Dallas LBO firm bets on oil industry comeback

DALLAS -- Hicks, Muse, Tate & Furst, venturing onto a field already littered with investor casualties, has placed a $250 million bet that the oil business is ready for a comeback.

Hicks, Muse, a leveraged buyout firm based in Dallas, will pay $6 a share, in cash, for 62 percent of Coho Energy, an oil exploration and production company with properties mostly in Oklahoma and Mississippi.

Although the deal itself is modest, Hicks, Muse says it plans to use Coho and its managers as a platform to buy other companies that find, produce, process and transport oil. Hicks, Muse is also looking over oilfield services companies and properties that companies want to unload.

Hicks, Muse, which usually borrows more than it invests, signaled its seriousness by making its Coho purchase entirely from its own funds. For Coho, the deal amounts to a private offering of additional shares, to Hicks, Muse, that will give it the wherewithal for a shopping spree in an uncrowded market.

Thomas Hicks, Hicks, Muse chairman, said his firm planned to continue buying in the next six to 18 months, then realize the gains over five or seven years as oil prices return from the current $13-a- barrel range to the $18 he predicts.

"Today is the most attractive time we've seen to invest in oil and gas in the last 10 or 15 years," Hicks said in an interview.

As oil prices have collapsed, so have shares of Coho and most others in the industry. Coho, having traded as high as $13 last fall, closed at $4.6875 on Friday. After news of the Hicks, Muse investment, they rebounded to $5.4375 on Monday.

Analysts called the 28 percent premium over Friday's closing price that Hicks, Muse is paying a sensible long-term proposition. Coho will have the money to become a consolidator among medium-sized oil companies that might be pressed to raise cash by selling some or all of their holdings, said C. Van Levy, an analyst at Jefferies & Co. "Provided these quality properties hit the market, I think it's a good move," he said.

Among the investors who had already jumped in before the shares hit bottom are the Hicks, Muse partners themselves. In May, they personally bought 2.2 million Coho shares at nearly $7 a share. Jack Furst, one of those partners, said that Monday's investment might also be early, but that the firm needed to establish a foundation for further acquisitions now.

For Hicks, Coho represents a cautious return to a sector he last invested in about two decades ago, only to face the 1980s oil price crash. He learned that oil is too risky for companies to bear heavy debt.

One of the energy industry's best-known outside investors this time around has been Richard Rainwater of Fort Worth. Though not familiar with the Coho particulars, Rainwater praised the Hicks, Muse strategy. He, too, is hunting for oil-industry acquisitions, having already bought some shares and some oil futures. In a television interview a year ago, he said that he would relish the prospect of $12 to $13 energy prices if it created opportunities.

"Now what's happened is people like Hicks, Muse who are pretty smart investors are taking advantage of it," he said Monday.

Though Rainwater's energy companies have fallen in recent months, he still has substantial long-term gains.

The Rainwater case for higher oil prices is based on growing global demand -- which has been slowed by Asia's economic turmoil -- and limited resources. In the Hicks, Muse outlook, low prices will force oil production cutbacks, especially in the United States, with rising demand then likewise leading to higher prices.

Coho Energy, named after the salmon to reflect its Canadian roots, operates primarily in Oklahoma, where it spent $250 million for Amoco's properties last year, and in Mississippi. The declining value of other holdings has forced it to take large write-offs this year.

Coho itself has grown through acquisitions, then proving that the acquired properties had far more oil than the sellers thought. Jeffrey Clarke, the company's chief executive, applauded Hicks, Muse's timing. "Most people get into this industry at the top," he said. "These guys have gotten in at the bottom, or as close to the bottom as you're ever going to see."

Copyright 1998
Provided by ProQuest Information and Learning Company. All rights Reserved.