Monday, September 16, 2019

Harold Hamm Said PEU Model is Broken

Continental Resources CEO Harold Hamm talked about private equity in the oil field on Bloomberg:

"There is consolidation going on.  All the money that came in from private equity.  Basically their model was to buy acreage and flip it to someone else.  So they were big competition in the plays that we did/developed.  That model is broken.  The private equities are in trouble and some of the publics."
Six weeks ago Bloomberg ran a story on private equity underwriters (PEU) buying pipelines at premium prices (15x earnings).  Two firms mentioned in the piece were Energy Transfer and SemGroup. 

Energy Transfer announced it would buy SemGroup in a $5 billion deal.  That is a month after Bloomberg reported:

Meanwhile, SemGroup Corp., which recently hired an adviser to look at joint ventures, saw its shares jump on Wednesday after a report by Reorg M&A that the company is evaluating takeover interest from at least one private equity consortium.
In 2008 SemGroup declared bankruptcy under Carlyle Group ownership after $3.2 billion in bad energy bets.  The implosion came a year after Carlyle Capital Corporation crashed.  Former FBI Director Louis Freeh investigated SemGroup's demise and his report revealed Carlyle pulled enough cash from SemGroup to cover it's initial investment.

An Energy Transfer subsidiary owned Philadelphia Energy Solutions alongside The Carlyle Group.  Their refinery exploded in June and permanently closed after a massive fire.

Philadelphia residents may not be fans of private equity as thousands of jobs will be lost at Philadelphia Energy Solutions (1,000) and Hahnemann University Hospital (2,500).  It took PEU Paladin eighteen months to run Hahnemann, a safety net hospital, into the ground.  Not included in the bankruptcy filing were significant real estate assets in downtown Philadelphia. 

The Carlyle Group's ManorCare, a giant nursing home company, declared bankruptcy after eleven years of PEU ownership.  Carlyle sold ManorCare's facilities for $6.1 billion to a healthcare REIT in 2011.  Carlyle's financial manipulations put ManorCare under.

Where else is the PEU model broken?  Possibly healthcare.  I'd say so.