What the Wise Man Does in the Beginning...

It is important to remember there are two reasons why these commodities have value, there is a demand, and it is hard to meet, it is hard to find oil, and it is hard to get it out of the ground.

The difficulty of finding oil has brought a lot of characters to our society, the broken prospector, the out of town rube duped by the hard scrabble locals, the bankrupt commodities investor.

Finding oil is a risky business and an erratic business. This is why people who searched for new oil (and often find dry holes) used to be called "wild catters". But in today's sophisticated markets we now call that business "E&P" and we don't call city slickers who show up in the oil patch rubes or prospectors, courtesy of Friday's Wall Street Journal, we can now call those fools "Barry Kostiner".

According to the Journal:

"Barry Kostiner traded electricity and natural gas for eight years on Wall Street. Last fall, he reinvented himself -- as a Texas oilman. With no assets beyond plans to buy oil and gas fields, he set up shop as Platinum Energy Resources Inc.

He had never worked in the oil industry or managed a company. Yet he carried out an initial public offering of stock and within two months persuaded several New York hedge funds to buy a large chunk of the shares, raising $115 million in all."

Expertise in finding oil is no longer important:

"Mr. Kostiner, 34 years old, acknowledges he is an unconventional oilman. But he says the oil business needs managers "who understand how to hedge, who understand how to raise capital, who know interest rates.""

Can anyone do this?

"Here in Houston, the boom's U.S. epicenter, veterans of major oil companies and their bankers are abandoning longtime employers for startups. Eric Mullins, a former investment banker at Goldman Sachs Group Inc. in Houston, recently persuaded some big endowments and pension funds to sponsor his career change -- to the tune of $450 million. Now Mr. Mullins, 44, hunts for oil and gas assets as co-head of Lime Rock Resources; the other co-head has an exploration background.

The fevered pitch reminds some of the Silicon Valley boom a few years back. "Energy's about as hot right now as tech was in 2000," says Ben Dell, an energy analyst with Sanford C. Bernstein & Co."

Don't worry, investment professionals won't touch junk like that, right?

"It took the elite private-equity firm Carlyle Group and its affiliate, Riverstone Holdings, just six weeks to raise $4.5 billion this spring for two funds to buy or start energy and power companies. Carlyle-Riverstone spent 2½ years raising $1.1 billion for its last energy fund, which closed in 2004."

But oil execs remember the boom and bust cycle, right?

"Public companies are fueling the frenzy by paying huge premiums to absorb competitors. Anadarko Petroleum Corp. recently agreed to pay $21.1 billion in cash for rivals Kerr-McGee Corp. and Western Gas Resources Inc. -- 40% and 49% more than their stock-market values, respectively, when the deal was announced. Norway's Norsk Hydro ASA last year paid $2.5 billion for Spinnaker Exploration Co., which investors led by Warburg Pincus LLC had started in 1996 with $75 million. In some recent power-plant deals, investors multiplied their original investments by as much as five times in less than two years."

Never mindqualificationss, sponsors are lining up:

"Joseph Bryant, a former top executive with BP PLC and Unocal Corp., is creating an elite team of deep-water oil explorers to hunt the last frontiers of the Gulf of Mexico and other hard-to-reach environs. Searching such virgin territory is mainly the province of big oil companies. Before Mr. Bryant's Houston startup, Cobalt International Energy, drills for his first drop, he must acquire seismic data and state-of-the-art software to research the ocean floor, purchase exploration rights and lease floating rigs that cost as much as $500,000 a day -- all for naught if he hits dry holes.

Yet Mr. Bryant had his pick of sponsors. "It wasn't a question of whether we could get money, but which to take," he says. He picked Carlyle-Riverstone and Goldman Sachs Capital Partners, which together committed $500 million. He recently accepted an additional $100 million from investors led by Canada's KERN Partners Ltd."

Not to be left out,individuala investors can invest in some of these operations due some "flexible" listing standards:

"One popular venue is the London Stock Exchange's Alternative Investment Market. The AIM has no minimum market value for its listed companies and touts a "flexible regulatory approach" with fewer governance requirements than major exchanges. Energy companies now account for a third of AIM's market value. They include exploration outfits with soaring stock prices that have yet to pump any oil and self-styled "green" ventures that generate power from wind or capture gas from pig manure and garbage dumps."

Timothy Burger
timothyb(at)timothyburger.com