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 re-emerge 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 de-lever. 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 that 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 re-emerge 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 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 Papa is in is precisely the same. Silver Run has amassed $450 million (an oversubscription of $50 million) 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 $1 billion SPAC in early 2015 to buy shale assets for American Energy Partners -- but that attempt ended in failure as McClendon only managed to raise $11 million of the planned $1 billion in units. That Papa has, in contrast, oversubscribed so easily for his nearly half-billion-dollar 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, nor is there zero competition for the best acreage 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 some of their better stuff. But I believe 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. They're trading for a 3%-4% 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.