Thanks to the JOBS Act, an opportunistic Long Island brokerage firm and a barrage of enticing webinars, Denver’s Phoenix Capital has sold $700 million of bonds yielding as much as 13%.
By Brandon Kochkodin, Forbes Staff
“If Warren Buffett and half of the sharp guys on Wall Street invested over $300 billion last year into domestic oil and gas, suffice to say, it ain’t going anywhere.” The speaker is Matt Willer, head of Capital Markets for Phoenix Capital Group, and he is leading a webinar entitled “Investing In Domestic Energy” being broadcast to some 300 investors from his office in Denver, Colorado. Behind him, through the window, you can see the Denver Tech Center sprawling across the mile high city’s far flung Hampden South neighborhood. Willer is assuring his audience that the unsecured, private placement bonds he is selling, with yields from 9% to 13% and backed by mineral rights to oil wells in places like Wyoming’s Powder River Basin and Uintah, Utah, are money good. “Mailbox money,” says Willer.
Willer works for an enterprising petroleum engineer turned financier named Adam Ferrari who founded his Phoenix Capital Group in 2019. Phoenix says it’s an oil and gas company, specializing in acquiring mineral rights and drilling independently, but its core competency seems to be raising funds from yield hungry investors. Mostly through advertising run on conservative radio shows like Hannity and webinars which it holds daily, Ferrari reports that Phoenix has so far raised $700 million of a planned $750 million private high yield bond offering. Some 95% of its sales, Willer says, are to people above the age of 55, with half of the funds coming from 401(k)s and IRAs.
“Most companies would hire Goldman Sachs or Morgan Stanley to raise them $500 million or $1 billion,” says Willer, who claims his widowed mother invested $500,000 in the bonds, “we don’t need their help and we certainly don’t need their fees.”
Phoenix is one of a growing number of little known financial firms taking advantage of Congress’s Jumpstart Our Business Startups (JOBS) Act, signed into law by President Obama in 2012 which enabled companies to more easily sell unregistered securities, otherwise known as private placements, directly to individual investors. Because the legislation exempts these deals from the traditional disclosures required of publicly traded companies, few realize how large an impact the JOBS Act has had. From 2009 through 2020, $15 trillion of so-called Reg D offerings were sold, according to a 2023 study by SLCG Economic Consulting. During the same time period, fully SEC registered offerings, of stocks, bonds and ETFs trading on exchanges, tallied $16.4 trillion in sales.
For operators in the oil and gas business, The JOBS Act has been a godsend. As the ESG (Environmental, Social, and Governance) movement gained traction, many banks and large institutional investors began withdrawing from fossil fuels, citing environmental concerns. This opened a window for sellers of unregistered securities, especially those with enticing offerings like Phoenix and its 13% oil bonds.
Webinar pro Willer, explaining the virtues of his bonds, whose prices you will never see on a Bloomberg terminal, says “this is just the same concept as a CD. You know what you have, you know what you’re getting and you know how long your commitment is without any fluctuations.”
Adam Ferrari says the name he gave to his Denver-based oil and gas company, Phoenix Capital Group, was inspired by his father, Daniel Ferrari. A former sheriff, pipe fitter, and welder in Illinois, Daniel was paralyzed in 2016 from transverse myelitis, an affliction the family believes was triggered by the flu vaccine. Phoenix is “symbolic of a second birth, something that never dies and continues to persevere,” says Adam Ferrari.
The younger Ferrari, now 41 years old, grew up in the suburbs of Chicago and graduated from the University of Illinois in 2005 with a degree in Chemical Engineering. Due to a shortage of petroleum engineers, oil giants like BP and Shell were open to hiring chemical engineers. He started his career at BP, spending two years working in the oil giant’s offshore division. In 2007, Ferrari left BP for BHP, an Australian metals and mining company.
Around 2009, Ferrari enrolled at the University of Wisconsin-Madison’s business school, aiming to shift his career toward investment banking. However, he left the program prematurely to accept a job offer as an energy analyst from Macquarie Capital in Denver. His tenure at Macquarie Capital was short-lived. Ferrari says he didn’t much like the work and he feared he was going to have to move to New York to keep his job, so he went back to engineering, joining Newfield Exploration, where he was involved in drilling, completion, and some production work. From there he moved to Halcon Resources, a start-up oil producer founded by Floyd Wilson, a legendary wildcatter who, in 2011 sold Petrohawk Energy Corp. to BHP for $12 billion.
In 2014, Ferrari struck out on his own, forming Ferrari Energy which bought and sold mineral rights and royalties. In 2016, along with partners and private equity backing, he created another entity called, Wolfhawk Energy, where he served as CEO. From 2016 to 2019 Ferrari’s energy companies spent $150 million to acquire more than 2,500 properties in Colorado, North Dakota, Wyoming, and Utah.
