Smart Money Moves Back into Energy, But Carefully

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), Jan. 6, 2009

A pair of deals by Oklahoma billionaire George B. Kaiser, widely considered one of the country's savviest energy investors, could be an early sign that after a massive selloff, the smart money is getting back into the oil industry.

But the cautious nature of the investments suggests that while a bottom may be near, the recovery won't be quick.

In one of two deals announced Monday, a private-equity firm controlled by Mr. Kaiser will buy assets from natural-gas producer Chesapeake Energy Corp. for $412 million in a transaction financed by Goldman Sachs Group Inc.

In the second transaction, Mr. Kaiser bought $50 million of shares in another gas producer, Sand-Ridge Energy Inc. -- a 5% stake -- from that Oklahoma City company's chairman and chief executive, Tom Ward. A charitable foundation established by Mr. Kaiser will have the option to buy another 6.67 million shares from Mr. Ward at the same price.

Shares of oil and gas companies have been battered in recent months as slumping energy prices have deflated revenues and the weak economy has raised fears that demand for oil will remain low for many months. At the same time, tight credit markets have forced some smaller companies to sell assets to raise cash at a time when buyers are scarce.

That is creating opportunities for investors with cash and a tolerance for risk. Steve Mitchell, managing director of Mr. Kaiser's private-equity firm, Argonaut Private Equity, said Mr. Kaiser believes many energy stocks are trading at prices about as low as they're going to get.

"The anchor's dragging along the bottom. . . . He feels there are some good buying opportunities," Mr. Mitchell said.

Mr. Kaiser's moves are closely watched by energy investors because of his nearly 40-year career in the industry. He built Kaiser-Francis Oil Co. into one of the nation's largest closely held oil and gas producers largely by buying up properties during market downturns.

"George is clearly smart money in this sector. . . . Seeing someone like George Kaiser involved would reinforce the notion that this is the time to be looking at opportunities," said Carl Tricoli, managing partner of Denham Capital, an energy-focused private-equity firm.

Mr. Kaiser isn't the only prominent investor putting money into oil and gas. Billionaire Kirk Kerkorian last month added nearly two million shares to his 40 million-share holdings in Denver-based energy producer Delta Petroleum Corp.

Other investors are targeting energy as a potential source of strong returns. In December, natural-gas producer and pipeline company El Paso Corp. became the first company since October to successfully sell high-yield bonds, and several other energy companies have followed suit.

But even wealthy investors are treading carefully. Mr. Kerkorian has been buying Delta Petroleum shares on the open market but hasn't renewed a tender offer to buy as much as 14 million shares, which Mr. Kerkorian canceled in November after Delta's share price fell sharply.

Mr. Kaiser's investments also are structured cautiously. He bought his SandRidge stock for $5.62 a share, near its lowest close of 2008, and he has the right to sell it back to Sand-Ridge's Mr. Ward in February for the same price.

In the Chesapeake deal, Mr. Kaiser bought eight years of natural-gas production from wells that already are operating, meaning he doesn't need to worry about the Oklahoma City company drilling dry holes. And Mr. Kaiser paid just $4.20 per thousand cubic feet of gas, 34% less than the price Chesapeake got when it did a similar deal in August.

"We wouldn't have done a deal like this 12 months ago. . . . We were not buyers of gas in April or May," Mr. Mitchell said.  

Copyright (c) 2008 Dow Jones & Company, Inc.


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