An Unusual Energy IPO

I’ll bet that when you think of IPOs, or initial public offerings, you think of hot tech stocks like Facebook, Tesla or GoPro (granted, some of these stocks are a little less hot these days).

I do too, so I was a little surprised to read in the Wall Street Journal that the biggest IPO this year is essentially a blank check for what is known as a Special Purpose Acquisition Company, or SPAC.

A SPAC is an unusual breed of investment because in some sense it puts the cart before the horse.  Typically, someone starts a business by raising money to fund it.  With a SPAC, money is raised in the public offering with the purpose of buying a company.

When someone raises money with a SPAC, it’s like giving them a blank check.

I should note that part of the reason that this IPO is the largest one so far this year is that the overall IPO market has been pretty sluggish.  If you had a business and wanted to sell stock to the public, would you want to do that in this market?  I didn’t think so.

What makes this interesting beyond being the largest IPO is that this SPAC was formed to go out and buy energy assets on the cheap.

This deal will give veteran oil and gas investor, Mark Papa, $450 million to buy whatever looks good over the next two years (if he doesn’t buy anything, SPACs turn into interesting arbitrage opportunities for a different kind of investor, but that’s a different story).

I hadn’t ever heard of Papa until last night, but the WSJ said that he spun off EOG Resources from Enron before Enron collapsed and was a pioneer in drilling techniques and became the largest crude oil producer in the continental US.  Upon retirement, he joined a private equity firm.

What I like about this story, though, beyond the unusual attributes that I mentioned above, is that it’s evident that seasoned energy investors are looking to buy in the sector.  Energy has obviously been a terrible investment since oil prices have collapsed, but at some point – or I should say at some price – investment in energy will be very attractive.

I can’t say whether we’re at that point now and I don’t think that this SPAC is a signal that we’ve hit a bottom, but it’s a little bit of evidence that is worth noting.

Maybe in two years, he won’t have invested any of the money he raised or maybe everything he buys will sink like a stone, but I’m interested that he’s interested enough to go raise $450 million from investors with the intent to buy.