When the Tide Goes Out

Written by Latha Ramchand on February 26, 2016

Only when the tide goes out do you discover who’s been swimming naked, or so Warren Buffet has been known to say.

The tide has been going down for the energy industry, and Houston sees and hears it loud and clear. Layoffs, reductions in capital expenditures by 50% relative to 2014, and by some estimate, over 50,000 job losses still to come. Over 40% of investment grade bonds of oil and gas firms are currently trading at junk levels. Big banks are expecting losses from the loans in their portfolio made to energy companies.

Those that are prepared to manage through times when the tide runs out — those that have built resilient business models and agile learning systems — will survive and thrive.  Better yet, those that have shown they can be trusted will come out ahead of the crowd.

In this environment, enter Silver Run Acquisition Corp., which raised $450 million to buy energy assets.  Interestingly, it was more than what the company expected to raise. They sold 45 million units at $10 per unit.  Each unit represents one share and a third of a warrant to buy shares at $11.50 in a year.  Additionally, it is what they call a “blank check” IPO.  The company does not have any sales or earnings yet, and plans to use the proceeds to invest in assets in the oil and gas sector. Interesting again, the IPO market this year has been depressed with only 5 IPOs since the beginning of the year compared to over 25 at the same time last year, and only a fifth of the proceeds raised during the same time frame last year.  This issue was the largest IPO so far this year.  Mark Papa, former CEO of EOG Resources and a Bauer MBA alumnus, is the prominent player in this deal.

Under Papa, and starting in 2006, EOG began to drill for oil.  This was unusual given that EOG’s core business had been in natural gas.  Furthermore, the drilling was to be in North Dakota and not in the usual areas like Canada or the Gulf of Mexico. The strategy paid off, leading EOG to become the largest oil producer in North Dakota.  A sound land acquisition strategy, along with technical expertise driven by scientists at EOG who identified the Bakken in North Dakota as the area that had the most potential for oil, helped the company.  Papa saw the decline in the price of natural gas coming before others did and moved to oil.  Most important of all, perhaps, was Papa’s strong belief in the Bakken and in EOG’s ability to extract oil, when other companies were backing off from there.  This allowed the company to buy acreage at bargain prices.  In addition, a conservative balance sheet helped the company emerge stronger and ahead of others in the recent downturn.

Smarts, and resilience, seem to be the Mark Papa brand.  Building trust is not easy, but those that can do it have a place at the front row during good times, but more so during bad times.

Sometimes we need the tide to run out to also discover who’s been building muscle.

At Bauer College, our goal is to build resilience and develop “smart” leaders — trustworthy leaders with good judgment who can keep their teams afloat even in a down cycle. And we’re doing this, one successful student at a time.

Posted Under: Business perspectives, Economy

1 reply to “When the Tide Goes Out

  1. Nnenna Umelloh

    I am very impressed with Papa’s intuition. How would you recommend developing a similar level of intuition? Is this something we have to learn by experience or can we somehow prepare beforehand?

    Reply

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