Wilbur Ross’s Next Big Bet: Oil and Gas
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Written by: MATT JARZEMSKY
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His investment firm, WL Ross & Co., has purchased hundreds of millions of dollars in troubled energy debt in a bid to take control of distressed oil and gas companies if they are forced to hand over ownership to creditors, according to people familiar with the matter. The firm sat out the early innings of the downturn, when other investors pounced on perceived bargains that continued losing value when oil and gas prices fell further.
WL Ross is angling to swap debt for ownership in Breitburn Energy Partners LP, which filed for chapter 11 protection in May, and has been buying debt of Permian Resources LLC, a Texas oil producer founded by late wildcatter Aubrey McClendon that might ultimately have to hand at least part-ownership to creditors in a restructuring, said people familiar with the matter.
The slide in oil prices that began two years ago and a resulting spate of bankruptcies have dragged down the prices of energy-company debt, sometimes to just pennies on the dollar. Distressed-debt investors such as Mr. Ross buy the deeply discounted debt but retain bargaining rights on the full face value in a bankruptcy or debt restructuring.
The strategy can deliver big gains if the companies rebound after slashing their debt. Mr. Ross used it as he built up steel and coal conglomerates that he later sold for billions of dollars.
But it isn’t without risk: Mr. Ross’s attempt to revive the U.S. textile industry has stumbled amid stiff competition from China.
U.S. crude futures are trading below $50 a barrel, down from about $100 in mid-2014. As of Aug. 1, 90 oil and gas companies had filed for bankruptcy in the U.S. and Canada since the start of 2015, according to law firm Haynes & Boone LLP.
While Mr. Ross, 78 years old, plays a less active role in the firm’s investments these days, the former Rothschild & Co. banker’s investing philosophy continues to hold sway. His deputies think now is the time to put that strategy to work in the energy industry.
The plan is to take control of oil and gas companies through debt investments and acquire companies or individual assets in traditional buyouts, according to investor materials reviewed by The Wall Street Journal. WL Ross anticipates these deals eventually could give it a platform to roll up energy assets like it did with other out-of-favor industries.
Shaia Hosseinzadeh, head of energy investing at the firm, said at a March investor meeting at New York’s Pierre Hotel the firm sees “tremendous potential” in the sector in coming years, said people familiar with the presentation.
Distressed-debt investors largely abandoned the industry last fall after early bets soured. Crude fell to as low as $27.30 a barrel in February, and even the highest-ranking debt of energy producers—first in line for repayment in bankruptcy—fell to discounted levels.
As the slump heads into its third year, private-equity firms are starting to spend the tens of billions of dollars they raised for energy investments. WL Ross, Apollo Global Management LLC, Oaktree Capital Group LLC and other investors that specialize in distressed debt are targeting the troubled producers that might be forced to hand over control to creditors.
Mr. Ross is a veteran of this distress-for-control strategy.
He pieced together bankrupt steel producers Bethlehem Steel, Acme Steel, Weirton Steel and LTV Steel to form International Steel Group in 2002. He took the conglomerate public in 2003 and sold it to Indian billionaire Lakshmi Mittal two years later for $4.5 billion. The firm made more than 12.5 times its money, a person familiar with the matter said.
In 2004, he joined with A.T. Massey Coal Co. to buy assets from bankrupt Horizon Natural Resources Co., using a combination of cash and debt. In bankruptcy, creditors can sometimes count the face value of their claims toward a bid for a company’s assets.
Renamed International Coal Group, the company went on to buy up smaller coal producers and, in 2011, was sold to Arch Coal Inc. for $3.4 billion. The investment made WL Ross about 2.5 times its investment, a person familiar with the firm said.
Some of Mr. Ross’s investments haven’t gone as planned. The market value of Mr. Ross’s International Textile Group Inc., a roll-up of bankrupt textile companies, has fallen to a few million dollars. WL Ross is the largest shareholder of Dallas natural-gas producer Exco Resources Inc., whose shares have lost more than 70% of their value the past two years.
Despite the risks, 2016 could be one of the best years for energy private-equity investing in recent history, Mr. Hosseinzadeh said at the March investor meeting, according to attendees.
He cited a growing need among even well-positioned energy companies for cash at a time when few are able to sell bonds or stock to raise money, the people said.
In choppy markets, there is no one to “wave the white flag” giving an all-clear signal to buy, Mr. Hosseinzadeh said, according to the people.