Having just returned from New Orleans, I tried to leave Without A Trace, also the title of Soul Asylum's 1992 hit about the Crescent City. That song's lyrics reference joining the "Grave Dancers' Union" (also the name of the album containing that track,) an appropriate action given the plethora of spooky cemeteries in the Big Easy.
That phrase also has parallels to investing, as there are still a few of us out here that attempt to value assets and purchase only when the markets have mispriced them. It can be a lonely pursuit in these go-go markets but it is nice to have company.
So, I was very pleased to watch an interview with Sam Zell on Bloomberg TV yesterday. Zell earned the nickname "Grave Dancer" by buying up real estate in various bust periods in the past. He doesn't speak loudly nor say much, so when he talks, I listen.
I could not have been happier to listen to Zell speak about his current interest in the energy sector. The Grave Dancer is buying oil production assets, so that tells me that we may finally have reached a bottom in the valuation of energy companies. Zell described a market in which energy companies, which are typically starved for cash due to the capital intensive nature of hydrocarbon extraction, are seeking alternative sources of financing as credit markets dry up.
Thursday I also saw a chart of this year's performance of the triple-C rated debt market in the U.S. These are the junkiest of junk credits, and generally have performed well in this year's broad-based credit market rally. In fact nine of the CCC sub-sectors had produced positive returns this year, with only one sector showing lower pricing than in 2018. Can you guess which one? Of course it is the energy sector.
So, energy companies are starved for capital and that's when deep-value investors like Zell pounce.
Zell recently did a $300 million "DrillCo" deal with California Resources (CRC) , a public company that was created via a spinoff by Occidental Petroleum (OXY) in 2016. Such deal structures were quite common in the oil boom years of 2013 and 2014, but I hadn't heard of one -- essentially Zell puts up the capital for CRC to drill wells and will receive payments until a predetermined rate of return is achieved at which point the revenues from production revert to CRC - in the last two years.
So, that's validation for me. In the week ending November 8, 2018, there were 886 oil rigs running in the U.S. Last week there were 684. That will equal less supply as we head into 2020, with domestic demand showing no signs of slowing. Also, despite what you might read in the newspaper, China's demand for imported oil (10.04 mmbd imported in October 2019 vs. 9.05 mmbpd in October 2018) continues its unabated rise, and that should lead to higher crude prices in the next 12 months.
I would note that Zell was not at all bullish on natural gas, especially from domestic producers in the Northeast's Marcellus/Utica shale region. So he's not with me on the trade I mentioned in my Real Money columns last week, a bullish one on Chesapeake Energy (CHK) . CHK plunged this week as energy private equity firm NGP distributed is 318 million CHK shares to its investors.
A look at CHK's stock chart shows that many of those shares hit the market immediately. I am still in there fighting, of course, and my complex web of options plays around my core holding of CHK stock means that I am still, happily, showing a gain on my total Chesapeake position.
So, as Reuters reported Thursday that Comstock Resources (CRK) -- in which Dallas Cowboys owner Jerry Jones holds a 84% stake -- is in discussions to purchase CHK's Haynesville Shale assets for $1 billion, I was even more pleased.
I would probably have a better conversation with Sam Zell about deep-value investing than I would with Jerry Jones about the Cowboys' often dreadful offensive play-calling, but at the end of the day it doesn't matter. Running a small investment firm grants instant humility. I know there are much bigger players than I and my firm, Excelsior Capital Partners, and by aping those investors' moves, I can continue to generate above-market returns.
