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Why the Distressed Energy Cycle is Still Ahead of Us

by trusted insight posted 3years ago 15810 views
Post by: Greg Silberman, the Chief Investment Officer of Atlanta Capital Group. Atlanta Capital Group specializes in creating custom private market solutions for RIA/Family Office clients and is an active acquirer of independent wealth management practices.

We needed a 4-wheel drive.
We didn’t have one.
I visited Mozambique once
It was 1996.
The 15 year BLOODY civil war has ended and the future looked bright for the resource rich, war torn country.
Once called the Paris of East Africa
Lourenço Marques or “LM” encapsulated the romantic idea of colonial life - torpid, sensual, a breeding ground for white mischief.
It was a college road-trip.
My girlfriend and I and two other couples set off driving south-east from Johannesburg to KwaZulu Natal - Zululand!
http://hluhluwegamereserve.com/wp-content/uploads/2014/05/backgrpicture11.jpg?8bfc84

We spent the night with friends on an Almond plantation.
We woke up early the next morning and took turns riding on our friend’s micro light.
We flew over the blue Indian Ocean.
I never saw it but my friend said they often fly over Whale Sharks swimming close to the surface.
We pushed NORTH towards the border
The tar road gave way to gravel and then to sand
We needed a 4-wheel drive.
We didn’t have one
But we were young, idealistic and stupid so we pushed on.
We only went as far as Ponto do Oura (Point of Gold) a few kilometers inside Mozambique.
Back in the day Ponto do Oura was a beach resort for the wealthy to escape LM (now called Maputo) for a few days retreat.
Miles and miles of untouched, deserted Golden Beeches.
The fishing was amazing!
And the food was outrageous!
Side note: For a sample of spicy Portuguese/Mozambique fare in the DC area check out Nandos.
It was a great trip!
The only reminiscence of war was the numerous DO NOT WALK signs as landmines were still a big problem and the numerous local people missing limbs (again landmines).
We drove home the same way – going around the Swazi Kingdom leaving that expedition for another time.


Figure 1 - Map of S.Africa - Johannesburg, Kwa-Zulu Natal, Mozambique and Swaziland


Great Tale Greg but why is it relevant?
Recent events have caused me to recall these memories.
Firstly: I’ve been conducting a personal, fact-finding mission on the Sub-Saharan (ex-South Africa) Private Real Estate space. Some elements I would like to see are:
  • Large Institutional sponsor;
  • Focus on A-grade retail, office and industrial real estate;
  • Anomaly: capturing the acute shortage of regional-size shopping malls in sub-Saharan Africa (1 mall : 10M people vs 1:100k in South Africa);
  • Positive Fundamentals: growing consumerism and rapid expansion of international retailers into Africa e.g. Walmart

Secondly: In 2010 Anardarko and Eni discovered the Mamba South Gas field in Moazmbique:
  • 150 trillion cubic feet of Natural Gas recoverable reserves.
  • This would make Mozambique one of the largest natural gas producers in the world.
  • Production was expected to start in 2018
  • I got to thinking, now that Gas prices had collapsed, what is the fate of this project and the people who are desperately relying on its prosperity?

I’m paid to be a sceptic
I see a lot of investment opportunities as I’m sure you do too.
Most are similar types of  investments - not a bad thing just not terribly exciting.
Recently I’ve been seeing a LOT of energy related investments … of course that’s no different from a year ago except that energy prices are now 40 – 50% lower.
I am weary of a formerly crowded space rebounding in a V fashion.  The sceptic in me thinks the week hands and the hot money still need to capitulate before a buying opportunity presents itself in the Energy patch.
To that end I got with my good friend Brian Shapiro at Simplfy LLC.
Brian is sitting on a treasure trove of private market data – tracking hundreds of individual private managers -  performance, holdings, terms, risk metrics, public filings etc. etc.
We came up with this infographic which I think tells the story of how we should be thinking about any upcoming Energy Investments.


Figure 2 - Source: Simplfy LLC.-Click to Enlarge Graphic

It seems like the real distressed energy cycle is still ahead of us.
Now is the time to be vetting managers and offerings in anticipation of capital drawdowns into the meat of the distressed cycle.
Happy Hunting!
Warm Regards
Greg



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.