“Once-in-a-lifetime opportunity” Sinks Hedge Funds

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Energy Markets Are Testing Some Big Investors.

By Charles Kennedy, Oilprice.com:

Plummeting oil prices have beaten down the share prices of energy companies across the board, with some going out of business while others are struggling to hang on.

With valuations of E&P companies a mere fraction of what they were from a year or two ago, big-time energy investors see a massive opening to scoop up investment positions on the cheap. The CEO of Avenue Capital Group, an investment firm focused on distressed securities, sees a “once-in-a-lifetime opportunity” in distressed energy companies.

Marc Lasry spoke at the Reuters Global Investment Outlook Summit in New York on November 17, where he discussed his firm’s big gamble on energy right now.

“Either you will get paid off, or you will become the new equity of these companies, but you need the luxury of time. You need to be able to wait two or three or four years,” he said. Lasry’s Avenue Capital Group manages $13.2 billion in capital, and he recently raised money for a specialty fund investing in energy. “The whole market is oversold, and we’re trying to take advantage,” he said.

But so far, the bet has not paid off. It seems every time that investors think the sector is turning a corner, the downturn persists and even deepens. Lasry admitted that his fund has lost money in the first few months since it was set up. But he sees the industry turning around in the coming years.

For other investors, the payoff is too risky and too far away. A hedge fund in Chicago recently announced that it was giving up, having been burned by energy investments. Achievement Asset Management, one of Chicago’s biggest hedge funds, has decided to return money to investors rather than continue to gamble on speculative energy debt.

The fund, setup by former UBS executive Joseph Scoby, had over $2 billion under management in mid-2014, but that dropped to around $900 million recently. The hedge fund had gobbled up distressed energy debt, but oil prices have failed to rebound, leaving the firm with an array of losing positions.

“Obviously, we did not make money in credit,” Scoby told The Wall Street Journal. He blamed increasingly illiquid market, which made it difficult to move in and out of positions. By Charles Kennedy, Oilprice.com

Oil is brutal. But for those prepared to survive this bust…. It’s Always Darkest Before The Dawn

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  8 comments for ““Once-in-a-lifetime opportunity” Sinks Hedge Funds

  1. Petunia
    Nov 19, 2015 at 10:59 am

    Not so buried in the new budget deal is the sale of 58M barrels of oil from the strategic oil reserve. It will be hard for any energy company to compete with this amount of oil dumped on the market. Even with a sale over time and at low prices this is a massive market manipulation tool to keep prices down.

  2. Paulo
    Nov 19, 2015 at 11:40 am

    I’ll be more respectful with this comment than I was about the ‘Darkest Before the Dawn” article. I apologize for my past rudeness on this blog.

    regarding statement:
    “But so far, the bet has not paid off. It seems every time that investors think the sector is turning a corner, the downturn persists and even deepens. Lasry admitted that his fund has lost money in the first few months since it was set up. But he sees the industry turning around in the coming years.”

    It reminds me of my best friend who has been convinced for many years that Gold is going to $5,000, Platinum looks good, and ‘I’m doubling down’.

    I suppose if anyone has ‘secret’ knowledge of an absolutely stunning energy company that is “just oh just so close to making it big, if only they had a few more $25,000 dollar retail investors”, that in turn said company defies the physical laws of depleting wells, red queens, and the fact that the easy/cheap oil was drilled and burned decades ago; it probably is a sure bet. (Cough cough). Oh yeah, and everyone knows the entire world economy is poised to break out into 4% sustained growth any day now and that ZIRP is still in effect simply because we need a little bit more inflation to season those incredible jobs reports and declining unemployment stats. Yeah, I think I’ll go and tell my wife I am taking our retirement savings and will be buying into the ground floor of an energy hedge fund.

    People are desperate for return. I understand this. But in this economy (and speaking as a 60 year old retiree) I have found only one sure fire way to increase my nest egg and future security. This is our investment secret: we cut back and live a more simple life, we watch our discretionary spending, and we never make impulse purchases. It’s a marathon, not a sprint…..and a run with lots of enjoyment to be had along the way. There were and are no shortcuts or easier routes.

  3. Paulo
    Nov 19, 2015 at 12:14 pm

    Hi Petunia,

    The 58 million barrels released oil is approx 2.75 days of US oil ussage, or 60% of what the world uses in one day. The numbers seem huge, but it will have a middling effect on price. Today there was a big headline about a Big New Discovery in the Gulf of Mexico. 100 MILLION BARRELS!! Wow, a whole 1.25 days worth of world oil consumption. One of these has to be found every other day to mitigate looming depletion, and they aren’t. Today’s low prices reflects a shitty economy with an extra 1% or so production in the ME, (until Shale finally goes bust). It’s coming. Don’t worry, if there is any economic activity left to burn it.

    • Petunia
      Nov 19, 2015 at 1:47 pm

      The story I heard was that they needed the income to fill a budget gap, but DC being what it is, you know it will be a give away to the well connected. One million barrels over the average bought or sold on any given day will move the market. I expect this will be used as a plunge protection team devise when the price gets too low. Or, it will be gifted to the more deserving.

  4. NY Geezer
    Nov 19, 2015 at 2:29 pm

    If the pharase “its always darkest before the dawn” were applied to US natural gas I would agree that the dawn has to be close. But oil is not very close to a dawning unless you have a horizon of a year or two.

    • night-train
      Nov 20, 2015 at 3:01 am

      The problem with natural gas is that there is a lot of it and it is relatively easy to find. When reserves deplete to a certain deliverability, the panic switch is thrown, prices rise and exploration commences. Then we find a lot of it and create what we used to call a “gas bubble”, prices fall and here we go again.

  5. Nick Kelly
    Nov 20, 2015 at 1:38 am

    As a super bear, I think oil is stuck around 40 or worse. However there is one thing that could change everything and it may be closer than we think: war in the Middle East. Here is just one scenario:

    With Iraq, once the most secular country in the ME, now turned into a huge vacuum thanks to the US. Saudi Arabia and Iran face each other across a turbulent no-mans land- Iraq, which is really no longer a state.
    Not all Westerners understand the depth of the enmity between the Sunni branch of Islam in Saudi Arabia and Shia Iran.
    It is far more intractable than the Catholic- Protestant divide that caused wars in Europe and Britain for centuries.

    One item from the present; one of the Wiki- leaks was a message from SA, asking the US to ‘cut off the head of the snake’ i.e, Iran

    One item from the past: Salah- Al- Din, or Saladin as we call him, was the
    Muslim who finally drove the Crusaders from the Holy Land ( the Middle East) in the 12 th century. But he regarded the struggle against the Crusaders as Job 2.
    The real struggle was with the Shia branch of Islam, which he regarded as demonic.
    Incidentally, Jesus has a place of respect within Islam: whenever the Arab chronicler of the 12 th century refers to him he adds: ‘praise be upon him’ or similar.

    • Nick Kelly
      Nov 20, 2015 at 1:52 am

      Sorry: ps to last: Both Israel and Saudi are very upset with the US over the Iran nuclear reactor deal. Both know they can live with each other but maybe not with a resurgent Iran.
      It is not inconceivable that the two could reach at least a non- aggression pact to deal with Iran. Both are armed to the teeth with modern weapons, especially aircraft. Iran’s stuff is old and probably not in good shape.
      Who knows what the outcome would be but it would be good if you are long oil.

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