“I can’t pick the tops, but I can pick the bottoms.”

wealthymattersJeff Sandefer was once my teacher in school.Since graduating from Harvard Business School in 1986, Sandefer has had many successful business ventures, amassing a personal fortune of hundreds of millions of dollars.

Here is the story of how this Texas oilman acquired 17 billion barrels of Australian shale oil reserves in a controversial deal that eventually generated roughly $150 million for his philanthropic organizations. Those nonprofit groups now play a major role in Sandefer’s efforts to change higher education in Texas.

Confidentiality agreements prohibit Sandefer from revealing details of the Australian play. He says he can’t even confirm the identity of his partners, the Ziff brothers of New York, even though their involvement is widely known.

Some in the Australian media have portrayed Sandefer’s 2003 investment in Southern Pacific Petroleum as a calculated ploy to force SPP into liquidation and hijack the company’s vast reserves and technology.

“I can’t say much, but I’d say those reports are pretty exaggerated,” said Bill Jones, a former MBA student of Sandefer’s who worked for him on the SPP deal. Jones later became a vice president for Ziff Brothers Investments and now teaches at Acton.

The investment down there was not as close to a complete solution as we thought it was,” Jones said. “We were trying to find a technology that was closer to working than what we had.” Apparently the old teacher too was nowhere near as prepared as he expects students to be with their case studies! And he does drive by the seat of his pants.

Oil shale is mined, like coal. Finding a cost-effective, environmentally friendly method of extracting petroleum-like liquids from the rock is a holy grail of the energy industry, promising untold riches to anyone successful in the quest.

The western U.S. has enough recoverable shale oil reserves to provide a quarter of total U.S. demand for petroleum products for more than 400 years, according to the Rand Corp.

But getting the liquid out of the rock is hard. The process requires a tremendous amount of energy — temperatures of 900 degrees and beyond — and can use a lot of water. Estimates vary, but over three decades, SPP spent $400 million or more, including government subsidies, acquiring the largest reserves in Australia and trying to perfect a process.

It couldn’t.

By the time Sandefer and the Ziffs made their investment, SPP’s major partners had abandoned the effort, and the company was burning cash — cash it didn’t have.

Much of the Southern Pacific Petroleum case can be pieced together from Australian media reports, Internal Revenue Service filings by nonprofit organizations controlled by Sandefer, corporate documents available from Australia, and Texas secretary of state business records.

The available paper trail begins in early April 2003, when Sandefer created three limited liability companies, each a variation of the name SCP Koala. SCP stands for Sandefer Capital Partners, an investment company Sandefer founded.

Within days, stories emerged in Australia outlining Sandefer’s rescue of troubled SPP. He invested more than $30 million Australian with the promise of more cash if certain milestones were met. But SPP continued to burn cash and failed to receive environmental approval for the next phase of its demonstration extraction project in Queensland, Australia.

By the end of the year, Sandefer and the Ziffs, the only secured creditors, had pushed SPP into receivership. When no bidders emerged, they acquired most of the oil shale assets of SPP for pennies on the dollar and created a new company, Queensland Energy Resources, to hold them. QER was ultimately controlled by SCP Koala.

The Courier Mail in Queensland compared Sandefer’s approach to Odysseus’ use of the Trojan horse. Greenpeace Australia blistered him in a story on its website.

“Sandefer doesn’t care about the environment, he doesn’t care about local residents and he doesn’t care about SPP’s shareholders,” a Greenpeace climate campaigner said. “The only thing that Jeff Sandefer cares about is lining his own pockets.”

No one would be lining anything, however, without a more promising extraction technology.

In mid-2004, Queensland closed its demonstration project in Australia, a complicated process plagued by environmental issues and breakdowns. Within a year or so, it became involved with a different process, Paraho, at a pilot plant in Colorado.

This was a simpler technology with fewer moving parts. Like a giant barbecue pit, the oil-bearing shale was loaded at the top and heated. Liquids were extracted, and shale ash came out at the bottom. The process also required much less water.

Once again, optimistic stories began appearing in the media about the prospects for large-scale shale oil development. That’s important. While the value of oil-related investments rises and falls with the price of the raw material and interest rates, the value of shale oil investments also rides with the perceived promise — or not — of the extraction technology.

In mid-2006, with optimism and oil prices increasing, Sandefer contributed his Australian oil shale holdings to his Jeff D. Sandefer Foundation (now called the Ed Foundation) and the Acton School of Business, according to the organizations’ annual IRS filings.

Acton received stakes in the Koala entities valued at about $20 million, and the Sandefer Foundation received about $110 million. The Sandefer Foundation also got $22 million in cash from Sandefer Capital Partners.

By the end of the year, the nonprofit organizations converted the bulk of their Koala holdings to cash, which they generally invested in

Sandefer’s gifts greatly increased the assets of his nonprofit organizations. At year-end 2005, for comparison, the Sandefer Foundation reported net assets of $411,000 and the Acton School of Business about $3 million.

Jeff Sandefer  sees himself as a contrarian investor. As he says,“I can’t pick the tops, but I can pick the bottoms.”

In 2005 or so, he decided to liquidate all his business holdings and devote his resources to education philanthropy . So at the time “A lot of the thinking was, how do I maximize the amount of money I have to invest in philanthropy?”.It took three years to unwind his businesses. He was out before the worldwide economic collapse in 2008.At year-end 2009, according to the IRS filing available, the Ed Foundation said its small remaining stake in SCP Koala Resources had a fair market value of $1.5 million, down from $25.5 million when the property was donated.

Nothing like being round Jeff to understand nonsense valuations. Great to sell at, never to buy with one’s own cash.

About Keerthika Singaravel

One Response to “I can’t pick the tops, but I can pick the bottoms.”

  1. Pingback: The #EssarOilDeal Presser | wealthymatters

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