New capital is 'postponing the day of reckoning' for oil companies

Carl Tricoli recently relocated the offices of private equity group Denham Capital to Houston’s beautiful Philip Johnson-designed Bank of America BAC -1.46% Center. The postmodernist masterpiece, completed in 1983, has long been a favorite of Tricoli’s, primarly for its grand architecture but also because of what it represents.

“It has a special place in my heart,” says Tricoli, co-president of Denham, “because I started my career at Republic Bank, which went bankrupt in the process of putting this building up. It was my first exposure to the lesson that when a company starts building a new headquarters it’s time to short.”

Republic was one of those victims of the great oil bust of the early 1980s, which decimated Houston, morphed into the great Texas real estate crash and introduced the world to the term “see-through office building,” of which there were many examples in this town.

Tricoli has worn a lot of hats in the three decades since then, with stints at Enron and Koch Industries , among others. In 2004 he co-founded Denham Capital, an energy-focused private equity firm with $9 billion currently invested in oil and gas, power generation and mining. Over the years Denham has invested $3 billion in 26 oil and gas companies, of which 14 remain in their portfolio.

For years I’ve enjoyed Tricoli’s no-nonsense insights on what’s going on in the oil and gas industry. It says something about the man that on the wall of his office he has an illustration of a comic strip character with a word bubble that says: “Bullshit walks.” Tricoli and I sat down for a talk last week to try and cut through the bullshit. The following Q&A has been edited for length and clarity.

Tricoli:  This is a really funny time right now. I’ve been through two significant downturns. In the 1980s when I started the collapse was more price driven. OPEC had established itself as a force, artificially driving prices up by curtailing supply. That drove up investment in the United States. And then they turned the spigot back on and the U.S. went from 4,500 rigs to 800. Then during the 2008 financial crisis demand dried up on a global scale, but that didn’t last long. This time around is just supply driven; supply has outpaced demand. And you really do need low prices to cut off the supply.

http://www.forbes.com/sites/christopherhelman/2015/04/17/new-capital-is-postponing-the-day-of-reckoning-for-oil-companies/?ss=energy