Home' Trinidad and Tobago Guardian : October 29th 2015 Contents BG10 NEWS
BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 29 • 2015
When Karen Robinson s husband died, she
worried she wouldn t have enough money to
raise her two young girls and save for retirement.
Then she met a financial planner, Tom Parks,
who told her about investment partnerships that
would allow her to ride the boom in US oil and
gas production while receiving a steady stream
of payments to help pay her bills.
"He showed me this picture of the United
States, and said they were getting oil out of shale,
and energy was the way to go," says Robinson,
a high school teacher from Cranfills Gap, Texas.
She liked that Parks seemed so confident. "I
Two years later, her partnerships have plunged
in value and Robinson has lost more than half
of the US$202,000 she invested, according to a
complaint filed with regulators against Parks and
his firm, Ameriprise Financial Services. Parks
did not return phone calls and emails; Ameriprise
declined to comment.
For years, brokers have been luring savers like
Robinson into drilling partnerships with the
promise of fat payouts. With yields on safer
investments like government bonds so puny, it
wasn t a hard sell. But now this once hot business,
a big source of fees for brokers and banks, is
coming to a messy end.
In the past year, investors have lost US$20
billion in publicly traded drilling partnerships,
or US$8 of every US$10 they had invested, accord-
ing to a report prepared by FactSet for The Asso-
ciated Press. That figure does not include losses
from US$37 billion of bonds sold by the part-
nerships in the five years since 2010, many down
by half in last 12 months, or losses from bets on
private partnerships that don t trade publicly and
are difficult to track.
A plunge in the price of oil that few anticipated
explains much of the loss. But many partnerships
had borrowed heavily and were running big risks
even when oil was twice as high a year ago, sug-
gesting that either investors were too sloppy in
their hunt for steady income or brokers too reck-
less in their hunt for fat fees --- or some ugly
combination of both.
"If you were trying to preserve your capital,
oil and gas producers were not for you," says
Ethan Bellamy, a financial analyst at RW Baird.
"They were always higher risk investments."
The losses on partnerships are piling up as
investors are having second thoughts about their
headlong rush into other high-yield, high-risk
securities, like bonds from volatile emerging mar-
kets or from highly indebted US companies,
called "junk" because they are so dangerous.
In the first eight months this year, investors
have yanked US$4 billion each out of junk funds
and emerging-market bond funds, according to
the latest figures from Morningstar, a research
A new way to play oil
The energy partnerships, formally called master
limited partnerships, can avoid some corporate
taxes by passing much of what they earn straight
to their investors, called partners. These payments
explain why the firms used to mostly stick to
storing and transporting oil, unsexy businesses
that generate a steady stream of cash. Bankers
called them "toll booth" businesses, and it was
meant as a compliment. With much of the cash
going out the door as soon as it came in, you
want boring predictability.
Then the Federal Reserve slashed interest rates
to near zero to help revive the economy in the
financial crisis, and that helped send yields on
conservative investments like US government
bonds plunging. Investors scrambled for alter-
natives to earn a bit more. Partnerships focused
on drilling sprung up to meet the demand, dan-
gling yields of 6 per cent or more, and Wall Street
got busy selling their stocks and bonds.
In the five years through 2014, energy part-
nerships of all kinds raised US$21 billion in initial
stock sales, more than twice what they sold in
the five years before the financial crisis, according
to financial data provider Dealogic. For help with
the sales, banks like Citigroup, Barclays and Wells
Fargo pocketed an estimated US$1.1 billion in
fees, according to Dealogic. Fees from follow-up
stock sales, plus bond offerings, added to their
Because they can tap stock and bond markets
to raise money, publicly traded partnerships
appear to have plenty of financial flexibility. But
that s not true in troubled times when investors
are scared and money is needed most.
One of the partnerships in Robinson s account,
BreitBurn Energy, has sold stocks and bonds to
investors 10 times since 2011. It needed to raise
money because nearly half the US$1.6 billion it
took in from selling oil and gas from its wells
since 2011 went to investors.
Then oil began to fall last year and BreitBurn
stock tumbled. It cut its payments to investors
in half to conserve cash, but by March this year
the stock was still under pressure and it had to
strike a deal with an investment firm for a US$1
billion infusion in exchange for fat monthly pay-
ments. In just 12 months, its stock has plunged
85 per cent.
BreitBurn declined to comment.
"It s a little like a death spiral," says Andrew
Stoltmann, a lawyer representing Robinson.
"When the bad news inevitably hits, they don t
have a cash cushion."
Bells going off
Partnerships that don t trade publicly have
dangers of their own. Managers carve out big
payments for themselves and for the brokers
who raise money for them, a dangerous move
for businesses frequently in need cash to secure
new wells to replace old ones running out.
Ron Vaerewyck and his wife, Jeanine, found
out about these risks the hard way. While their
checks were coming in, the retired couple never
suspected any danger in their two private part-
nerships, run by Reef Oil and Gas Partners in
Then production at some wells fell short,
threatening the stream of income. And the big
money going to Reef management and an affil-
iated brokerage firm, Reef Securities, left little
financial cushion. Of the US$90,000 they had
invested, nearly US$14,000 went to those two
groups right from the start. The checks got smaller
and infrequent, and the Orlando, Florida, couple
started to worry.
"The bells were going off, and we started ques-
tioning things," says Ron, 73, a retired Dow Chem-
ical human resources executive. "Why are your
expenses so high?"
In 2012, the Vaerewycks and seven other
investors filed a complaint with regulators accusing
the brokerage of not vetting the deals properly
and misrepresenting the risks. Last year a panel
of arbitrators ordered Reef to pay the investors
US$188,000, about 40 per cent of what they
had invested. The Vaerewycks got US$45,000.
Reef Oil and Gas says that the risks of the
deals were clearly disclosed, with the term "risk"
itself appearing dozens of times in the offering
While partnership losses mount, other investors
are hurting, too: those who poured billions of
dollars into partnership bonds.
Fearing they won t get their money back when
their drilling bonds mature, investors have been
dumping them. A US$250 million issue due in
six years from Houston partnership Atlas Energy
Group, once offering 9.25 per cent in annual
interest, has dropped 55 per cent in 12 months.
"When interest rates are zero and junk bonds
are paying 9 per cent, that is high risk," says
David Miller, a Houston lawyer who recently
settled eight investor claims involving energy
partnerships. "I would expect to see a wave of
New way to bet on oil wipes
out billions in investor savings
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