Ferrari says it was also at this time that he first had the idea for what would become Phoenix, based on the realization that oil and gas had the potential to generate high yields, for which investors have an insatiable appetite. His edge would come from using the JOBS act, as well as a novel strategy designed to cut out the costs and friction that comes from hiring investment bankers and brokers.
The concept might have remained just an idea if not for a run-in with the law.
In 2019, Adam Ferrari pleaded guilty to felony theft in Colorado. He was charged with cheating a mineral rights holder and Anadarko Petroleum out of $300,000, accrued royalties kept in a account for a piece of land in Weld County. Ferrari allegedly forged a deed to reroute the money held in escrow to him instead of the rightful owner. Two months after his arrest, Ferrari Energy changed its name to Petram Group and severed ties with its namesake. He received a deferred sentence that included three years of unsupervised probation, with his plea to be withdrawn and record to be expunged at the end of it, as reported by the Greeley Tribune. His record was sealed in May 2022.
Ferrari maintains he didn’t do anything wrong. He says the episode was the result of a “corporate hit job” brought on by a competitor who was, and he says still is, out to get him. In explaining why he took the plea, Ferrari asserts that accepting the guilty deal was the fastest way to put the entire episode behind him. “I had a deal in writing from the Denver DA that the plea could be withdrawn and there would never be a conviction entered,” he says. “It is unequivocally clear in Colorado criminal law that Adam Ferrari has never been convicted of a crime. Period.”
Phoenix was born amid Ferrari Energy’s implosion, but on paper founder Ferrari wasn’t listed as its CEO. According to securities attorneys, disclosure of his criminal record may have been required though Ferrari and his lawyers refute this. Regardless, from 2019 until 2023, Ferrari officially worked at Phoenix in an advisory role. His official bio says he founded Phoenix Capital in 2019 with $2.5 to $3 million in seed money from an entity called Lion of Judah LLC, which holds about 60% of the company’s equity. Lion of Judah’s voting interest was held equally by his two parents, Daniel and Charlene Ferrari, but a 2023 offering document for the 9% Reg A bonds says that Adam was the “owner” of the company, but had “no voting or managerial interest.” By the end of 2022 Ferrari’s felony record was legally expunged. In November 2023, Ferrari was officially listed as the CEO of Phoenix.
Over the last eight years or so Ferrari and his companies have been involved in numerous lawsuits. He has gone to great lengths to clear his name, including hiring a reputation management firm, which has created dozens of websites, blogs and social media posts on his behalf in an attempt to bury bad news related to his past.
Ferrari assures Forbes that the lawsuits he has faced have never interfered with his skill in picking high return energy investments for his companies. Furthermore, he says given the “complex nature” of the mineral rights business, litigation is an “unfortunate, but common occurrence.”
Says Ferrari, “Nobody has ever lost a dollar in a business deal with me or my family.”
Among small businesses taking advantage of 2012’s JOBs Act to raise capital, few have been as aggressive as Phoenix, especially in the area of bonds.
“When we talk to people in the institutional finance world, the first thing they say, universally, when they look at us, they’re like wow, that’s different,” says Ferrari from his Irvine, California office, referring to the fact that his oil and gas business is 100% debt financed.
While banks would likely shun such high leverage, the investors Ferrari prospects for with his webinars, are less likely to scrutinize his balance sheet so long as they can lock in the yields he is advertising – from 9% to 13%. Phoenix also advertises that its bonds have no fees. In fact, companies offering private placement securities generally aren’t allowed to even take a commission directly from investors, though brokers selling their oil bonds can. Phoenix gets around this with the help of a broker-dealer named Dalmore Group, which is run out of a house on Long Island.
Dalmore’s specialty is offering small firms raising capital, mostly via the JOBS Act provisions, a DIY way to legally sell their own securities as an SEC registered broker. Hence, salesmen on Willer’s Denver-based webinar team are technically licensed as brokers through Long Island’s Dalmore Group. This way Phoenix’s own people get to charge commission under Dalmore’s Financial Industry Regulatory Authority (FINRA) license. Acting as the official brokerage agent on Phoenix’s $750 million in bonds, Dalmore takes a 5% commission but the Long Island firm only keeps 1% of it, kicking back 4%, or some $30 million, to Phoenix and its salesmen.
They’re “W-2 employees,” but for financial compliance purposes they are registered with FINRA as if they worked for Dalmore, says Ferrari.
In 2023, Phoenix had total revenues of $118.1 million and losses of $48.3 million. Outside of interest costs on its bonds, marketing and advertising, which amounted to $36.7 million, was the firm’s biggest expense. In the first six months of 2024, revenue soared to $120.5 million, up 143% from the same period last year as mineral and royalty revenues went from $49.2 million to $85.6 million. Still, company losses amounted to $20.6 million during the period.
