An interesting article pointed out on the Oil Field Services thread
Leveraged Buyout Firm Bets on Oil Industry Comeback
By ALLEN R. MYERSON
ALLAS -- Hicks, Muse, Tate & Furst, venturing onto a field already littered with
investor casualties, announced a $250 million bet Monday that the oil business is ready
for a comeback.
Hicks, Muse, a leveraged buyout firm based here, agreed to pay $6 a share, in cash, for 62
percent of Coho Energy, an oil exploration and production company with properties mostly in
Mississippi and Oklahoma.
Although the deal itself is modest, Hicks, Muse says it plans to use Coho and its managers as a
platform to buy other companies that find, produce, process and transport oil. Hicks, Muse is
also looking over oilfield services companies and properties that companies want to unload.
Hicks, Muse, which usually borrows more than it invests, signaled its seriousness by making its
Coho purchase entirely from its own funds. For Coho, the deal amounts to a private offering of
additional shares, to Hicks, Muse, that will give it the wherewithal for a shopping spree in an
uncrowded market.
Thomas Hicks, Hicks, Muse chairman, said his firm planned to continue buying in the next six
to 18 months, then realize the gains over five or seven years as oil prices return from the
current $13-a-barrel range to the $18 he predicts.
"Today is the most attractive time we've seen to invest in oil and gas in the last 10 or 15
years," Hicks said in an interview.
As oil prices have collapsed, so have shares of Coho and most others in the industry. Coho,
having traded as high as $13 last fall, closed at $4.6875 on Friday. After news of the Hicks,
Muse investment, they rebounded to $5.4375 on Monday.
Analysts called the 28 percent premium over Friday's closing price that Hicks, Muse is paying
a sensible long-term proposition. Coho will have the money to become a consolidator among
medium-sized oil companies that might be pressed to raise cash by selling some or all of their
holdings, said C. Van Levy, an analyst at Jefferies & Co. "Provided these quality properties hit
the market, I think it's a good move," he said.
Among the investors who had already jumped in before the shares hit bottom are the Hicks,
Muse partners themselves. In May, they personally bought 2.2 million Coho shares at nearly
$7 a share. Jack Furst, one of those partners, said that Monday's investment might also be
early, but that the firm needed to establish a foundation for further acquisitions now.
For Hicks, Coho represents a cautious return to a sector he last invested in about two decades
ago, only to face the 1980s oil price crash. He learned that oil is too risky for companies to
bear heavy debt.
One of the energy industry's best-known outside investors this time around has been Richard
Rainwater of Fort Worth. Though not familiar with the Coho particulars, Rainwater praised the
Hicks, Muse strategy. He, too, is hunting for oil-industry acquisitions, having already bought
some shares and some oil futures. In a television interview a year ago, he said that he would
relish the prospect of $12 to $13 energy prices if it created opportunities. "Now what's
happened is people like Hicks, Muse who are pretty smart investors are taking advantage of
it," he said Monday.
Though Rainwater's energy companies have fallen in recent months, he still has substantial
long-term gains.
The Rainwater case for higher oil prices is based on growing global demand -- which has been
slowed by Asia's economic turmoil -- and limited resources. In the Hicks, Muse outlook, low
prices will force oil production cutbacks, especially in the United States, with rising demand
then likewise leading to higher prices.
Coho Energy, named after the salmon to reflect its Canadian roots, operates primarily in
Oklahoma, where it spent $250 million for Amoco's properties last year, and in Mississippi.
The declining value of other holdings has forced it to take large write-offs this year.
Coho itself has grown through acquisitions, then proving that the acquired properties had far
more oil than the sellers thought. Jeffrey Clarke, the company's chief executive, applauded
Hicks, Muse's timing. "Most people get into this industry at the top," he said. "These guys have
gotten in at the bottom, or as close to the bottom as you're ever going to see." |
