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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Why High Risk Energy Investors Are Looking To Iraq

Oil Field

There are distressed energy investors, investors who are distressed about energy, and then there are investors who will buy distressed properties that no one else would touch with a ten-foot pole. Of late that last group is starting to become interested in an area of the world that is radioactive to every other investor out there; Iraq.

Iraq is a war-torn mess where the prospect of earning a profit is almost unimaginable to many investors. Yet a select few investors are starting to look for opportunities in the country, and in the process are giving literal truth to the old adage about investing when “blood is running in the streets”.

Investing in Iraq is notable for a few reasons.

First, the country itself may present a long-term opportunity. The U.S. State Department cites Iraq as having “long term potential” based on its status as the world’s fifth largest repository of oil reserves, as well as massive reconstruction and infrastructure needs. A State Department report notes "U.S. companies have opportunities to invest in security, energy, environment, construction, healthcare, agriculture, and infrastructure sectors".

In other words, U.S. investors do not have to literally go to Iraq and take their life in their hands to buy and oil rig. Instead they can invest in U.S. firms that will benefit over the long term from any Iraqi stability and rebuilding. This could include construction and development firms like KBR and Fluor, oil majors like Exxon and BP, and financial firms with a large swath of international experience like Citi. Of course, defense stocks are a good way to hedge these bets in the event of renewed fighting where additional equipment like helicopters from Lockheed Martin or missiles from Raytheon may be needed.

Iraqi-investing is also significant to investors for a second reason though; it epitomizes the need to look outside traditional investing circles for new opportunities. Despite the fact that the stock market as a whole has returned about 11 percent on average annually over the last 30 years, many investors have returns far lower than that. In fact, even sophisticated millionaire investors only expect returns of 4-6 percent on average.

Related: Oil Traders See Market Balance By Mid-2017

In order to break out of that type of low returns environment, investors need to think outside the box and look for new opportunities. That could mean opportunities where they can use personal expertise to understand a business that the rest of the market does not, or it could mean participating in investments that the market is not yet willing to consider. Iraq is one example of the latter.

Beyond Iraq though, there are plenty of other markets and market segments that the broader swath of investors do not want to participate in right now. For example, Russian stocks or healthcare stocks might qualify under these criteria.

Investors buying into Iraq or other distressed under-appreciated sectors of the investing world need to have patience and a long time horizon, but if they do, they should profit handsomely. That’s not to say that a situation like Iraq will always work out well – it may not , but that’s a risk that investors can take if they have a broad enough portfolio. Moreover, taking on that type of risk is likely to lead to higher returns on average over time. A situation like Iraq is not right for many or perhaps even most investors, but the broader lesson about keeping one’s eyes open for new opportunities anywhere they may appear is universally true.

By Michael McDonald of Oilprice.com

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