moustachio

Wow, only two choices in the poll. The best option is third party. How does a ticket with two former governors on it whom no one seems to hate sound? Well, compared to the two clown options in this poll it sounds great to me. The Libertarian party has two former Republicans on the ticket this year. I think they are objectively better choices than Hillary Clinton or Donald Trump. You know, Gary Johnson seems like a genuinely nice guy, which is a stark contrast to our current choices. Unfortunately, I don't think they will have the backing, infrastructure, or time to pull off a serious challenge to the major joke candidates everyone is going to vote for.

You might want to take a look at what PGN looks like in 2016 and 2017... they have some very high priced contracts rolling off and their rigs are more likely to be scrapped than re-contracted over the investment horizon before this company goes BK I hear ya, it really does come down to what happens when these contracts expire and if the management team can find away to limit the haircuts to the rates. Speculative indeed! I did some more work on PGN, Company is a dog, definitely not a multibagger, I'm guessing they start tripping their covenants in 2Q 2016 Isn't the revolving credit facility the only debt with coverage and leverage requirements? Won't they be able to pay that off in full before 2016?

Yeah, its only one data point now, but I expect we'll see further drops going forward. Some officials from the ND government (http://www.reuters.com/article/2015/01/12/north-dakota-oilprices-idUSL1N0UQ0P020150112 ) along with plenty of people from the industry have said that they expect production to remain steady or grow for some time even with low oil prices. It sounded like wishful thinking to me and I expect slight declines in production most of this year, but I didn't want to dare question the competence of government officials or O&G executives that want to pretend that their production isn't going to go down. Obviously there is only the potential for such rapid declines in production in tight oil plays, so I find the following link informative. It has rig counts for the tight oil plays and production numbers from those plays: http://www.artberman.com/oil-prices-dont-change-because-of-rig-count/ An interesting dynamic in the Bakken is the potential of wells being drilled, but not completed. I don't know how many companies are doing that, but a company I've followed a little is doing just that: http://thebakken.com/articles/1017/triangle-petroleum-unveils-2015-well-completion-schedule

I was more wondering if they will be able to survive the year without an asset sale. They have over 5x D/CF with oil at 65$ according to a December press release: http://finance.yahoo.com/news/lightstream-announces-2015-capital-program-223521477.html With oil likely to be much lower for at least the first half of the year, they are looking at much lower cash flow flows and further declining production. I wonder if they'll be able to come up with any cash flow at all for drilling. "Lightstream Appears On Track To Nearly Wipe Out Its Shareholders" http://seekingalpha.com/article/2985546-lightstream-appears-on-track-to-nearly-wipe-out-its-shareholders

Scott, could you tell us more about this job and how you got it? I've always been interested in the newsletter industry.

I was more wondering if they will be able to survive the year without an asset sale. They have over 5x D/CF with oil at 65$ according to a December press release: http://finance.yahoo.com/news/lightstream-announces-2015-capital-program-223521477.html With oil likely to be much lower for at least the first half of the year, they are looking at much lower cash flow flows and further declining production. I wonder if they'll be able to come up with any cash flow at all for drilling.

