Wednesday, February 18, 2015

Ziff Brothers, Athabasca Oil Sands Corp & Clean Line Energy & J Glotfelty

In this multi-state battle against Clean Line Energy nothing much has been said about the Ziff Brother’s other energy investments.  There are no known Ziff investment in wind energy or any other electricity generation.  Ziff’s are invested in three Canadian energy companies.  Velvet Energy is a natural gas company owned by three different investment capital companies.  Seven Generations Energy is another natural gas company that has recently had an IPO.  Ziff’s big investment is Athabasca Oil Sands Corporation.  Athabasca had an IPO and the Ziff’s own a substantial chunk of the company.

Ziff investment in Athabasca is in the oil sands industry with an emphasis on hydraulic fracturing.  It’s not the intention of this blog to demonize the Ziffs for oil sands or fracking.  Personally, I like cheap energy and economically priced oil.  I am proud The United States and Canada ingenuity to drill out of oil dependency. 

There are two methods of refining oil sands.  The bulk of it is refined from strip mining.  A small portion of oil sands are close enough to the surface, it can be surface mines, process and refined.  When there is too much over burden, the oil must be extracted by other means and this becomes more expensive and a much slower process.  The majority of the oil sands reserves must be extracted and not mined.  This is where Athabasca Oil is developing and has the second largest land base for oil sands reserves with rights to 3.6 million acres. 

Athabasca is attempting to utilize hydraulic fracturing, horizontal drilling and inject steam into the ground to heat the oil and make it easier to extract it from wells.  It’s understandable, this is not a cheap method and to be profitable oil prices need to remain high.  While it might not be trial and error, this is not a refined science. 

Just as the established electricity companies are into nuclear, coal, and natural gas generation with wind and solar filling the role of less competitive marginal players.  The same looks to be true in oil sands.  The big companies are into the strip mining.  The speculation capital, like Ziff Brothers are into drilling.  They’re a nitch, but the reserves are substantial.  It’s likely a race to be the first company to master the drilling process.  Over the next 20 years, this market will likely be changing substantially.  The current cheap oil prices will slow down the innovation process but not stop it.  The Saudis cannot stop North America’s innovation. 

As a venture capital project, Athabasca has had its problems.   Just before the IPO, Athabasca sold a substantial portion of its reserves to PetroChina. Athabasca’s main marketable asset is the potential reserves.  Ziff Brothers, as a venture capital investment company, the goal is no to develop the asset in the long term but maximize short term profits.  One method used by all venture capitalists is divide a company up to sell assets before the IPO.  In this instance, Athabasca profits were not reinvested, but went to the pockets of the investment companies.  The Ziff’s pocketed 240 million dollars. 

Athabasca then had their IPO.  It didn’t bring as much as hoped, but what sale ever sells for as much as hoped.  Even still, at approximately $17.92 a share shortly  just after the IPO, Ziff was looking good when one owns 56 million shares.  Athabasca sells for $2.27 as share today and Ziff’s own about 65 million shares. On paper, that is a decline in stock price of $15.65 a share.  Ziff’s have likely profited more on the sale of reserves to China than the investment in the remainder of Athabasca.   Since the IPO in April of 2010, Athabasca has sold off  the remainder of a couple projects to PetroChina last year.   That sale was finalized last fall and brought Athabasca 600 million in cash but more later. 

Late last August, Ziff announced they intended to divest their energy investments.  Coincidentally, that was when oil prices started to slide from $100 to $50.  They weren’t stupid.  They likely saw it coming.

Now Athabasca claims 1.217 billion in cash and promissory notes, of that, 600 million came from the last sale to China with 584 million in promissory notes.  That leaves about 33 million in cash before the sale to China.  They also have 802 million in long term debt.  Athabasca’s banks want the company’s reserves and assets reassessed.  Previous loans were based on high priced oil.  We don’t have $100 oil anymore and that has damaged Athabasca’s balance sheet.  At current oil prices, Athabasca is having some credit issues.

So what does all this have to do with the Ziff Brother’s investment in Clean Line Energy Partners llc?

The purpose of venture capital investments is to make a profit.  Whether a company’s projects are split up and sold prematurely or allowed to mature a bit, venture capital investments are not in the business for the long term.  Like National Grid’s option to buy any or all of Clean Line’s projects, some venture capital projects are sold before the project is even developed.

Venture capital projects are often over hyped.  The reality and Athabasca’s current price is nowhere near what the hype originally made just after the IPO.  Clean Line is doing the same and selling the image of their projects while the true value of the company is likely nowhere near the image Clean Line is spinning to government officials and bureaucrats. 

Speculations by venture capital companies do not intend to build a company or industry leader.  Short term speculators sell assets to China, then raid the assets before the IPO.  That’s the game they play.  It doesn’t matter if it is microchips or potato chips, venture capital speculators plays the same game. 

What makes Clean Line different is their desire “develop” assets through eminent domain.  The easements is the assets Ziff’s investment in Clean Line desires.  If Ziff’s Athabasca bought the oil rights in an open market from a willing seller who had a choice to sell, then great.  That’s how an open market works.  No one held a gun to the head of previous owner of the oil sands reserves.  Like Jimmy Glotfelty, Clean Line’s former Washington bureaucrat once stated in his commentary to a National Review Online article about wind farms;
"It's their land and their choice to make revenue..."

Eminent domain was never intended for speculation.  Eminent domain was never intended for venture capital.  Like Jimmy Glotfelty, Clean Line’s former Washington bureaucrat said it smoothly to a Senate Energy Committee on the 2003 Blackout;

"I just got back from spending from spending two days in New York City meeting with investment bankers ... and time and time again we heard that repeal of PUHCA was necessary for more investment in the transmission sector."

That was a sugar coating the matter.  “Investment bankers” do not work with Union Electric, Ameren, or Exelon.  “Investment bankers” are really speculators playing in high risk industries.  A public utility is no place for a speculator.  Nearly 60,000 acres of assets, whether a transmission easement or potential oil reserves were never intended to be available for taking by eminent domain.  Is it any surprise farmers do not want Clean Line’s high risk speculation projects traversing their farmland?

The risk of failure is high.  The projects will likely be sold immediately after the easements are secured through eminent domain.  The “investment bankers” will profit by obtaining the right of ways for an economical price.  What remains is an aerial sewer through farmland, a monument to the failures of speculation projects.

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