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WEDNESDAY, NOVEMBER 12, 2014
BUSINESS
Ruble’s slide resumes,
testing Putin’s words
Central bank’s firepower in question
LUXEMBOURG: A view of international companies’ signs in Luxembourg, seen on
Monday. Leaked documents describing the Luxembourg tax arrangements of more
than 340 multinationals were published on November 5, 2014, pushing a debate
over the allegedly favorable tax deals offered by the Grand Duchy. — AFP
SPECIAL REPORT
For these oil and gas bets,
the odds favor the house
NEW YORK: Atlas Energy LP has a deal for
investors eager to get in on the US energy
boom: Contribute at least $25,000 in a partnership that will drill for oil and gas in Texas, Ohio,
Oklahoma and Pennsylvania and then share
any revenue from the wells’ output. Atlas
Resources LLC, a subsidiary of the Pittsburgh,
Pennsylvania-based energy group, aims to
raise as much as $300 million before the offer
closes Dec. 31. The company says it will toss in
up to $145 million of its own capital, too.
But not all investors are created equal in
this undertaking. Atlas’s confidential offering
memorandum, reviewed by Reuters, shows
why. Up to $45 million of the money raised will
be paid to Atlas affiliate Anthem Securities to
cover commissions to broker-dealers who market the deal, the memorandum says. As much
as $39 million more will be used to buy drilling
leases from another affiliate. Atlas-affiliated
suppliers may also get some of the $53 million
set aside for buying drilling and transport
equipment.
An additional $8 million of Atlas’s investment is not an investment at all; it is a 15 percent markup on estimated equipment costs.
As soon as drilling begins, Atlas will pay itself
nearly $52 million in various other fees and
markups. In short, Atlas’s $145 million exposure is reduced by at least 40 percent, and possibly much more, after taking into account
payments to group affiliates and markups.
Further, if and when the venture starts generating revenue, Atlas is entitled to a 33 percent
cut, reflecting the size of its stake before
accounting for those payments and markups.
Atlas is raising money for the venture,
called Atlas Resources Series 34-2014 LP, in
what is known as a private placement - a sale
of unregistered securities through broker-dealers to a limited number of investors. And as the
offering details suggest, oil and gas private
placements tend to be structured so that “the
house always wins,” said Mitch Little, a Frisco,
Texas-based lawyer who has represented
investors in and issuers of private placements.
QUICK AND EASY
Private placements, a lightly regulated market comprising hundreds of billions of dollars a
year in new issues, have a long history in the
oil and gas sector. Small prospectors, known as
“wildcatters,” have for years used them as a
quick, easy way to fund the expensive and
highly speculative process of drilling, drawing
in investors keen to take advantage of generous federal tax breaks on energy exploration.
In the new century, the US “fracking” boom has
prompted a new wave of prospecting, attracting tens of thousands of investors.
Reuters was able to review offering memoranda and other marketing material for six oil
and gas private placements issued over the
past 15 years by four companies: Atlas; Reef Oil
& Gas Partners of Richardson, Texas; Discovery
Resources & Development LLC of Frisco, Texas;
and Black Diamond Energy Inc of Buffalo,
Wyoming. These documents contain details on
multiple previous private placements by each
company, and they show that the deal Atlas is
now marketing adheres to a common template: The issuers typically charged between 15
percent and 20 percent in upfront fees from
investors, while paying brokers - often affiliated with the issuer - an additional 10 percent of
the total offering in sales commissions.
The upshot is that the issuer often starts
out at an advantage relative to outside
investors. For slightly more than half of 43 private placements Atlas issued over the past
three decades, outside investors lost money or
just about broke even. In 29 of those deals,
Atlas did better than those investors.
Of 34 deals Reef has issued since 1996, only
12 have paid out more cash to investors than
they initially contributed, according to Reef’s
latest publicly available financial statements.
The statements show Reef sold an additional
31 smaller deals between 1996 and 2010 for
which it collected a total of $146 million and
paid out just $55 million.
Brian Begley, Atlas Energy’s vice president
for investor relations, declined to comment.
Reef Chief Executive Officer Michael Mauceli
said in a statement: “We have conducted our
business with the utmost integrity, meeting
and surpassing ethical, business and regulatory standards.”
Energy ventures are by their nature risky
prospects, narrow bets on a single commodity.
Wells can come up dry. Volatility in oil and gas
prices can sink returns. As Atlas warns in the
memorandum for its offering: “These securities
are speculative and involve a high degree of
risk. You should purchase these securities only
if you can afford a complete loss of your investment.”
