Wednesday, July 08, 2009

More Oil and Gas
The revelations on the Provident deal have me thinking. I am amazed that a half a billion dollar Ponzi scheme has gone unnoticed by the media, except for some truncated versions of the SEC press release. Bernie Madoff and R. Allen Stanford have hardened the media. In one of the versions I read, linked here, it states that Provident was paying old investors with new investors' money. Not good, and like I said yesterday, the drop in energy prices has exposed the weak operators. Like real estate, tech stocks or any other asset experiencing rising prices, all oil and gas promoters were geniuses when energy prices were increasing. Weak energy prices will continue to separate the good from the bad.

I've read a fair number of oil and gas syndication offering documents and the independent research reports that accompany the deals. There is so much self-dealing, so many affiliated transactions and so many places to inflate fees and expenses, it is hard to truly understand oil and gas deals. The lack of transparency in an oil and gas deal is startling. What is the norm in oil and gas - absurd mark-ups and self-dealing to name just two areas - would never be tolerated from a real estate sponsor. I am convinced that the analysts writing the independent research reports on these deals don't fully understand their intricacies, and in some cases even the workings of the oil and gas industry. I am not sure the attorneys putting the deals together fully understand the deals.

I recently read an analyst report on a royalty program (not Provident) and the report contained nothing on the sponsor's operating track record. The sponsor's previous programs' distributions have fallen off a cliff. Some of this drop can be attributed to the decline in energy prices, but not all. The deals buy existing royalty interests from third parties (and possibly affiliates) that are marked up (and the sponsor keeps all distributions until it assigns the royalty interests to the offering, which was not in the report either). The sponsor could not tell me how many wells have had production stopped due to low energy prices, or even how many had stopped production. There was no mention in the report on the acquisition criteria and pricing for the royalty interests, neither was there information on the age of the targeted acquisitions. Oil and gas wells in the Southwestern United States have steep initial (approximately twenty-four months) decline curves and then relatively stable production there after for many years (fifteen or more). A gas operator that acquired lease interests and drilled wells based on energy prices before they dropped last fall may shut wells and wait for prices to improve once past the initial decline curve, and a royalty interest owner has no say in this decision. I think it is important to know the economic interest and price threshold of the wells' operators. On blind pools, like the offering I am writing about, older programs must be reviewed. The analyst had no understanding of the deal and its dynamics.

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