Oil Price Boom Brings Risky Energy Investments

by: Steven Towns

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

As Oil Prices Rise, Investors Pour Into Risky Energy Plays

  • Summary: High oil prices have raised the stakes for investing in energy-related endeavors. Billions of dollars are flowing from private-equity, hedge funds, and other professional speculators into unconventional loans, management teams with limited track records, and IPOs on lightly regulated stock markets such as the Pink Sheets and the London Stock Exchange's Alternative Investments Market. Look no further than the ease at which the Carlyle Group and its Riverstone Holdings affiliate raised $5.4 billion in just six weeks this spring to buy or start energy and power companies. As for public companies, look at the huge premiums paid recently in acquisitions: Anadarko Petroleum Corp. paid 40% more than the stock market value of rival Kerr-McGee Corp. and 49% more for Western Gas Resources Inc. "Energy's about as hot right now as tech was in 2000," says Sanford C. Bernstein & Co. analyst Ben Dell. But Jeffrey Currie, head of commodity research at Goldman Sachs in London, points out the risk taking is justified given the energy industry's long underinvestment in new capacity and that supplies have grown extremely light. In October 2004 there were 180 energy-focused hedge funds with assets of $25 billion. As of July 2006 there are 514 funds with assets of 67.4 billion, or an increase of nearly 170%.
  • Comment on related stocks/ETFs: Retail investors may want to pay heed to the SEC's advice mentioned in the article warning investors that "companies quoted in the Pink Sheets can be among the most risky investments" because it is an electronic stock-quote system that lacks any listing requirements.' However, there's no reason to completely shy away from investing in energy-related companies. Refer to SeekingAlpha's coverage of Energy Stocks. Recent articles include: Marc Gerstein's Oil Investing: Stocks vs. ETFs, Dan Carty's Oil Prices: Fundamentals Don't Apply, ETF Securities' Oil Price Driven By Supply Constraints, William Trent's Oil Prices Are All About Supply, Oliver Schwindler's Has Oil Peaked for the Year?, and Rob Black's Energy Stock Report.