UNPAID FOR RISKS
Beyond the inherent risks, though, these
deals are often unfair to outside investors, said
David Miller, a Houston-based lawyer who represents investors in lawsuits against issuers
and brokers of private placements. “Investors
are taking on huge risks, but simply are not
getting paid for those risks,” he said. Issuers say
that criticism ignores the tax benefits of their
deals. Investors can write off more than 90
percent of their initial outlay the year they
make it. But investors in oil and gas deals comprise not just the savvy, high-income individuals meant to use the tax break. Of the 28 people interviewed for this article who invested in
deals from Reef, Atlas, Discovery Resources
and Black Diamond over the past 10 years, 17
were retirees who had low tax burdens when
they signed on.
Under U.S. law, brokers can market private
placements only to institutions and accredited
investors, the latter defined as American residents with either $1 million in assets, not
including the investor’s primary residence, or
$250,000 in annual income.
Those criteria were set in 1982. Since then,
inflation has greatly expanded the number of
people who qualify. Now, they include people
like Arla Funk, a 79-year-old retiree who works
part-time for the Salt Lake City, Utah, school
system in a job that pays $10 an hour.
In 2006, Funk invested $100,000 in a private
placement called Atlas American Series 272006. “We were looking for some long-term
retirement kind of income,” Funk said. She said
the broker who sold her on the deal told her
she would receive “a paycheck that comes
every month.”
As of Dec. 31, 2013 - seven years after she
gave Atlas her money - she and other outside
investors had earned back just 31 percent of
their principal. For her and other unhappy
investors in private placements, selling isn’t a
realistic option: There is no active secondary
market for the securities.
“When I finally found out what a scam it
was, I was upset because it was too late for me
to do anything,” Funk said. In addition to the
Atlas and Reef deals reviewed for this article,
thirteen from Black Diamond between 2001
and 2006 failed to generate enough revenue
to return investors’ initial contribution.
Black Diamond filed for bankruptcy in
2011 after a major bank creditor called its
loans. It never completed the bankruptcy
process. Its principals, one of whom, Charles
Koval, was a founder of Atlas Energy, are trying
to sell Black Diamond’s leases and equipment.
Koval declined to comment.
Discovery Resources, which issued four private placements between 2006 and 2009, filed
for bankruptcy in 2010, as did its founder
Richard Weyand. Federal prosecutors in March
charged Weyand with filing a false tax return
for 2008 to hide $101,000. He pleaded guilty in
April and is currently awaiting sentencing.
Weyand’s lawyer, Jeff Boggess, said Discovery
Resources’ deals provided tax breaks to
investors and therefore could not be called
unsuccessful.
LARGE AND OPAQUE
All sorts of businesses - including banks,
heavy industry and, especially, investment
pools like hedge funds and private equity
firms - use private placements to raise money
for all sorts of purposes.
The market is vast: A Reuters analysis of
nearly 100,000 filings with the Securities and
Exchange Commission found that between
2008 and the second quarter of this year,
issuers intended to raise as much as $5.5 trillion through private placements. And that sum
excludes the 22,000 issues intended to raise
“indefinite” sums. (The number of issuers does
not include those who submitted paper, rather
than electronic, filings before 2009.)
The market is also opaque. The required
documents filed with the SEC typically state
the name of the issuer, the maximum amount
sought, and little more. There are no follow-up
filing requirements.
The Financial Industry Regulatory
Authority, the securities industry’s self-regulatory body, requires that brokers perform due
diligence on each issue they sell to ensure its
suitability for investors. But as Reuters reported in a previous article, many brokers rely on
outside due-diligence firms that are in fact
paid by the issuers - a setup under which some
issuers have engaged in multimillion- and
even multibillion-dollar frauds.
In the oil and gas sector, the SEC data show
that since 2008, nearly 4,000 private placements have sought to raise as much as $122
billion.
Brad Bennett, head of enforcement at FINRA, said in a statement that brokers need to be
“meticulous in their consideration of the types
of customers for whom [oil and gas private
placements] may be suitable.” He added that
the deals should be “only recommended to
clients whose financial goals are consistent
with the products and who understand the
risks inherent in them.”
State and federal regulators have little
scope for oversight of private placements, and
the scant reporting requirements give them little information to work with.
In a 2013 alert to the public, the SEC said
investors needed to keep in mind that oil and
gas private placements were especially risky,
that they often carried hidden fees, and that
issuers routinely made money even when
drilling yielded no oil or gas. A spokesman for
the SEC declined to comment. — Reuters
MOSCOW: The ruble resumed its dramatic slide
yesterday, a day after the Russian central bank
floated the currency that has been driven
sharply lower by falling oil prices and economic
sanctions imposed over Russia’s policy in
Ukraine.
