Oil Prices Fluctuations – Investment Opportunity
The history is full of oil busts, all bringing about as many winners as there are losers. As the oil prices are slumping again, new opportunities are again stirring.
Resolute Energy form Colorados is being played by the Wall Street and is facing hundreds or even thousands of layoffs. Investors and banks stand to lose a fortune. However, new fortunes are also about to be started.
3 years ago, when Resolute bought land in West Texas, they were showered with money by a lot of lenders. Unfortunately, the company’s inexperience and lack of expertise has caused their credit line to be slashed and their stock to go down to just pennies.
The recent oil price drop caught the industry by surprise. Several highrollers in the business have been forced to step down and they can’t even sell bonds or raise enough equity. Loan terms are also expected to become tighter for oil companies.
The oil boom of the recent years created over 200,000 new jobs and resulted in oil companies taking out $1.2 trillion in loans. This kind of risk taking is now starting to pay off, and not in a good way.
Resolute recently bought some time by borrowing money from the Highbridge Capital Management hedge fund to pay off their existing debt. The fund knows that even if they do not get their money back, they can still profit from the high interest rates on the loan as well as from the assets that they will seize in case of bankruptcy. The interest rate of this loan is over 10% and there is also the backing of the oil fields that Resolute owns.
Other investors are also seeing the low oil prices as an opportunity. David M. Rubenstein from the Carlyle Group stated that investing in distressed energy businesses is the best opportunity right now. He also advised to take control in these companies, which will be raising billions once the crisis is over.
However, energy companies have not given up either and are trying hard to pay back the borrowed money on deadline. They also understand that the situation is only temporary. Oil prices may recover as fast as in a few months.
Wall Street may have made a mistake in predicting long-time distress in the energy industry and they may find it hard to find opportunities for investments once they have raised the money to do so.
Resolute is trying hard to get over the slump.