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A Backdoor Way to Profit From the Struggling Resource Sector

By Brian Weepie, analyst, Stansberry Research Resource Report
Friday, October 2, 2015

In the past year, more than 10 oil and gas companies have filed for bankruptcy – including, most recently, Samson Resources.
 
Major coal producers like Alpha Natural Resources, Walter Energy, Patriot Coal, and James River Coal have also all filed for Chapter 11 protection.
 
And there are likely more bankruptcies to come. As I told you in July, this is actually good news for resource investors. When enough producers leave the sector, we'll see a bottom in resource stocks.
 
But in the meantime, there's one group of companies set to profit. Let me explain...
 
As regular readers know, commodities have been in "bust" mode over the past year. The price of benchmark West Texas Intermediate (WTI) crude oil is down more than 50% from its June 2014 peak. Gold and coal prices are both down about 40% since late 2011.
 
Low prices are making it impossible for many resource companies to earn profits. Companies with high levels of debt are struggling to pay it back.
 
And things could soon get worse...
 
You see, Federal Reserve Chair Janet Yellen says the Fed plans to raise interest rates before the end of the year. Higher interest rates cause the interest portion of a company's debt service costs to rise. Many resource companies that are already struggling to pay their debts may soon be pushed to restructure... and some will have to file for bankruptcy.
 
But this is good news for one group of companies.
 
You see, when a company files for bankruptcy, it hires professionals to help. In addition to attorneys, bankrupt companies often hire an advisor to assist with the nuances of operating while in bankruptcy, and an investment bank to restructure debt and sell assets.
 
The most well-known groups to offer these services work within the restructuring division of a larger firm or bank.
 
With low interest rates the past few years, the restructuring market has been quiet. But now, with a wave of new resource bankruptcies looming, companies that offer restructuring services like the ones mentioned above are preparing for growth.
 
For example, many investment banks are hiring new employees for their restructuring divisions.
 
Global bank Houlihan Lokey (HLI) went public earlier this year to raise money to continue its growth. Last year, Houlihan advised on more than $90 billion worth of restructuring deals. And from 2000 to 2014, it served as an advisor in 12 of the 15 largest bankruptcies – including banks Lehman Brothers and Washington Mutual, and telecommunications company WorldCom.
 
Last year, investment bank Moelis & Co. (MC) also went public. Since 2008, Moelis has represented parties in more than 190 restructuring assignments around the world.
 
Former Morgan Stanley banker Paul J. Taubman's boutique advisory firm PJT Partners also recently combined with investment firm Blackstone Group's (BX) advisory business to form a publicly-traded financial advisory firm called PJT Partners Inc. (PJT). The new company's services include restructuring and reorganization.
 
In short, the restructuring market is likely to see a lot of growth soon. So how can you set yourself up to profit? The table below shows some of the public companies in this space.
 
Company
Type of Company
Market Cap
FTI Consulting (FCN)
Financial Advisor
$1.7B
Huron Consulting (HURN)
Financial Advisor
$1.4B
Blackstone Group (BX)
Financial Advisor,
Public Investor
$36.0B
Stifel Financial (SF)
Holding Company*
$2.9B
Evercore Partners (EVR)
Investment Bank
$1.8B
Greenhill & Co. (GHL)
Investment Bank
$820M
Houlihan Lokey (HLI)
Investment Bank
$1.4B
Lazard (LAZ)
Investment Bank,
Asset Manager
$5.5B
Moelis & Co. (MC)
Investment Bank
$1.4B
PJT Partners Inc. (PJT)
Investment Bank
$820M
* Stifel Financial owns investment bank Miller Buckfire.

All of these names have experience helping struggling resource companies restructure. For example, Blackstone is providing financial advisory services in the bankruptcies of Samson Resources and coal producer Walter Energy. Lazard is working in the Sabine Oil & Gas bankruptcy. And Moelis is involved in utility and coal producer Energy Future Holdings' bankruptcy.
 
So all of them will benefit from an increase in resource bankruptcies. With commodity prices likely to stay low in the near future, and interest rates likely headed higher, I recommend looking into some of the above stocks today.
 
Good investing,
 
Brian Weepie




Further Reading:

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Market Notes
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From The Crux
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1923.72 +0.2% -1.2%
Oil (USO) 14.55 -0.9% -57.4%
Gold (GLD) 106.73 -0.1% -8.6%
Silver (SLV) 13.87 +0.0% -15.8%
U.S. Dollar 96.12 -0.1% +11.9%
Euro 1.12 -0.2% -11.6%
Volatility (^VIX) 23.27 -5.0% +39.3%
Gold Stocks (^HUI) 105.76 -2.5% -46.1%
10-Year Yield 2.04 -1.0% -15.0%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 191.53 -0.1% +0.5%
Israel (ISL) 17.00 +1.0% +0.9%
Japan (EWJ) 11.47 +0.4% +0.2%
India (IFN) 24.26 -0.4% -0.6%
China (FXI) 35.67 +0.6% -3.1%
Taiwan (EWT) 13.44 +2.1% -9.3%
S. Africa (EZA) 54.28 +1.1% -12.2%
S. Korea (EWY) 49.54 +1.6% -14.9%
Russia (TRF) 9.68 -0.5% -18.7%
Singapore (EWS) 10.05 -1.2% -21.6%
Canada (EWC) 22.96 -0.2% -22.9%
Lat.America (ILF) 22.59 -0.1% -35.5%

Sector ETFs
Symbol Price
Change
52-Wk
Software (PSJ) 40.14 +0.1% +15.4%
Retail (PMR) 36.60 +0.2% +13.0%
Consumer Svcs (IYC) 137.93 +0.3% +13.6%
Construction (PKB) 22.67 +0.9% +11.2%
Utilities (XLU) 42.62 -1.6% +4.3%
Real Estate (IYR) 71.01 +0.1% +6.4%
Health Care (IYH) 140.66 +0.5% +6.9%
Insurance (IAK) 48.31 -0.6% +5.6%
Big Tech (QQQ) 101.79 +0.0% +5.8%
Semis (PSI) 23.56 +3.1% +4.0%
Defense (PPA) 32.71 -0.4% +4.1%
Financials (IYF) 84.05 -0.1% +3.0%
Biotech (PBE) 45.93 +0.5% +0.5%
Media (PBS) 23.86 -0.3% -0.9%
Industrials (IYJ) 96.05 -0.4% -1.7%
Transportation (IYT) 140.46 +0.4% -3.5%
Telecom (IYZ) 26.54 -1.7% -7.6%
Water (PHO) 20.45 -0.4% -15.7%
Basic Mat (IYM) 64.95 +0.3% -21.1%
Alt. Energy (PBW) 4.06 -1.0% -32.2%