Investors Go All In For Oil As Many See Market ‘Froth’ Elsewhere

Joseph Gladbach and his fellow bankers at Jefferies Group field three to five calls a day from investors eager to park their millions in energy stocks or bonds in the worst down cycle in 30 years.

They’re no dummies, Gladbach says. One of the biggest mysteries of the oil market crash is why the money hasn’t dried up. The collapse in crude prices was supposed to devastate companies and spook investors after wiping more than $200 billion off the balance sheets of U.S. and Canadian producers. It didn’t.

As industry luminaries gather at the IHS CeraWeek Energy Conference in Houston this week to ponder the implications of $50-a-barrel crude, the money keeps piling into oil, with hedge funds, buyout firms and asset managers rushing to claim a spot at the table.

“There is just so much money,” said Gladbach, who noted that more than $100 billion has been raised and set aside for energy investments by the likes of Blackstone Group LP and Carlyle Group LP.

Many of the investors are newcomers to the industry, drawn by the hope of turning a quick profit on market fluctuations. Some are seeking a haven from inflated assets in other industries, or positioning themselves to take over distressed companies, according to interviews with more than a dozen investors and bankers that have helped energy companies raise money this year.

High Interest

The structure of many debt offerings has put new investors near the front of the line should any of the companies fail. These new investors may be able to take over assets that could increase significantly in value in a recovery. And in the meantime, the loan pays off on higher-than-average interest.

Private equity and hedge fund groups with long experience in energy see the downturn as an ideal time to buy in cheap to strong assets and management teams.

“It’s a natural place for investors to evaluate, where there has been a clear correction in a world where other assets are fairly to fully priced,” said Eric Scheyer, head of the energy group at hedge fund Magnetar Capital, who oversees a team that manages more than $4 billion.