I thought about this for a while, and this is what I am thinking right now. Oil services are basically a bet on the overall health of the parts of the oil industry that they cater to, along with oil prices rising enough for there to be enough activity for service revenues. A bet on an O&G company is a bet on that specific company and oil prices rising enough for it to do well. In the current oil supply/demand situation, SA(Saudi Arabia, and their close allies in OPEC) had two choices: cut or don't cut. Cutting would just make high cost production sustainable, production would increase, and in 6-12 months they would be faced with the same problem of excess supply. They would have to continually cede market share, and in the end there would be a lot of extra wells drilled because of it. There would be a lot of shale wells with their initial decline already done, so there would be a lot of sustaining extra production. So instead, they decide to not cut. They say that high cost producers need to cut, that OPEC doesn't need to cut because they are low cost. Now who are the high cost producers? Basically deep sea, shale, and oil sands. Oil sands are big operations with tons of capital sunk in, and from my limited understanding probably won't go away. That leaves deep sea and shale, and it appears to me that both of those service stocks are providing services to those parts of the oil industry. The oil crash in 2008/2009 was cut relatively short because OPEC cut production, but this time is different. If SA wants to break the back of high cost producers, they may very well increase production to tighten the screws at some point. If you look at either of those companies, neither did very well in 2009 with a relatively short lived decline in oil prices. So, right now I think you are investing in industries that serve the very parts of the oil industry that OPEC is targeting. I assume MCR has significant exposure to shale, but that is somewhat of an assumption, correct me if I'm wrong. I've followed the MCR thread somewhat, but I haven't done deep research on it. MCR only seemed to start to perform well when the shale boom started picking up. Look at a chart, and I think services companies probably lagged O&G companies after oil prices started going up. This recovery might be even slower. A lot of shale companies are over-leveraged, and when oil prices stay below break-even, if they stop drilling production will drop rapidly due to high production declines. That leaves these companies with low oil prices, lowered production and lower credit lines due to readjusted credit facilities due to lower oil prices. Between bankruptcies, lower cash flow, and lower credit, there will probably be a lot less activity for a while. It could be a buyer's market for services for years, while it has been a seller's market with the boom. HOS is also very dependent on drilling activity. If you look at their investor presentation there are a number of slides on increased drilling, so it is pretty obvious much of their business is dependent on drilling activity. Look at the 10K from the 2009 end year and they had a rough year. If oil prices stay lower for longer, they will be in even worse shape with contracts potentially ended early and day rates plummeting. They are investing in more vessels at the same time as activity is going to drop a lot. Now don't get me wrong, I think both of those are healthy companies, they will survive, and they both show value at these prices, but not as much value as you seem to think. I just think that both will have a very rough year, and they probably won't bounce back super quickly. Look at 2009 charts and financials, and then imagine low oil prices for twice as long. IMO these won't be quick multibaggers, and they will probably have cheaper entry points some time this year(along with a lot of oil companies). A couple of quotes from HOS 10-K:

The oil majors are barely down from their 52 week highs, but there are leveraged small caps that are now a fraction of their 52 week highs. WRES and LEG.TO are good examples of oil/gas stocks that are a fraction of their formerly high price and potentially offer high upside(along with risk). Even some stocks with no leverage have suffered some high losses. TAO.TO is an example of such a stock. It has no debt, relatively high netbacks, and a high cash position, yet trades for less than 1/2 it's 52 week high. There are plenty of other examples of oil companies that have declined a lot further, but are probably value traps IMO. LTS.TO might go bankrupt at some point in the not so distant future, and SD will probably survive in the short term, but has a business model that might make it a walking dead company if oil prices don't double from here. Both of those companies have a ton of multibagger potential, but you are highly speculating on a fairly quick return to much higher oil prices. Why are service firms so attractive? At lower oil prices a very large percentage of wells will be below break even. How much business will these service companies have when drilling activity drops by 50%, 75%? At a certain oil price buying them is as much of a bet on rising oil prices as buying oil companies With that said, if you could find a service firm whose sales are mostly for maintaining producing wells and not related to new drilling activity and that also trades at a substantial discount, then you would probably have a very nice investment. I don't know if such a thing exists and haven't looked for it. I think a substantial opportunity exists in oil and gas producers right now, but you have to pick the right ones. *this last paragraph added during editing before reading yadayada's next post, but after he posted.

How is Lightstream looking to people now? 2015 is going to be rough...

An interesting article on past oil down cycles: http://seekingalpha.com/article/2757505-how-long-does-a-typical-oil-downcycle-last I thought the chart on past declines was pretty interesting, partly because it basically mirrors what I figured oil prices will likely do before I saw the chart.

A good article on break even costs for shale oil: http://www.bloomberg.com/news/2014-11-20/oil-at-75-means-patches-of-texas-shale-turn-unprofitable.html

