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Inside Investor with Dan Dicker
From Oil & Energy insider Premium edition
March 25, 2016 credit

Who To Back When Oil Rebounds

In my book Shale Boom, Shale Bust, I isolated three places one could reasonably invest for the long term to bet on the (I believe) inevitable boom cycle in oil that will reemerge in 2017. The first, the E+P ‘survivors’ of the long cheap oil ‘winter’, I’ve talked about almost exclusively and at length. The second, infrastructure and services, hasn’t yet fully revalued for the huge production shifts and decreases to come – and therefore remains an investment for the future.

Finally, there are the ‘vultures’ – Those cash-rich companies and private equity groups that can pick off the assets of the distressed, debt-laden producers being forced to delever. In my book, I mentioned two likely candidates for this: Exxon-Mobil (XOM), a possible buyer of a big shale player and Blackstone (BX), one of several PE firms who have established big independent funds that will concentrate on distressed energy assets.

But what if a true oil ‘landsman’ - who had already built a great shale company - wanted to reemerge at this moment in the bust cycle to build another company from scratch? This is precisely what Mark Papa, the ex-CEO of EOG Resources (EOG), is intending to do with his SPAC: Silver Run Acquisitions (SRAQU). I believe it represents a great long-term opportunity.

Recently, I was deeply considering the idea of a managing a focused energy fund. What an incredible advantage, I thought, to be able to start a fund today at zero by buying stocks and bonds when they are at their most distressed point. I ultimately decided not to take on this challenge, but the position Mark Papa is in today is precisely the same. Silver Run has amassed $450m (an over subscription of $50m) to allow Papa to go wherever he wants and pick out his choice of depressed shale assets with which to build his new company.

His is hardly the first focused vehicle to attempt this. The tragically departed Aubrey McClendon floated a $1B SPAC in early 2015 to buy shale assets for American Energy Partners – but that attempt ended in failure as McClendon only managed to raise $11m of the planned $1B in units. That Mark Papa has, in contrast, oversubscribed so easily for his nearly half a billion fund says a lot for the confidence the market has in him – and my confidence in him as well.

It’s not as if the market is awash in superb shale assets selling at bargain basement prices right now, nor is there zero competition for the best acreage that is available. As I mentioned, Blackstone is one of more than half a dozen PE firms to have set up dedicated funds for energy assets, and all of them are hungrily waiting for distressed companies to start to offer out some of their better stuff. But I believe that Mark Papa has an advantage over many of them, not only because of his land knowledge – acquired while he was at EOG – but because of his personal relationship with the other ‘landsmen’ at the other companies.

They know Mark Papa – and trust him. They’ll likely be more inclined to talk to him first about whatever assets they are thinking of putting on the block.

For these reasons, I’ve begun to buy units of Silver Run. Right now, they’re trading for a 3-4 percent premium over their initial offer price, which I consider a reasonable premium to pay – for the expertise of a true shale ‘guru’ getting back into the game.