Long time readers of this blog know that we have previously reported that brokerage firms have increasingly recommended that retail investors invest heavily in various types of oil & gas investments including private placements, master limited partnerships (MLPs), leveraged ETFs, mutual funds, and even individual stocks. See Overconcentrated in Oil and Gas Investments?, MLP Fund MainStay Cushing Royalty Energy Hurt by Failing Oil & Gas Prices; Oil and Gas Investments – Issuers Profit While Investors Take All the Risk
For instance, MLPs are publicly traded partnerships where about 86% of approximately 130 MLP securities, a $490 billion sector, can be attributed to energy and natural resource companies. Billions more have been raised in the private placement market. These oil and gas private placements suffer from enormous risks that often outweigh any potential benefits including securities fraud, conflicts of interests, high transaction / sales costs, and investment risk.
These investments have been recommended by brokers under the assumption that oil & gas would continue to be sold at around $100 and increase steadily over time. However, last summer the price of oil & gas plummeted due to a strengthening dollar and increased global supply of oil and remains below $60 to this day. Some experts are saying that if production volume continues to be as high as it currently is and demand growth weak that the return to $100 a barrel is years away.
In addition, several companies have recently been accused of making false statements in order to promote their stock price through these turbulent times triggering class action complaints. Two such companies are Cobalt International (Cobalt) and Seadrill Limited (Seadrill).
According to the allegations, Cobalt was supposed to operate in compliance with U.S. laws prohibiting the bribery of foreign officials. However, the complaint alleges that Cobalt gained access to its oil wells in Angola by partnering with certain shell companies that were in part owned by high-level Angolan officials. This action placed Cobalt at risk of an enforcement action by the SEC and Department of Justice for violating the Foreign Corrupt Practices Act. In addition, the class action complaint alleges that Cobalt overstated the value of these Angola wells after it learned that they contained little or no oil. Accordingly, Cobalt’s stock price has plummeted over the last year.
In the case of Seadrill, the class action lawsuit alleges that Seadrill falsely told investors in July 2014, that it would maintain its dividend until at least the end of 2015. Such statements are used to reassure investors that the cash flow of the company is expected to be sound. However, the complaint alleges that the purpose of these statements was to stabilized Seadrill’s stock price which would allow the company to retire several hundred million dollars of its debt. Then four months later Seadrill turned a 180 and told investors it would be eliminating the dividend immediately. Seadrill’s market capitalization fell more than $2 billion in a single day. Indeed, right up until the dividend suspension Seadrill increased its dividend in order to assure investors right before eliminating it completely. Over the past year Seadrill has last nearly 75% of its value since its market high.
Investors who have suffered losses in oil & gas related investments are encouraged to contact our firm. Brokers who sell oil and gas investments have an obligation to make sure that the investment is suitable for the investor and to disclose all the risks associated with the product. Our consultations are free of charge and the firm is only compensated if you recover.