Stability for the currency is one of the main
achievements of President Vladimir Putin’s 14year rule, and its slide has revived memories of
the currency collapse that shut banks and wiped
out the savings of Russians a year before he took
power. The currency has lost nearly 30 percent of
its value against the dollar so far this year, most
of that in the last three months as sanctions hit
the ability of banks and companies to refinance
debts and tumbling oil prices hurt government
revenue. A new threat to a two-month-old
ceasefire in eastern Ukraine has hurt hopes that
sanctions could be lifted soon. Western countries say that Putin has dispatched more troops
to the frontier with his neighbor in recent days
and sent armored columns to defend enclaves
the Kremlin now calls “new Russia”. A senior EU
official said the bloc would discuss next week
whether to increase sanctions still further.
Moscow denies that its troops operate in
Ukraine, although some Russian soldiers have
died fighting there. The Russian central bank is
trying to avert a repeat of the ruble crash of
1998, which bankrupted the country’s financial
system, impoverished its citizens and led to a
period of political turmoil that ended when
Putin took power a year later. The bank has a
huge $430 billion cash pile of reserves. But even
that has limits, and after spending as much as
$2.5 billion a day to prop up the currency in
recent weeks it announced last week that it
would halt massive regular interventions.
Free to float
On Monday it officially set the currency free
to float, saying it would now target inflation
rather than the exchange rate, a step it had
planned by the end of the year.
Although regular interventions will stop, the
bank said it would keep the market in check and
punish those betting against the ruble by carrying out large, ad hoc interventions.
Yesterday, the ruble lost around 2.2 percent
against the dollar by mid-afternoon, falling to
46.86 rubles per dollar after gains in the previous
two sessions. It lost 2.5 percent to trade at 58.22
versus the euro. The currency was nevertheless
still above a record 48.6 to the dollar set during
wild swings on Friday, with traders now cautious
about testing the bank’s firepower, especially
after Putin promised to avert a crash.
MOSCOW: A woman walks past a currency exchange point in central Moscow yesterday.
Russia’s central bank said Monday it is floating the ruble and will intervene to prop up the currency which has lost nearly a quarter of its value so far this year only if “financial stability” is
threatened. — AFP
“The ruble gained yesterday on verbal inter- exports. Brent crude was off more than half a
ventions from officials including President percent by Moscow’s late afternoon.
Analysts also said demand for dollars
Vladimir Putin, but those words have to be followed up by action. The market still expects remained high, given sanctions restricting
more from the central bank,” said Yury Tulinov, Russian firms’ access to international capital marhead of research for capital markets and invest- kets. Companies need dollars to meet an onerment banking at Rosbank. The central bank, ous foreign debt repayment schedule before the
Putin and Prime Minister Dmitry Medvedev have end of the year. The central bank has already
all spoken in support of the ruble in recent days, raised its key interest rate by a cumulative 400
blaming speculation by private banks for its basis points this year and has spent over $70 bilslide. Medvedev told a government meeting on lion in interventions to defend the currency and
Tuesday there were no fundamental reasons for curb capital flight. On Monday, the bank cut its
the ruble to weaken further and ruled out growth forecasts to almost zero for this and the
next two years and predicted sanctions would
restrictions on foreign currency sales.
remain in place until the end of 2017.
David Kohl, a forex analyst at Swiss bank
Sanctions threat
EU foreign ministers will discuss new sanc- Julius Baer, was even more pessimistic, saying
tions on Russia next week, the EU’s foreign his bank saw an economic contraction of 0.5
affairs chief said yesterday, following fighting percent in Russia next year.
“Russia’s confrontational policies in Ukraine
between pro-Russian separatists and Ukrainian
forces in the past week that put a Sept. 5 cease- have worsened fundamental headwinds, and
fire in doubt. The ruble was also pushed down the most recent decline in oil prices has
by further falls in the oil price, hurting a country removed the last supporting pillar for the curthat relies for most of its income on energy rency.” — Reuters
Germany eyes sale of stakes
in Deutsche Telekom, Post
BERLIN: The German government is considering
reducing its stakes in Deutsche Telekom and
Deutsche Post, hoping to cash in on high share
values at a time when it is under pressure to
spend more to stimulate its faltering economy. A
finance ministry document seen by Reuters,
which is due to be approved by Chancellor
Angela Merkel’s cabinet today, sketches out
plans for holdings in a range of companies. A
sale of shares in rail operator Deutsche Bahn also
remains an option, it says.
