The Money is in Oil, Ladies and Gentlemen

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BX
The Blackstone Group

Submitted by Emma Cox as part of our contributors program.

The Money is in Oil, Ladies and Gentlemen

It seems Wall Street has found the silver lining amidst everything that’s happening in the world economy right now. A lot of investors are currently looking at oil, since prices have been overwhelmingly low lately—from $100 a barrel down to just about $50 now. According to CNN, a considerable number of private equity firms are working to raise a substantial amount of capital in order to buy oil assets while they are still cheap.

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The collective wisdom of private equity firms

Is it now time to invest? Per Nasdaq energy analyst Tamar Essner, it looks like the answer is yes: “Private equity companies are uniquely positioned to capitalize on this. Not only do they have the deep pockets, but they can also take a long-term approach.”

As long as there is a supply glut of oil, and as long as global demand for it remains weak due to a slow growth in Asia and Europe, then prices will continue to be low. Perhaps it also doesn’t help that the OPEC has refused to intervene in the supply and pricing issues. Nevertheless, aggressive investors are looking at this situation as an opportunity.

The Blackstone Group (NYSE:BX), for one, recently launched an energy fund worth $4.5 billion. This gives the business the capability to acquire “distressed assets” —that is, oil companies who have found themselves in a dire state of affairs, with drilling projects that were subsequently closed down or cancelled, as well as incurred debts and inability to sustain operations.

Another player to watch out for is Apollo, a buyout group heavily invested in Athlon Energy Inc (NYSE:ATHL). Speaking at private equity conference in Berlin, Leon Black, founding partner at Apollo, said: “Clearly what you’re seeing in the energy market with the cataclysmic fall in oil prices—halved in such a short period—I think you will have haves and have nots . . . .We along with others in our industry are dusting off (opportunities).”

Forget blue chips and software stocks for a moment

It seems that for most buyout groups, energy stocks are steadily climbing to the top of their lists as its prices remain low.

In a compilation made by 1Derrick, a consultancy platform that gathers data and news about oil and gas, it shows that investment opportunities are plentiful in the United States and its surrounding areas. In fact, North American shale gas and oil fields amounting to as much as $112 billion are available for purchase, such as the one in Wyoming owned by Anadarko Petroleum Corporation (NYSE:APC), as well as Canada-operated oil sands by ConocoPhillips (NYSE:COP).

In an interview with Reuters, Joseph Landy, co-CEO of Warburg Pincus, talks about seizing the day: “I think when these knives are falling is when the opportunities actually present themselves. Everyone is running in the opposite direction . . . In the long-term the equilibrium point of oil prices is in the $70-85 range. The question is when is it going to get there, are we talking 9 months or 30 months? That is where the risk lies.”

Contemplating Russia’s future and its influence on the global market

Meanwhile, in the neighboring region of Russia, the struggle continues as its economy strives to reconcile falling oil prices with the falling ruble value, as well as the Ukraine crisis. The latter, especially, has had devastating effects to the country, and is perhaps an issue considered to be more unstable than oil.

There was almost good news when crude oil giant Rosneft (MCX:ROSN) was reported to have outperformed the Micex index earlier this year, however, the US dollar remained strong and steadfast, erasing any progress that Rosneft may have gained in the interim.

All eyes are now on other commodities and base metal companies that might help pull the Kremlin out of a rut and onwards to the road of recovery. Perhaps one of them could be Amur Minerals Corporation (OTC:AMMCF), whose Kun-Manie project in Amur Oblast is waiting to be explored and produced. The reserves are said to hold massive tonnes of nickel-sulphide mineralization. The company has already submitted all the needed requirements, and its license application is reported to be in the last stages of approval. Currently it is under the review of Prime Minister Dmitry Medvedev.

From bulls to bears

Most of the forecasts so far remain consistent: prices will continue to slide. At least that seems to be the trend for the first quarter of 2015. Earlier in January, Goldman Sachs further estimated oil prices to slip, from $80 per barrel to $30. Would it come to fruition? Only time would tell. “Capitulation is typically a sign that a bottom is near,” per an article from Nasdaq. “[T]he world has become quite bearish on the outlook for oil. And that creates an even bigger vulnerability for a reversal, given that the shorts in the market are likely not very convicted.”