As oil prices crater, hedge funds dive in Kate Kelly | @katekellycnbc 1 Hour Ago

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As oil prices round out a month of trading in the $40 range, hedge funds in both the U.S. and abroad are grabbing at investment opportunities in a distressed energy sector.

In recent months, a spate of money managers, including Lansdowne Partners, Avenue Capital, Carlson Capital and Blackstone’s GSO Capital unit, have been raising fresh capital to deploy in either long-short energy stock picking, credit investing, or both. At the same time, hedge-fund investors say that finding ways to home in on the distressed oil industry has been a top priority of late.

Energy “is one of our top themes,” said Charlie Krusen, whose $200 million fund of funds company, Krusen Capital Management, has fielded dozens of pitches from hedge funds and private equity shops focusing on the troubled sector in recent months.

It’s all part of a stampede for returns at a time when energy companies’ cash-intensive drilling and servicing operations have been strained in the current, cheap-crude environment.

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By snapping up shares of those companies in the stock market or their debt in the bond market, investors generally are making two types of bets: that the companies will recover ground when crude rises again, generating attractive returns for those who bought shares during the downturn, or, alternately, that the companies will go bankrupt if oil remains cheap—giving their bondholders a chance to swap existing bonds for equity and, effectively, take over troubled companies with compelling assets at fire-sale valuations.

“You haven’t had an industry this large become this distressed since the banking crisis,” said Jason Mudrick, manager of the $1.2 billion fund company Mudrick Capital, which is expanding its investing in energy at the moment. (Krusen’s company, for instance, plans to become an investor.)

The trick for investors is doing enough due diligence on corporate balance sheets and credit structures to know what they’re in for, while simultaneously finding the shale plays in the U.S. and beyond that are worth owning in the longer run.

Clint Carlson, whose $9 billion Carlson Capital in December announced the opening of three separate funds for trading energy stocks and bonds, believes that moving quickly will be critical.

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“What we’ve seen and we continue to see in the equity market is a lot of volatility in equity pricing, a lot of mispricing between companies that are doing the same things, [and] people not really understanding the impact of these capex cuts that are happening now,” Carlson said. Such tumult creates the opportunity for savvy stock pickers to generate returns, he added.

By contrast, Carlson said, the time to strike in the bond market is likely still two or three quarters away, at which point companies grappling with continued cheap crude prices would be in more severe distress.

The new energy investments are being funded by a mix of players. Some are traditional investors, like the fund of funds Krusen Capital or the Pennsylvania Public School Employees’ Retirement System, the pension fund that recently invested $200 million in Avenue’s Energy Opportunities Fund, according to public filings.

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But wealthy individuals and corporations are also involved, the hedge fund managers said.

And distressed investing, whether in energy or another sector, is not without risk.

“It’s going to be very volatile,” said Marc Lasry, Avenue’s CEO, in a recent CNBC interview.

Cheap Oil’s Global GDP Boost Offset by Europe, Brazil Woes

By Andrew Mayeda Jan 9, 2015 9:17 AM ET

Plunging oil prices are giving a bump to consumer and business spending around the world — just not enough to increase global growth forecasts. A darkening outlook in emerging markets including China, Russia andBrazil and geopolitical risks such asGreece’s possible exit from the euro are overshadowing the benefits from lower energy costs. The median estimate for 2015 world expansion from economists surveyed by Bloomberg News has been unchanged since October, when it fell to 3.5 percent from 3.6 percent. “People are cautious in a world where they see other risks skewed to the downside,” said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. “There’s still a question mark out there.”

Oil Prices

Economists’ reluctance to boost estimates underscores the fragility of global growth after four straight years of below-forecast expansion. JPMorgan is a case in point: It estimates that sustained $60-a-barrel crude oil prices will add 0.5 percent to global gross domestic product, yet its Jan. 2 world expansion forecast of 2.9 percent for 2015 is down from a 3.3 percent estimate in July. The U.S., with a 3.2 percent expansion estimate, is the only one among the world’s 10 biggest economies that JPMorgan now sees growing more quickly than expected in July. The bank projects emerging markets will grow 3.9 percent this year, down from its July forecast of 4.9 percent, reflecting markdowns for nations including Russia, Brazil and India.

Global Stocks

Oil’s 55 percent decline since June, the steepest rout since the global financial crisis, has benefited haven assets such as U.S. Treasuries while depressing the currencies of crude exporters such asRussia. The MSCI All-Country World Index of stocks has dropped about 3.6 percent in the same period. Data released today highlighted the relative strength of the U.S. in the global economy. U.S. employment rose more than forecast in December and the jobless rate declined to 5.6 percent, capping the best year for the labor market since 1999. Meanwhile, Germany’s industrial production unexpectedly fell in November from the previous month as energy output slumped, while China’s factory-gate prices in December extended a record stretch of year-over-year declines with the sharpest drop since 2012.

Not ‘Manna’

Lower oil prices may not be the “manna from heaven” some forecasters are expecting, HSBC Holdings Plc economists Stephen King and Karen Ward said in a report Thursday. High levels of debt in developed nations are likely to blunt the benefits of monetary easing, while declines in oil and other commodities are straining emerging countries, they said. “The global economy was losing momentum and disinflation was building, meaning pricing power was being lost, before anything started to happen in the oil market,” Ward, who’s based in London, said in a phone interview. Federal Reserve officials last month saw a mixed bag in oil prices and the state of the global economy, according to minutes of their December meeting, released this week in Washington. While some policy makers said the drop in oil would have a positive impact on overseas employment and output, many officials “regarded the international situation as an important source of downside risks,” especially if oil’s decline and weak growth abroad affect financial markets, the minutes said. IMF Estimate The International Monetary Fund estimates that declining oil prices will increase global output by a range of 0.3 percent to 0.7 percent this year by boosting household incomes and lowering input costs for businesses, according to a blog post last month by chief economist Olivier Blanchard and Rabah Arezki, the head of the fund’s commodities research. Yet Blanchard and Arezki gave a disclaimer in their blog, saying that the estimates of the impact from oil’s drop don’t “represent a forecast for the state of the world economy in 2015 and beyond.” The IMF will release an update to its World Economic Outlook later this month. The fund’s last forecast in October was for global expansion of 3.8 percent this year, down from a 4 percent estimate given in July. If low oil prices persist for years, that could herald a prolonged boom in the global economy, saidEric Green, head of U.S. economic research at TD Securities USA LLC in New York.

Avoiding Flareups

“Provided Europe doesn’t go back into recession or you don’t have some flareup of massive geopolitical risk or some financial issue, you are going to see global forecasts revised incrementally higher,” Green said in a phone interview.
Much will depend on whether the drop is driven by excess supply or softening global demand. The IMF estimates weak demand accounts for as little as 20 percent of oil’s decline. The more that’s a force, the less the world economy will benefit from lower crude prices, according to the Washington-based lender. “If the drop in oil prices were only a supply shock, you’d most likely see a relatively strong boost to global growth,” said Gregory Daco, lead U.S. economist at Oxford Economics USA in New York. “Some of the weakness in oil prices is being driven by relatively modest global demand, which is why you’re not seeing in your surveys many outright increases in global growth.”

To contact the reporter on this story: Andrew Mayeda in Ottawa at amayeda@bloomberg.net To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Scott Lanman, Brendan Murray