This is hilarious. NOBODY predicted the drop in oil prices a year ago. Yet today, we have charts in Bloomberg saying it's an absolute fact. What changed so much in the following to provoke a 40% drop in price? Vehicle fuel efficiency New generation moving to cities Wind and solar power generation Public transport usage Baby boomers retiring It seems to me people are putting up a bunch of shit together to explain the sudden collapse. The only facts are: Shale gas has increased supply China's slowdow has reduced demand I don't see how a player that consumes 10% of oil (falling to 9% maybe) and a producer going from 10% to 12% could mark a drop of 40%. It just does not add up. Its like investing. You predict future earnings and cash flows based on past performance, trends, and analysis. When shale oil supply increases are out gaining demand for oil, something has to give. The trend will continue until the price gets low enough to reverse it. So if we have an extra million barrels of oil being pumped everyday, and can assume supply will continue to increase, you end up with a lot of oil sitting around. Even at $70 oil US oil companies were guiding for increased production. So you have extra supply, forecast for more supply, the market will go down until things balance out. $60 oil seems super cheap, but even at that price a lot of US shale oil drillers will still make production gains. I don't think many companies will shut in production at that price, and even if they do they may run at a loss for a while before they make that kind of decision. It might go down to a silly low price because companies will just keep drilling and won't cap off wells until it does. On the demand side, other than companies buying to increase inventories and companies looking to increase reserves, both at discounted prices, how quickly does demand increase when prices go down? I would think there is a pretty long lag between lower prices and increased demand. I don't suddenly start driving more just because gas is cheaper. I honestly think prices would have been lower before, but ISIS made it look like Iraq's production could go away at any time for quite a while. Now ISIS doesn't look to be a crisis, and US shale production gains march on. IEA article worth reading: http://www.bloomberg.com/news/2014-12-12/crude-oil-extends-drop-below-60-as-iea-cuts-forecast.html A few quotes: On the other side China is boosting strategic reserves: http://www.bloomberg.com/news/2014-12-01/china-winning-in-opec-price-war-as-hoarding-accelerates.html That won't last forever and doesn't take off all the current over supply, so it isn't a justification right now for prices to not go lower.

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/wres-warren-resources/

I just started a thread on WRES in the investment ideas forum: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/wres-warren-resources/ It an oil and gas company that IMO is being mispriced as if it was primarily an oil company, but due to an acquisition that is no longer the case. LTM Pro forma EBITDA of 139.5 million... the current market cap is 121 million. Oil is unhedged, so oil ebitda will not be that high, but the CEO that didn't hedge is history. Last trade was 1.50 and the 52 WK high is 7.02. Unlike many of the ideas discussed in this thread, I don't think this one needs a much higher oil price for upside. I think it is undervalued even in the current crazy environment. I have another idea I'll probably write up when I have time too. EW.V, a tiny micro cap with 12M market cap and 8.3 M cash on hand with no debt. It has oil producing properties(250 boepd (net), and as they say in their presentation: "Portfolio of assets has access to approximately 1.3 million prospective exploration acres in five countries". The most interesting of those(other than the current producing ones) are potential gas properties in Romania. If drilling is done they would be fully carried for 12 wells for 15% interest. That is a lottery ticket, but it could have a lot of upside. The company is currently buying back shares.

The Shiller PE includes earnings from one a period including one of the worst recessions we've ever had. I think that makes it a little less accurate for this time period than it would be otherwise. You could replace the earnings from the recession with an average of the earnings from the other ten years, but with a proper % hair cut like you would get from a "typical" recession. That should get a lower and more relevant number, unless of course you think our next recession will be like 2008-2009 all over again. Me, I don't see anything on the horizon that could cause that kind of recession to happen anytime soon.

"In conclusion, first 24 hour production per well, when measured by well number, has dropped by 40 percent since peaking in the 24000s. This, to me anyway, clearly indicates that the sweet spots are playing out and companies are now drilling on less productive acreage. I now believe that North Dakota production will peak no later than 2015 with a high probability that 2014 will prove to be the peak year." The author of that page may be very good at collecting data, but he doesn't seem to have much in the way of analytical skills or critical thinking. The production per well is only half of the equation, the other half is number of wells drilled. Sure, the best spots are disappearing because many of them have already been drilled. It is pretty obvious that companies are going to drill them first, so they can get quicker and faster returns and reinvest those returns into more capex. However, if a well today produces 40% less on average than before, but you drill two wells instead of one, you are obviously still going to get more production out of those two wells than just one. Anyone can look at production gains that Bakken companies are reporting and what they are forecasting and see that guy's forecast based on his reasoning is bull. However, if oil prices go much lower he might be right about a peak(probably a temporary one), but he would be right for the wrong reasons. If oil prices go back above $80 a barrel, he will definitely be wrong. If you look at oil charts you will see part of the time the Bakken boom was happening was with oil prices similar to the ones we've had recently. Some of the best acreage has already been drilled, but well costs have gone down and efficiency has gone up as companies have scaled up operations and improved processes. So, even though average production might have gone down, that doesn't mean returns have gone down proportionally. Here is a quote from Oasis Petroleum's most recent earnings call to add some more to this post:

I haven't looked over this stock at all and just looked through this thread. If it is going to be a pump and dump it would usually go down something like this: 1. Build up the appearance of the beginnings of operations. 2. Start issuing press releases about all kinds of exciting sounding partnerships and new products, etc. 3. Possibly start booking revenue, never mind that it is from a related party. 4. Hire a network of promoters that hype the stock beyond belief for a cut of the profits. 5. Issue "big news", and possibly create artificial volume by being on both sides of trades. 6. Sell into the buying frenzy.

