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The Curse Of Foreign Investment?
Are recent investments in onshore oil and gas assets in the United States by foreign buyers the sign of a market peak in this sector? Or are these investors making savvy purchases that will deliver outstanding returns? (To know more about oil and gas, read Oil And Gas Industry Primer.)
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Energy Investments
There has been a torrential flood of foreign investment in onshore oil and gas assets in the United States over the last few years. In January 2012, Chesapeake Energy (NYSE:CHK), EnerVest (OTCBB:EOSOF.PK) and French oil company Total SA (NYSE:TOT) closed on a joint venture to develop properties in the Utica Shale in Ohio. Total paid $2.32 billion for a 25% share of 619,000 net acres exposed to this promising oil play.
Marubeni (OTCBB:MARUY) just announced a $1.3 billion investment with Hunt Oil Co., a private oil and gas company. Marubeni, which is a large Japanese grain trading company, will acquire a 35% share of Hunt Oil's position in the Eagle Ford Shale.
Other non-U.S. buyers have purchased entire companies rather than engage in a partnership. In 2011, BHP Billiton (NYSE:BHP) acquired Petrohawk Energy for $15.1 billion and gained access to the Eagle Ford Shale in Texas and other onshore areas. Later in the year, Statoil (NYSE:STO) spent $4.4 billion to buy Brigham Exploration Company, one of the most active operators in the Bakken play. (For additional reading, check out A Guide To Investing In Oil Markets.)
Bad Timing?
The conventional wisdom held by some investors is that foreign buyers of United States assets have lousy timing, and inevitably make acquisitions when the market is at a peak. The evidence that proves this theory are the purchases of high-profile commercial real estate properties made in the late 1980s by Japanese companies.
In 1989, the Mitsubishi Estate Company of Tokyo bought a 51% stake in the Rockefeller Group, an entity that owned part of Rockefeller Center in New York City. The company later increased its ownership share of this iconic property. Other purchases of high-profile real estate properties at the time included the Pebble Beach golf course, and raised jingoist fears that America was being bought by foreigners.
The United States economy soon entered a recession and commercial real estate assets were caught up in a vicious down cycle that took years to work through. In 1995, the Mitsubishi Estate Company walked away from its stake in the Rockefeller Group, after investments totaling close to $2 billion.
The Bottom Line
Although anecdotal examples of poorly timed purchases by foreign companies in other asset classes might pass as evidence in some quarters, investors should not form broad generalizations from these instances. Perhaps a better use of resources might be to examine the economic assumptions that underlie recent acquisitions in the energy sector, including well productivity, future commodity prices and development costs, and determine whether these are realistic or feasible. (Find out how to invest and protect your investments in this slippery sector. For more, see What Determines Oil Prices?)
Another thing to consider is that the boom in domestic natural gas drilling at the end of the last decade had a profound impact on supply, and one should judge whether the current oil directed drilling frenzy will lead to the same abyss in which the natural gas market finds itself.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
Energy Investments
There has been a torrential flood of foreign investment in onshore oil and gas assets in the United States over the last few years. In January 2012, Chesapeake Energy (NYSE:CHK), EnerVest (OTCBB:EOSOF.PK) and French oil company Total SA (NYSE:TOT) closed on a joint venture to develop properties in the Utica Shale in Ohio. Total paid $2.32 billion for a 25% share of 619,000 net acres exposed to this promising oil play.
Marubeni (OTCBB:MARUY) just announced a $1.3 billion investment with Hunt Oil Co., a private oil and gas company. Marubeni, which is a large Japanese grain trading company, will acquire a 35% share of Hunt Oil's position in the Eagle Ford Shale.
Other non-U.S. buyers have purchased entire companies rather than engage in a partnership. In 2011, BHP Billiton (NYSE:BHP) acquired Petrohawk Energy for $15.1 billion and gained access to the Eagle Ford Shale in Texas and other onshore areas. Later in the year, Statoil (NYSE:STO) spent $4.4 billion to buy Brigham Exploration Company, one of the most active operators in the Bakken play. (For additional reading, check out A Guide To Investing In Oil Markets.)
The conventional wisdom held by some investors is that foreign buyers of United States assets have lousy timing, and inevitably make acquisitions when the market is at a peak. The evidence that proves this theory are the purchases of high-profile commercial real estate properties made in the late 1980s by Japanese companies.
In 1989, the Mitsubishi Estate Company of Tokyo bought a 51% stake in the Rockefeller Group, an entity that owned part of Rockefeller Center in New York City. The company later increased its ownership share of this iconic property. Other purchases of high-profile real estate properties at the time included the Pebble Beach golf course, and raised jingoist fears that America was being bought by foreigners.
The United States economy soon entered a recession and commercial real estate assets were caught up in a vicious down cycle that took years to work through. In 1995, the Mitsubishi Estate Company walked away from its stake in the Rockefeller Group, after investments totaling close to $2 billion.
The Bottom Line
Although anecdotal examples of poorly timed purchases by foreign companies in other asset classes might pass as evidence in some quarters, investors should not form broad generalizations from these instances. Perhaps a better use of resources might be to examine the economic assumptions that underlie recent acquisitions in the energy sector, including well productivity, future commodity prices and development costs, and determine whether these are realistic or feasible. (Find out how to invest and protect your investments in this slippery sector. For more, see What Determines Oil Prices?)
Another thing to consider is that the boom in domestic natural gas drilling at the end of the last decade had a profound impact on supply, and one should judge whether the current oil directed drilling frenzy will lead to the same abyss in which the natural gas market finds itself.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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