Cigar puffs so to speak.
Producing approximately 9.0 mmcfe/d, the fields contained 111 wellbores with greater than 12 year remaining reserves.
65 Wells were non-operating and had been shut in due to no basic maintenance. Bonsai’s MO was if it’s producing – good leave it alone, if it’s a problem shut it down, no CAPEX.
Suffice to say this section is proprietary so we won’t go into great detail … plus it may be boring.
But the point remains, buying a distressed asset ‘right’ provides the opportunity to make multiples of your capital within 1+ years.
Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on LinkedIn, Twitter or via Atlanta Capital Group Investment Management.
Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct your own due diligence.
Greg Silberman is the Chief Investment Officer of Atlanta Capital Group Investment Management [ACGIM]. Atlanta Capital Group Investment Management specializes in creating custom private market solutions for RIA/Family Office clients.
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