The government had wanted to sell a stake in
the railway in Merkel’s first term, but cancelled
the plan when the global financial crisis hit in
2008. Any sale now would depend on market
conditions, the document said. Merkel’s “grand
coalition” government aims to balance the feder-
al budget next year for the first time since 1969
and a share sale could help it do that at a time of
slowing growth.
It could also free up billions of euros for public investments as Merkel is under pressure from
European partners and domestic industry to
spend more to stimulate the economy and shore
up Germany’s crumbling infrastructure.
At Monday’s closing share price, the government’s 31.7 percent stake in Deutsche Telekomwhich includes a 14.3 percent direct stake and a
17.4 percent indirect holding via state bank KfWwas worth over 17 billion euros. Its 21 percent
KfW-held stake in Deutsche Post was worth over
6 billion euros. The document, signed by Finance
Minister Wolfgang Schaeuble, says a further sale
of the Deutsche Telekom stake should be “care-
fully examined”, suggesting this may be one of
the first priorities. Reuters reported back in
February, citing sources, that KfW had invited
banks to make proposals for a placement of
Telekom shares, which have risen roughly 50
percent since early 2013.
Deutsche Post, whose shares rose 67 percent
over the same period, Deutsche Bahn and the
Berlin/Brandenburg, Cologne/Bonn and Munich
airports are all listed as candidates for sale.
Any rail privatization would exclude the infrastructure, the document said. It did not set out a
timetable for any of the share sales. Deutsche
Telekom shares were up 1.88 percent at 12.5
euros after the Reuters report yesterday, outperforming a 0.2 percent rise in the DAX index of
German blue-chips. — Reuters
Egypt’s SODIC
posts 37% rise in
9-month profit
TOKYO: A container is loaded onto a trailer truck from an international freighter at
the international cargo terminal in Tokyo yesterday. Japan posted a current account
surplus for the third consecutive month in September as a weaker yen helped boost
repatriated returns on foreign investment. Japan logged a surplus of 963.0 billion
yen ($8.4 billion) in the current account, up 61.9 percent from a year earlier. — AFP
Japan’s CA surplus up
61.9% in September
TOKYO: Japan posted a current account
surplus for the third consecutive month in
September as a weaker yen helped boost
repatriated returns on foreign investment,
official data showed yesterday.
Japan logged a surplus of 963.0 billion
yen ($8.4 billion) in the current account, up
61.9 percent from a year earlier, the finance
ministry said. It was much bigger than a
market median forecast of 532 billion yen.
The current account is the broadest measure of the country’s trade with the rest of
the world, measuring not only trade in
goods but also services, tourism and returns
on foreign investment.
Japan’s deficit in merchandise trade
expanded due to higher imports of liquefied natural gas, cellphones and other
telecommunications equipment. But overall
income improved with higher gains from
equity and other direct investment, as well
as from investment in financial items, data
showed. The rise was inflated with a weaker
yen, the consequence of Prime Minister
Shinzo Abe’s pro-spending policy and the
Bank of Japan’s massive monetary easing.
The Japanese currency was nearly eight
percent cheaper against the dollar on the
monthly average compared with
September 2013. — AFP
CAIRO: SODIC, Egypt’s third-largest listed property
group, reported a 37.4 percent rise in nine-month
net profit yesterday on the back of strong sales as
one of its property developments came on to the
market. The company said net contracted sales for
the third quarter rose 34 percent from the same
period last year.
“The strong sales came on the back of the launch
of Eastown Residences Phase VII which fully sold
out contributing 353 million (pounds) to year-todate sales,” it said in a statement. SODIC, also known
as Sixth of October Development and Investment
Co., said nine-month net profit rose to 109.71 million Egyptian pounds ($15.34 million) from 79.86
million a year earlier.
Egypt’s once-booming construction sector was
hit hard by the 2011 revolt that ended Hosni
Mubarak’s 30-year rule as this also ushered in a period of economic and political volatility. Many large
real estate contracts were cancelled in the wake of
the revolt and investment dried up.
Three years on, the economy is showing the first
signs of recovery, bringing an uptick in demand for
property. SODIC said earlier this month it had completed a 1 billion pound capital increase to help
finance new projects as the country’s real estate
market begins to recover.
It said the fundraising had taken its issued capital
to 1.35 billion pounds from 362.71 million pounds
and raised shareholder equity by about 47 percent.
SODIC managing director Ahmed Badrawi told
Reuters last month that two-thirds of the money
would be invested in a new project in the upscale
Cairo area of Heliopolis. The rest will go to new land
the developer is seeking to buy on the northern
coast or outside the sprawling capital, he said. In
May, US private equity firm Ripplewood acquired a
near 10 percent stake in SODIC. — Reuters