Walt Hagood looks out over his neighbor's guar crop. The Texas farmer is owed about $95,000 for guar that he grew on his own fields.
In the Race to Oil Patch Riches, One Wall Street Firm and Hundreds of Farmers Have Slipped on a Skinny Green Legume Known as Guar
By Ryan Dezember
In the race to the new riches of the oil patch, one Wall Street firm has slipped on a skinny green legume.
When the price of guar soared to record heights in 2012, investors took notice. Guar—a legume used to thicken products from toothpaste to peanut butter—is also a key ingredient in the rock-shattering hydraulic-fracturing process.
With the U.S. shale-drilling boom in full swing, New York hedge fund Scopia Capital Management LLC paid $4 million for a 45% stake in the only U.S. facility capable of extracting the starchy part of the legume's seed that is ground up to make its valuable thickening powder. But things soured quickly after the 2012 deal, landing the processing facility in bankruptcy court while tens of millions of pounds of guar that farmers grew for it last year sits in silos.
The guar debacle shows how investing in the shale boom—which took hold as drillers unlocked oil and gas reserves trapped deep in layers of rock known as shale—isn't without complexities and risks.
The processing facility, West Texas Guar Inc., had a deal to sell guar powder to a drilling company and last year offered farmers big prices for the legume, used to thicken oil-drilling fluids.
Farmers in Texas and a few other sun-scorched states jumped at the chance to grow the drought-tolerant crop, which had been planted only sparingly in the U.S. They wound up growing the biggest U.S. guar crop in a generation.
Yet a year after they delivered some 50 million pounds of guar, more than 200 farmers are still waiting to be paid, saying they are collectively owed in excess of $20 million.
Meanwhile, Scopia, which manages about $4.5 billion, has wrested control of West Texas Guar from its founders and laid claim to the crop. And the farmers have forced West Texas Guar into bankruptcy.
The processor, though, was plagued by mechanical problems and wasn't able to consistently produce the valuable thickening powder from guar.
At the same time, growing weather in south Asia improved and regulators in India, where most of the world's guar is grown, snuffed out guar hoarding and pushed prices well below what the processor had promised farmers.
Farmers say they were left in the dark about West Texas Guar's processing difficulties, and Scopia says key information was kept from it, too.
"We took all this risk to grow it and they haven't paid any of us a penny," said Walt Hagood, who said he is owed about $95,000 for guar he grew in fields outside of Lubbock, Texas.
Brad Cude stands in front of a combine that he bought to help harvest his guar crop. Andrew Mitchell for The Wall Street Journal
Klint Forbes, one of West Texas Guar's founders, urged U.S. farmers to consider planting guar as prices rose for the crop imported from Asia. Guar demand "caught all the suppliers short-handed," Mr. Forbes told The Wall Street Journal in 2011. He declined to comment for this article. He and his partners distributed guar varieties suited for the U.S. and built the country's only plant that splits the legume's seed into hull and protein—both fed to cows—and endosperm, which is used to make the thickening powder.
Farmers were swayed. Guar has soil-replenishing properties, needs little water and was in high demand in nearby drilling fields. "We were thinking, this is like the guy that grows hay next to the feedlot. This is going to be perfect," said Brad Cude, a Lamesa, Texas, farmer.
After contracting to sell his crop to West Texas Guar for 45 cents a pound, Mr. Cude borrowed money to plant 3,000 acres and bought specialized harvesting equipment. Late last year, he delivered a crop worth more than $550,000 at that price to West Texas Guar. He didn't know that the Brownfield, Texas, business was having financial difficulties. It had been splitting guar for years but couldn't consistently produce the more profitable powder, or guar gum, according to bankruptcy court filings.
Brad Cude holds a young guar plant. Andrew Mitchell for The Wall Street Journal
A few months after Scopia's investment, it became clear that West Texas Guar wouldn't have enough cash to pay farmers for the smaller 2012 harvest, court records show. Scopia agreed to lend the business $6 million that December to pay farmers and get the factory working in time for 2013's harvest.
West Texas Guar paid Scopia about $400,000 in dividends and paid some interest on the loan, according to court records. But it couldn't get the plant fully operational and was unable to borrow money or attract other investors. It defaulted when Scopia's loan came due in September 2013.
Scopia struck a deal with West Texas Guar to forgive $1.5 million of the loan if Mr. Forbes and his co-owners surrendered another 45% of the business. After gaining control, Scopia installed a chief executive who had overseen the Indian guar operations for a big oil-field-services company. The farmers in March filed an involuntary bankruptcy petition for West Texas Guar, which later consented to the Chapter 11 filing.
While West Texas Guar is processing and selling some of the guar, it still isn't manufacturing the powder used in oil and gas drilling. Proceeds from sales of the less profitable products are being held in escrow pending a settlement with the farmers.
Scopia hopes to sell West Texas Guar, court records show. There has been interest from potential buyers, including investment firms, oil-field-services companies and agricultural firms, said people familiar with the matter, but the litigation has complicated the sales process.
A deal may help the hedge fund recoup money, which came from a small private-equity fund it manages, but it may come too late for the farmers. Mr. Cude said he has yet to receive any of the $556,000 he says West Texas Guar owes him. He risks defaulting on his planting loans and missing payments to landowners.
"Right now, guar is a pretty bad word around this place," Mr. Cude said.
Write to Ryan Dezember at ryan.dezember@wsj.com
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