Real estate legend Sam Zell talked to Bloomberg on Nov. 14 about oil. Zell, who is nicknamed the "Grave Dancer" as he tends to make his move when a sector is starved for capital, equated the energy industry to the real estate industry in the early 1990s: empty buildings everywhere and no one had cash. Something similar is happening in the oil patch.
The gas space is not getting a lot of love from Zell. In the Marcellus, he believes everything is weak or weaker. Gas keeps getting closer to $2. Liquefied natural gas should have been the savior of gas, but the Russians got a second pipeline approved in Europe. That competes directly with U.S. gas exports. LNG is actually rather costly to transport overseas because it is refrigerated. Gas and gas assets are a lot less attractive to Zell compared to oil assets.
In the oil business, there are very unique lease features. People get leases and then they are obligated to drill. Zell is observing a lot of situations where people have a lot of leases but no money to drill.
Zell is buying in California, Colorado and Texas. He’s buying situations where companies are taking steps in anticipation of problems. He did not reveal the exact companies in this intervies, but recently entered a $300 million "DrillCo" deal with California Resources (CRC, Financial), a spinoff from Occidental Petroleum (OXY, Financial). Historically, deals like this were quite common. Under such contracts, an investor supplies the capital and returning the capital is prioritized for a few years, after which the cash flow goes back to the company.
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