By Pam Boschee, Managing Editor
For many investors, balance sheets and financial statements of energy companies are now most suited for use as kindling as we approach the winter season. (The sworn statements of executives attesting to the integrity of these documents are particularly useful as raw material for Duraflame logs.)
However, there are others who see a green lining under this bleak cloud of investor wariness, mistrust and retreat. They’ve got a different perspective: Opportunity may be knocking. With about $10 billion worth of energy-related assets reportedly up for grabs, opportunity may also be kicking and shouting.
According to Karl Miller of Miller, McConville & Co., “A better way to describe this is opportunistic capital, and the reality is, like in any market, there are always opportunists on the sidelines.”
I recently spoke with Miller about his newly formed partnership with Kevin McConville. Based in New York, these senior energy executives decided to form a leadership team to address the fiduciary issues facing the industry, including energy debt advisory and restructuring, and interim senior management under corporate restructurings and bankruptcies. Their backgrounds suggest that they know whereof they speak. Miller started his career on Wall Street, joined Enron in the early ’90s and went on to hold executive positions at El Paso Energy, Electricite de France and PG&E. McConville started his career at Panhandle Eastern and has held senior executive positions at the Williams Companies and served as a managing director for Enron’s industrial practice worldwide. Earlier this month, Heinz-Dieter Waffel was brought on board as a senior advisor. He most recently served as a managing director of E.ON Energie AG, the multinational German utility.
Miller explained, “What this is about, first of all, is leadership. It’s about providing and instilling some confidence in management in this sector. And when I say this sector, I’m not talking about just distribution companies, but also the IPP (independent power producers), the merchant sector, and also the capital markets. And that’s a critical point because everything in the marketplace is a management loan, so to speak.”
I asked Miller about the origin of this investment interest in what many institutional money managers have called the “dead capital pool” in our industry. Besides all the usual suspects such as institutional sources, private equity, LBO-type (leveraged buyout) capital pools, pension or insurance funds, Miller cited one group that especially piqued my interest-European or Asian energy participants.
Miller said, “They see an opportunity to enter into the longer-term profitable, short-term problematic U.S. energy sector.”
He characterized these companies as: “They are all energy companies in their own right. They obviously all focus on different areas of the world and different product bases. The one thing I’d say they all have in common is that they have substantial capital structures in fairly stable condition and solid investment-grade ratings. So, you could use some intuition and understand what that would mean for their potential entry, or their potential funding, of investment in the U.S. marketplace. They would have a superior advantage against the crippled energy merchants today.”
Try to guess one of the areas of high interest identified by Miller. You’re right on the money if you said electric T&D. Many of the market participants see the need for upgrading and expanding T&D that works not only in the U.S. but in Europe and elsewhere. Miller added, “That’s an investment in its own right. Those tend to be what we call annuity or dividend type businesses and offer attractive, although capped in many cases, rates of return and modest growth scenarios. But, that’s still a fundable business. There are clearly parties interested in that.”
Looking ahead, Miller expects to see bankruptcies, restructuring/liquidations, and aggressive acquisitions. He also predicts that U.S. incumbents retaining credit and capital capacity will “cherry pick” what may work in their region and may compliment their portfolios.
Miller summed it up the current state of the industry: “I’m talking substantial value degradation here, across the board. I think that’s where we come back to my original point. We [our industry] have to step up and take some responsibility for where we are. If we do that as an organization, our industry will make progress. Right now, I’m extremely disappointed as a professional that we just haven’t seen management, as well as the boards of directors, step up and raise their hands and say, ‘We’ve made some substantial mistakes here that have caused tremendous financial damage to our shareholders and the marketplace. It’s time for us to move on, and we’re going to try to contribute to solving the problem.'”
He concluded, “It all starts at the top, and if you don’t have a subscription to that value, what are you really doing?”
I’m going to be keeping an eye on Miller, McConville & Co. I think their approach is a courageous one during this period of tentative, cautious business. After all, they too are opportunists.
Pam Boschee, Managing Editor