Ferrari points out that about 50% of the bonds sold to retail investors feature payment-in-kind provisions, where interest payments are made with additional bonds instead of cash. This arrangement means Phoenix records the full interest expense on its income statement, but in reality, it pays out only about half of that each year. This cash flow savings is critically important when it comes to analyzing the bonds ability to cover interest.
According to FactSet the average energy company in the S&P 1500 has a debt to EBITDA ratio of 2x. Phoenix’s debt-to-EBITDA stood at 19x at the end of 2023. Ferrari says Phoenix’s EBITDA for the full year is expected to be between $125 and $135 million, which could bring the ratio down to between six and ten times by the end of the year, depending on how much additional debt they raise.
Thomas Watters, a managing director at S&P Global Ratings, says that for industrial firms anything over 3x is typically considered speculative. “Over eight or nine times gets into triple C land, which predicts very, very risky credit,” he says.
“Going out and buying royalties or buying into shale plays where the wells only pay off at two to three-times is not a sustainable strategy,” says Ed Hirs, an energy fellow at the University of Houston. Hirs also cautions that Phoenix’s unsecured bonds are relying on so-called probable reserves for their payout. In fact, during Willer’s webinar one slide shows Phoenix has $1.8 billion in estimated reserves but the fine print reveals that $1.22 billion, or nearly 70%, came in the form of probable reserves at the time.
“Bankers won’t give you a loan on probable reserves,” says Hirs. “They won’t even give you a loan on proved undeveloped reserves. Aubrey McClendon (the disgraced former CEO of Chesapeake Energy who Forbes once called “America’s Most Reckless Billionaire”) tried that and, of course, it didn’t work.”
And what if the price of crude oil drops from the current $73?
Willer and Ferrari assure investors that Phoenix can be profitable even if oil falls to $30 per barrel, despite the fact that a March 2024 survey by the Federal Reserve Bank of Dallas shows that, on average, oil companies need at least $64 per barrel to profitably drill.
Don’t expect Phoenix to ease up on selling its risky oil bonds to retirement minded investors anytime soon. On October 2nd, Phoenix announced a new confidential draft submission to the SEC to register its bonds. This will allow them to bypass the annual $75 million issuance limit on Reg A offerings, which are open to non-accredited investors.
Phoenix also recently secured a $135 million loan from $48 billion (assets) Fortress Investment Group, a New York-based alternative asset manager known for high yield and distressed lending. Roughly $100 million of the loan was received immediately, while $35 million can be withdrawn at a later date. The Fortress money allowed Phoenix to pay down a $30 million line of credit from Amarillo National Bank, which had an 11.5% rate.
The Fortress loan is priced at 7% above the Secured Overnight Financing Rate Data (SOFR), which brings its current cost to 12% annually over its three-year term. On the surface this seems like Fortress is lending to Phoenix at a rate similar to the one retail bond buyers are getting. However, the Fortress loan is far superior to the debt being sold to retail investors. It is floating rate, and it is secured, backed by the assets and equity of Ferrari’s entire operation. This not only protects the NYC lender’s downside from interest rate movements, but also places its loan far above retail investors in Phoenix’s capital structure. The deal also requires Ferrari’s firm to take out additional hedges against oil price movements. Another fine print detail: the Fortress loan only counts proved developed reserves in its asset coverage ratio, which make up a fraction of the headline $1.8 billion in reserves that Willer’s webinar touts.
While offering institutional investors better terms is not unheard of, it is important to note that the debt Fortress holds was issued with what is known as an original issue discount, so Phoenix is effectively paying Fortress’ secured debt a rate of interest that is more than 2 percentage points higher than retail investors are getting on their unsecured paper with a similar duration. Normally riskier bonds, like those Phoenix webinar investors are buying, would receive a higher rate.
Fortress, Ferrari notes, is enthusiastic about Phoenix’s fundraising abilities. It’s hardly a shock—there’s nothing stopping Phoenix from using the funds collected from retail investors to meet its obligations to the Wall Street behemoth. Fortress, he says, loves “the fact that we raise money” and “they want us to go raise more.”
Through a spokesperson, Fortress declined to comment.
Furthermore, as part of the agreement with Fortress, Phoenix had to attest to having no knowledge of any investigations by a governmental authority. Three people familiar with Ferrari’s oil bond operation have told Forbes that the Securities and Exchange Commission was investigating Phoenix for potentially misleading statements in its offerings.
Ferrari doesn’t deny the existence of an investigation. He says Phoenix has had “regular communication with the SEC for three years as a normal part of our business,” but that he’s “not going to speak about things” that he’s “not privileged to speak about.” A SEC spokesperson says the agency doesn’t comment on the existence or nonexistence of a possible investigation.