Energy Expenses Offset Rise In Energy Prices
Finally, my theory was verified in today’s Wall Street Journal. The theroy is that despite the current high price of oil and gas, the rise in acquisition and extraction costs make oil and gas deals a bad investment. The article details how the costs associated with the oil and gas industry have increased over the past few years. The arbitrage that allowed the oil and gas deals that were syndicated to investors in the late 1990s and early 2000s is gone. Elimination of the arbitrage will eliminate returns for many recent programs. This is bad news for oil and gas syndications and their investors.

The deals sold in the early 2000s benefited from high energy prices as they reached their peak production periods during the low cost high revenue period of the early 2000s. Their costs to acquire leases and drill for oil and gas were much lower than they are today. The returns for these were were much greater than the returns for deals done in the late 1980s and most of the 1990s. The money raised in today's deals, based on these returns, will be disappointed as recent deals will under perform. No sponsor talks about these increased costs. I was at a conference two weeks in Vegas and several energy sponsors spoke about all the opportunities in the energy sector, but rising costs were not mentioned.