Josh Young

The energy industry is a favorite of Josh Young, who is starting Young Capital Partners, a hedge fund that will launch in September with $10- to $20 million under management.

A native of Santa Monica, California, Young graduated from the University of Chicago with honors in economics. He then joined Mercer Management in Chicago, followed by stints with a private-equity firm in Los Angeles and a multibillion-dollar single-family investment office in Los Angeles.

Young began investing in energy equities several years ago. Since leaving his analyst job in February, he has continued to evaluate and invest in energy equities.

While energy certainly isn’t the only segment drawing Young’s attention, he notes the industry’s rapidly changing dynamics provide many opportunities. He elaborated on these factors and described his value-added investment approach recently in an interview with Oil and Gas Investor.

Investor: What are the dynamics that make energy attractive to investors?

Young: It’s an exciting place to be. There’s the whole peak-oil concept—whether you believe in peak oil or just that we’ll be finding less and less of it—that colors the macro environment. Then, on the financial side, inflation and an uncertain economic environment. And new drilling and completion techniques are opening up new plays constantly. These factors, combined with constrained capital availability and volatile commodity prices, provide a continual stream of opportunities.

Investor: What’s your investing strategy?

Young: I focus primarily on energy, business services and technology. I’m interested in companies where I can do a balance-sheet and cash-flow analysis to evaluate what they would be worth if they were sold right now. What are they trading at on a full-cycle basis, and based on free cash flow, what are they worth?

I’m only interested if they are trading at a large discount to their intrinsic value and if they have identifiable catalysts. Energy companies are particularly attractive in this strategy because it’s possible to hedge much of the commodity exposure, reducing downside risk while maintaining upside from buying at a discount.

Investor: You’ve had some good results.

Young: One example is Northern Oil & Gas, a nonoperator in the Bakken shale. It was trading at a level where it only needed to drill a few wells to justify the market price. I saw it was going to participate in far more wells. I evaluated how much risk was incurred on well economics, and the company’s liquidity, to make sure it would be okay if the drilling program were accelerated. I also met with a number of public and private operators in the Bakken to understand the economics and be able to forecast activity there.

The stock was trading at $2 to $4 and there was a clear path to achieving $20. It reached $18 recently.

Gastar Exploration is another example. There were clear signals it was selling its Australia coalbed-methane assets a year ago, and its enterprise value was less than the value of the Australia assets alone. It was trading at a huge discount to peers, at $2 per share. It sold the asset and reached $5.75 recently.

Investor: You’re investing your personal money in anticipation of how you’ll trade the fund.

Young: I’m getting my hedge fund established, raising capital and pursuing the same investment strategy I’ve been pursuing for the last few years.

As an example of a recent trade, three months ago I identified a company called Mesa Energy Holdings. It had acquired 3,000 acres in the Marcellus shale play in New York and released a reserve estimate that the field had a PV-10 of $151 million. It had recently paid $400,000 for the acreage. The company achieved a $150-million market cap even though it had no cash and several million dollars in debt.

Even the highest transaction comparables in the core areas of the Marcellus were $14,000 an acre, and here was a company trading for $50,000 an acre, with no cash to develop the acreage. When it got up to $3 per share, I shorted it and I’m still short a little bit of it at 40 cents.

Investor: What’s your investor profile?

Young: Three groups, primarily. Family and friends who want me to manage their money; high-net-worth individuals in the energy industry who understand what I’m doing and may sense the value opportunity but aren’t trading on it; and institutional investors who recognize that the type of risk I take and the returns I generate are differentiated.

I’m also involved in deal flow on the private side. Some of the companies I deal with have liquidity issues or are in emerging shale plays and seeking capital or assets. I’ve referred one deal to a public company that worked out well for them and should work out well for me. Being involved at the asset level is complementary to my due diligence process.

The energy industry is a great place to invest. There are increasing returns as you become more knowledgeable about the people, the assets, and the technology.