April 15, 2002; Major Owner of Forest Oil Proposes Energy Infrastructure Partnership

The news of a filing by Mr. Phil Anschutz to sell units in newly formed Pacific Energy Partners (proposed symbol PGX) triggers concern that the billionaire might ultimately disadvantage investors in recommended Forest Oil.  We are disturbed because we see PGX as proposed, as an attempt to fleece retirement investors seeking income.  The latest action follows the now apparent result that Mr. Anschutz’s company Qwest Communications has devalued investment in the traditional regional telephone company. 

To form PGX, Mr. Anschutz would bring together scattered oil pipeline assets in a new entity.  Initially PGX would pay distributions of $1.85 per year on units that would be priced at about $20.  Subordinated units owned by Mr. Anschutz that would forgo cash payout if operations faltered temporarily would prop up the artificially high distribution.  The hope would be that as investors see that the distribution is actually paid for a few quarters the price of the units would go up and the yield would go down.   A higher unit price would open the spigots to cheap financing that could be used to make acquisitions that could help spike the distribution to the point where the GP tax really bites.  The trigger point for the incremental tax rate going to 50% is a distribution of only $2.40 per unit.  Thus for an increase of only 30% in distribution the rate goes to the max.  Compare that to a required increase in income of several fold to go from the lowest federal tax rate of 15% to the highest 39%. 

Perversely, Mr. Anschutz may be doing investors a service by attracting demand away from higher Greed Gauge competitors.  We know that Kinder Morgan, El Paso, Williams and others are desperate to sell new units.  To the extent that demand from unsuspecting investors, or sophisticated investors playing the greater fool game, gets saturated, the high greed gauge stocks will find it more difficult to raise the capital needed to keep the schemes going.

Meanwhile, Mr. Anschutz’s role in Qwest Communications looks increasingly negative since we noted it when we recommended Forest Oil last fall (see Stock Idea, Forest Oil, October 16, 2002).  We spoke mostly positively about the investor’s past but hinted that there could be a problem if Mr. Anschutz were to sell abruptly his 32% of Forest.  We suggested, “He may think that the portfolio of high potential prospects management has worked hard to build need more time to ripen.”  Since we made those comments Qwest stock lost a further 70% of already depleted value. 

Forest Oil was in business before Mr. Anschutz came along.  The investor’s influence on the company seems positive so far.  We’ll be watching carefully.