By Juliet Samuel and Laurence Fletcher
The plunging price of oil and its knock-on effect on energy
companies has prompted a surge of interest from bargain hunters and
those betting on a price rebound.
Oil rigs, shale companies and energy stocks have all suffered as
a result of the slump in the oil price from more than $100 a barrel
in September to below $50 earlier this year.
Some investors, ranging from distressed debt specialists through
traditional funds and private equity companies to hedge funds,
believe markets have overshot and that the price of oil will rise.
Short positions on oil, which aim to profit when the price falls,
are at their lowest level for over two years. Others believe they
can profit from the current low price as it continues to take its
toll on struggling companies.
An index of global oil and gas stocks compiled by FactSet has
lost 27% of its value in the last six months. The Merrill Lynch
U.S. high-yield bond index for energy companies lost 18% of its
value between September and December last year, recovering some of
that ground more recently.
Futures traders are switching their bets. Net noncommercial
short positions on crude contracts on the New York Mercantile
Exchange, or investors' bets that oil prices will fall, are at
their lowest level since December 2012.
Investors on both sides of the Atlantic, including Franklin
Templeton, Third Point LLC, and GAM Holding AG, are eyeing bets in
the energy sector. For hedge funds in particular, oil has provided
a rare chance to trade a sharp rise in volatility that is not
predominantly driven by central bank activity, which has tended to
drive investors all in one direction recently.
"When you talk to investors, there's one area that's absolutely
picked up and is at the forefront of everyone's mind," said Gideon
Margo, a director at Credit Suisse. "The number of requests for
energy funds is very high."
In a recent investor update, reviewed by The Wall Street
Journal, U.S.-based Third Point, which runs $16.8 billion in
assets, wrote: "After a lackluster year for credit in 2014, we are
starting to see value in energy-related names and potential
opportunities to reload our portfolio."
Switzerland-based GAM Holding AG, which manages 123 billion
Swiss francs ($127 billion) in assets, has begun investing in some
energy-related names since the selloff, according to chief
executive Alexander Friedman.
Manny Roman, chief executive of U.K. hedge fund Man Group, which
manages $72 billion in assets, said the U.S. high yield market is
"a great opportunity," due to distressed oil and gas companies
dragging down the value of all debt in the sector, even for some
companies with stronger balance sheets. Shale oil and gas are a
better bet than offshore oil, he added, because of the high cost of
undersea drilling.
Man Group is making a number of bets on the oil markets, looking
to buy distressed debt in some companies that have been downgraded
below investment grade and also making particular bets on stocks,
for instance that lower-cost, onshore producers with good access to
pipelines will do better than offshore or remote higher-cost
producers.
Several private-equity firms have also recently raised new
funds, providing cash with which to go shopping for assets during
the upheaval. Carlyle Group LP, which manages $194 billion in
assets, recently completed fundraising on a $2.5 billion fund to
invest in energy. Most of the fundraising happened before the oil
price dropped sharply in November but market conditions favor
investing now, according to Marcel van Poecke, the managing
director in charge of the new fund. "If you could choose the time
to invest, this would be the time you'd choose," he said.
Warburg Pincus LLC also finished raising a new $4 billion fund
just before last autumn's oil price fall.
Meanwhile, larger, traditional investors have been raising their
stakes in investments they had already made before the oil price
rout, whose value has fallen, as well as making new bets.
Dylan Ball, an executive vice president responsible for managing
about $1.2 billion at Franklin Templeton, which runs $894 billion
in total, said that his fund is predicting that the oil price will
rise back up to settle around $70 a barrel. "History has shown us
that normalization in oil prices is likely," he said.
In particular, he is buying oil field services groups like
Halliburton Co. and Baker Hughes Inc. He has also put more money
into Chesapeake Energy Corp., a large shale oil and gas producer,
as well as BP Group, Eni SpA and Total SA.
"We need to go for the stronger balance sheets," said Mr.
Ball.
Another public equity investor, Tom Nelson, who manages a
portfolio at Investec Asset Management, which runs $117 billion in
assets, has increased his fund's stakes in Anadarko Petroleum
Corp., Marathon Oil Corp. and Apache Corp. "We expect 2015 to be a
year of oil price recovery," he said, forecasting an average price
this year of $70 a barrel. So far, it has averaged GBP55.
His fund, which manages $1 billion, prefers to buy firms without
large debt burdens and with good production flows, he said, and is
underweight the oil majors, particularly Exxon Mobil Corp.
However, Nicolas Rousselet, head of hedge funds at
Switzerland-based investment firm Unigestion warned that too many
investors may be chasing some of the credit opportunities in the
oil market. "The high yield energy index has come back a lot,
there's too much money flowing too early, creating the risk of
running zombie companies," he said.
Write to Juliet Samuel at juliet.samuel@wsj.com and Laurence
Fletcher at laurence.fletcher@wsj.com
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