Tuesday, July 28, 2015

Oaktree's responses to oil questions on quarterly conference call

I thought these were worthwhile comments to share:
Christopher Harris [Wells Fargo analyst] 
First question relates to the opportunity in energy you guys talk about there. Really just wanting the team to talk about how you guys have sort of managed the risks investing in that sector. And kind of what I'm wondering about is that if you underwrite investment, assuming kind of $50 oil was the baseline yet $25 ends up being the reality, it seems it could be a lot of downside associated with those investments. So that's the question, part one of the question. Part 2 is do you think it's a little early yet to be an aggressive investor in the sector at this point? 
David M. Kirchheimer [Chief Financial Officer] 
Well, the hallmark of Oaktree investing is to focus on the downside. And when we look at energy, we try to do the same. We try to assume -- we look at obviously the forward curve and what that's telling us, but then we assume a lot of downside and -- to that and try to build that into the equation. So the most recent transaction that we're working on right now, for example, our breakeven would be well below the forward curve and probably something in the 30s. Now if oil gets down to $25, that's got to hurt a lot of people. And of course, no one knows what's going to happen. But the interesting things about Oaktree, and I could have said this to Mike in answer to the very first question, is as things gets worse and worse, the opportunity set for us opens up more and more. And so, for example, we would raise more money in Opps Xb to take advantage of the opportunity set a year or 2 from now. But in terms of today, we can't proceed assuming that oil is going to be $25. All we can to is structure our investment such that we protect ourselves in a downside scenario which we do, do. 
Christopher Harris [Wells Fargo analyst] 
And the second part of the question, is it a little early yet to be really aggressive in investing in the sector? Do you think now would -- there's been enough shakeout with there are some really an attractive opportunity at this point?
Bruce A. Karsh [Co-Chairman and Chief Investment Officer] 
Well, in the last quarterly call, I mentioned the psychology that there wasn't opportunities because the psychology was not really that negative. The psychology is starting to turn negative, but it's just beginning. And we haven't dived in yet by any means. We have a lot of dry powder, and we're right now accessing opportunities that again are structured to basically minimize the risk, but also want to take advantage of now happens to be, in retrospect, the right time to step in for part of the opportunity. So our instinct is that it's not time to dive into the water completely, but it is time to take advantage of low oil prices and gas prices.