Wall Street Won’t Give up on Its Energy Bets

This piece originally appeared on Oilprice.com.

The oil and gas industry is suffering through its worst cycle in a generation, with most companies losing money at today’s prices. Debt is piling up and the losses are starting to become a concern for lenders. Shareholders are getting burned by plummeting share prices. Yet, major investors are still not ready to throw in the towel on oil and gas. Some are even doubling down, raising their bets in an effort to predict the bottom and profit from a rebound.

Warren Buffet’s Berkshire Hathaway stepped up its share purchases of Kinder Morgan (KMI) at the close of 2015, according to The Wall Street Journal. Kinder Morgan is one of the largest energy infrastructure companies in North America, and controls over 84,000 miles of pipelines. The company’s share price is off more than 60% from its peak in 2015, but Berkshire Hathaway saw that as a buying opportunity, purchasing $396 million worth of shares in the fourth quarter.

Carl Icahn also added a bit to his stakes in Cheniere Energy (LNG), which is set to begin shipping the first American LNG abroad this year. Cheniere’s share price is also down more than 60% since last year, amid an increasingly depressed and oversupplied LNG market. Icahn also has an 11% stake in Chesapeake Energy, the second largest natural gas driller in the United States, which is fighting off speculation of an imminent bankruptcy. Icahn lost $2.8 billion across seven different energy investments, but apparently has not backed off.

Equity markets have not entirely closed their doors to energy companies, despite the decline across the entire sector since large offerings were issued in 2015. Devon Energy issued another 69 million shares of common stock on February 17, raising nearly $1.3 billion in fresh equity. Texas driller Energen Inc. also issued new stock on the same day, raising another $334 million. Raging River Exploration, a junior oil and gas company in Saskatchewan, offered new equity as well.

“When capital markets are open you take it,” David Tameron, an analyst at Wells Fargo Securities, told the WSJ.

It is not at all clear that these bets will pay off. Picking the bottom of the investment cycle could be lucrative, but so far that has not been the case. Several companies that raised new equity or took on more debt last year have already filed for bankruptcy.

The WSJ reports that a record $18 billion in energy equity was issued in 2015, but those offerings have since lost about $7.2 billion in value. Or, viewed another way, only seven of the 58 energy offerings in 2015 have actually seen their share price move above their offering price.

That has resulted in very large string of losses for energy investors, although much of that is unrealized. According to Reuters, at least thirteen large activist investors—investors that take stakes in companies and seek to change decision-making—suffered at least $9.2 billion in losses last year.

Reuters found that Corvex Management, one activist investment fund, is stuck in a particularly bad position. It has $1 billion tied up in Williams Companies, a pipeline operator that is getting dragged down by the bankruptcy rumors surrounding Chesapeake Energy (CHK). Williams has contracts with the natural gas driller, which guarantee that the company gets paid for providing pipeline capacity. But if Chesapeake goes under and cannot fulfill its end of the bargain, Williams Companies would suffer from the fallout. Chesapeake had to issue a statement in early February denying any plans for a bankruptcy. Corvex Management is heavily exposed to Williams Company, which represents 14% of its entire portfolio.

The problem for some major hedge funds and activist investors is that their own shareholders have short time horizons, expecting quarterly paybacks. That means the funds may not have the ability to wait out the downturn.

Over the past 20 months or so since the downturn in oil prices began, Wall Street has largely remained bullish on energy, increasing positions in an effort to predict the bottom. It has not worked out well, with oil prices repeatedly plumbing new lows. But with little room left for oil on the downside, at least some energy investors are once again trying to load up on positions. Time will tell if those bets pay off.