Report: Carl Icahn, John Paulson Suffer Tremendous Losses from Energy Price Declines

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Carl Icahn + John Paulson

U.S. hedge funds bet billions of dollars on oil & gas stocks in 2014, but the drop in oil and gas prices has left them with enormous losses, The Motley Fool (TMF) said.

Hedge fund manager John Paulson rose to fame by correctly predicting the housing crash in 2007, making billions for himself and investors in the process. But he certainly didn’t see falling oil prices coming, the financial services company said.

He was very bullish on energy at the end of the third quarter, reporting positions in Whiting Petroleum, Cobalt International Energy, and Oasis Petroleum, which would have cost him nearly $1 billion had he held onto them until Thursday’s close. We won’t know for a few weeks what positions were held at the end of the fourth quarter, and hedge fund returns are closely guarded, but reports put Paulson’s Advantage Plus Fund losses at 35% last year, and much of that is tied to energy, TMF said.

Paulson’s real losses could be even larger because Paulson also reported a 26 million share position in Kodiak Oil & Gas, which was acquired by Whiting Petroleum in a stock deal that would have added 4.6 million shares to his Whiting stake, the report said.

Paulson wasn’t alone in betting the wrong way on energy. Carl Icahn has been heavily invested in energy and, through positions in CVR Energy, Chesapeake Energy, Transocean, and Talisman Energy, could have lost $1.56 billion in the last three and a half months alone, according to TMF.

We don’t yet know what trades either manager made during the fourth quarter, but it’s safe to say that both Paulson and Icahn lost a lot of money in energy stocks, and they’re not alone. Citadel Advisors, Discovery Capital Management, and David Tepper’s Appaloosa Management had hundreds of millions of dollars invested in energy stocks at the end of Q3, the report said.

The collapse in energy wasn’t predicted by private equity firms, either, who buy out entire companies and hope to sell them for a big profit when they’re sold again or taken public. Bloomberg reported on December 21 that buyout firms had lost $11.7 billion just on 27 publicly traded energy stocks since June. Between that report and today, WTI and Brent crude oil prices are down 17% and 20%, respectively, so losses have probably grown, TMF said.

The drop in oil prices could make it nearly impossible for private equity firms to finance energy buyouts in the near future as well. That’s the downside of the buyout business: Money is easy to come by when prices are high, but when valuations are low, no one wants to finance an acquisition, the report said.

As energy prices tumble, a number of hedge funds are starting to get bullish on energy. Citadel was adding energy stocks in the third quarter, and if they saw deals then, they should see great values now. T. Boone Pickens has also made bullish comments on energy prices. But no one really knows when oil prices or energy stocks will recover. If they did, some of the brightest minds in the hedge fund world wouldn’t be dealing with billions of dollars in losses, TMF said.

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