Just because something drops in price, doesn’t mean it’s cheap
I know zero hedge is suspect but this is something somewhat discussed a bit ago on your blog.
Here was my response;
Thanks for the email.
Indeed, the wealthy are desperate for returns and yields. Sam Zell has been making the interview circuit recently and he is looking at energy assets. This Zerohedge article paints a fairly accurate picture of the situation.
I think that these oil assets are still too expensive and the only thing holding them up are low interest rates. Rates need to come down more in order to make the cap rates look attractive. Oil is stuck down here and the global supply is too great. As terrible as OIH and XOP look on the charts, I wouldn’t bottom fish here. There are longer-term industry dynamics at play, which are helping to reprice many of these assets. Although many of these firms were run inefficiently, at least their owners were knowledgeable of the P&E process. These outsiders are not as familiar and are using stale pricing models to spot value.
Pricing real estate and pricing oil are two different matters. Oil assets may look attractive to some investors, but these outsiders overlook the massive fixed costs that are incurred from time to time, which throw the pricing models into the wood chipper.