When other major players in the oil-and-gas industry zigged, Scot Cohen zagged.
Unconventional drilling, such as fracking across shale plays, has become the popular route for most energy explorers in recent years. Cohen, however, did the opposite: the New York-based investor has put his money into straight conventional drilling using 3D-seismic geology.
The decision was a wise one. Unconventional drillers have been plagued by price plummeting and mass bankruptcies. In 2015, 42 oil companies filed for bankruptcy and this year is shaping up to be even worse. For example, 11 percent of exploration companies defaulted on debts coming due versus just 0.5 percent in the same period a year earlier.
Chesapeake Energy Corp., one of the U.S.’s biggest shale gas producers, recently saw its stock fall 50 percent in a day. Not long ago, KKR & Co. — one of the largest private equity firms in the oil-and-gas space — shelled out big money for Samson Resources Corp., only to watch it go bankrupt in September.
Cohen, a private equity pro in his own right, says his company, Petro River Oil Corp., based in the Time Equities Building, has its own game plan. Read on to learn more about how this oil purveyor, who turns 47 on Friday, managed to churn a profit from his non-shale, pure-play conventional E&P (exploration and production) company even though a global oversupply has pushed crude prices down to 12-year lows.
Why did you choose to specialize in oil and gas considering how risky the sector has been?
I ask that question myself too many times. I started the Iroquois Opportunity Fund in 2008. Before that, my biggest return in a position was while running a hedge fund. I invested in an oil and gas (hydrocarbon processing) company. It was a pure tech investment, but it serviced the oil and gas business. Chevron became interested and ended up getting involved in a meaningful way.
It was the first time I became an active investor and the experience served me well for what I’m doing today with Petro River. I was fairly young at the time, but as I started learning about hydrocarbons — the more I got my hands around it — the more I saw the upside. It’s bigger than any other sector. I had success, and off that deal, my eyes were open to the business. I decided I was going to do a private equity fund that invested in nothing but energy. It was the biggest return I ever made so I decided to hire a bunch of smart people and that’s how I got into it.
How did Iroquois do?
Unfortunately, the fund itself and the drilling partnerships ended up with a poor performance. Our team was chasing resource plays not unlike other public and private equity-backed companies, when everything looked great at $80 or $100 oil. The success and the lessons that come from that however are meaningful, and have put myself and my investors in the position we’re in today. Petro River Oil was recapitalized and today has a seasoned team. The upside in the conventional assets that we’ve acquired at Petro River is that any one of them can be a company changer and deliver outsized returns for all of our investors, and erase any losses that occurred in the past.
Who is on your team?
Currently, there’s Stephen Brunner, who became president of Petro River in November 2015. He was VP of Pogo Producing Co., which sold for $3.6 billion, and ran Constellation Oil & Gas. There’s also Dr. James Rector, the company’s chief technology and geophysical advisor who has a deep geological background. He sold four companies while he was a professor at Berkeley and has an expertise in 3D seismic technology.
The other key player is Jonathan Rudney, CEO of Horizon Energy Partners, which Petro has a 20 percent stake in. He serves Petro River as senior advisor and we’ve co-invested in deals for three years now. He started an oil and gas company over 30 years ago. He built it up to be one of the biggest independent oil and gas producers in the Gulf of Mexico with $300 million a year in free cash flow.
How has owning a stake in Horizon helped?
The majority of our plays, and the global exposure, comes from the Horizon portfolio. The benefit is the people who invested in Horizon, 10 of them are industry insiders working for Texaco, Exxon and Shell. They’re each high ranking executives with geological expertise. They all held senior positions and they’re also on the boards of some of the biggest funds in the space, including Carlyle, KKR and Riverstone.
When you look at how difficult of a playing field the energy sector is, what goes through your mind?
The main thing is I don’t make the same mistakes I made in the past. I’ve had bad partners and invested in a lot of shale related resource plays. Petra’s portfolio, however, has nothing to do with shale. Meanwhile, 90 percent or higher of the public companies out there are shale related and that defines us as something different. There aren’t many conventional E&P plays, like us, around today.
The domestic oil and gas industry has been built on unconventional shale plays. That’s bad because those plays don’t work when oil prices go down and that’s why we’re having so many bankruptcies. So they don’t work at $50 dollars a barrel or higher. So the problem is when prices go down, as they have, you haven.t hedged your oil production and your plays are basically ruined.
What makes your portfolio different?
Our plays can survive at $10 and $20 a barrel where most shale producers can’t. It’s straight conventional drilling like we did in this country in the early 1900’s. The difference is we use 3D seismic data to delineate where we’re going to drill wells to produce geologically defined targets. That’s different than 80 to 90 percent of U.S. production which is mostly a shale environment and is price sensitive. Most of those other plays don’t even work at $40 or $50 a barrel.
Anthony Noto is a multimedia journalist focused on venture capital and Silicon Alley startups. Based in New York for the Business Journals, he previously was a reporter at SourceMedia and The Deal LLC. He is a graduate of Rutgers University.