Rumors of the death of China's economy have been greatly exaggerated, for a number of years. People have been calling for a crash for a long time now. Chanos has been calling for one since at least 2009. I'm no expert or anything close to it, but I think the people at the top running things in China are well aware of these potential problems and take actions to try to smoothly manage things. I get the sense that officials lower on the totem pole are corrupt and inefficient, impeding the officials ability at the top to manage things exactly as they like. I think they are a large part of the reason so much debt has been created without as much return to show for it. Allowing things to be more market based, which China is always making measured moves towards, should help with this. China is in need of some "creative destruction", and I believe the people at the top realize that and are trying to slowly work that into the economy, without causing crashes or crisis's. IMO, you simply can't compare a well managed, part market based economy like China's to either a mostly market based economy, or a total shit managed economy like Zimbabwe. Market based economies have booms and busts. If there wasn't such a big potential crisis then China would probably do well to allow a bit of a bust, to clear out inefficiencies and root out some corruption. As it is, they need to do small house cleanings and take actions to reign in inefficient growth in certain areas without slowing things down to bust status and creating contagion. You generally couldn't do this in a market based economy, but you potentially can in China. In America, the Fed pretty much has free reign within it's sphere of power, but it doesn't necessarily have congress and the president acting in concert with them, and many things congress could do are limited by politics, the constitution, courts, etc. The people at the top in China can control banking, fiscal policy, trade, etc. I am sure they are well aware of these problems, they have probably read this article or one like it. In closing, I don't think we are going to see some huge crash in China, unless outside influences get the ball rolling. I think global macros look good unless a war breaks out or something, and unless demand for China's products temporarily evaporates, the people at the top managing China's economy should be able to smooth things out. Also, the overall debt burden as a percentage of GDP is still small compared to the US, for example.

What was your position size as a percentage of your portfolio? I'm usually not a fan of short term trades, since I tend to over size all of my positions. I'm no technical analyst, but at least it looks like the stock is in something of an uptrend...

I have to disagree. I think it is clear that some segments of this market is overvalued if not in full out bubble territory. First, the Russell 2000 at 100x trailing P/E is overvalued, period. I don't care how many "high fliers" are in the index. Next, I agree with David Einhorn that we are witnessing the second internet bubble in 15 years. Third, biotech sector is out of control. Here is a link on the trailing P/E for the Russell 2000. http://online.wsj.com/mdc/public/page/2_3021-peyield.html On the flip side, I believe many large cap stocks are at market or below market multiples. The market cap of the underlying securities for the S&P 500 and Russel 2000 are 16,700 billion and 500 billion, respectively. Both of those are from wiki and the Russel number is not dated, but I think it should be accurate enough to illustrate the overall point. The overall value of the Russel 2000 is pretty insignificant compared to the S&P 500. Also, many of the high flying tech stocks and biotech are included in the S&P500 (Amazon, Netflix, etc) and the PE of the index by many people's measures(mine included) seems to be about fair, despite overvalued stocks being included. Biotech may or may not be wildly overpriced as a whole. There are probably some pretty big game changers coming soon that will add a lot of value to some of the winners of the biotech industry. Personally, I worry about the psychological impact of a crash in small caps or tech stocks and how that might impact sentiment and thus the overall market more than I worry about the effect of overvalued stocks on overall market valuations right now. However, haven't they been overvalued for some years now? The market has still given us good returns.

This is a good idea and doesn't make any more work for Parsad. This could even be done by several people as long as there isn't too much overlap and the threads could be pinned to the top, or just bumped every week or so. People should be choosy and pick ones that stand the test of time though.

' "James, are you able to find anything in today’s financial markets that still has an attractive valuation?" Nothing at all. When we look at the world today, what we see is a hideous opportunity set. And that’s a reflection of the central bank policies around the world. They drive the returns on all assets down to zero, pushing everybody out on the risk curve. So today, nothing is cheap anymore in absolute terms. There are pockets of relative attractiveness, but nothing is cheap or even at fair value. Everything is expensive. As an investor, you have to stick with the best of a bad bunch.' I'm sure its hard to find bargains if you're managing 100 billion. 100 billion dollars is just too much to manage in an equity portfolio. For individual investors, if you think there is nothing cheap, much less fair value, then you aren't looking very effectively. "Several valuation measures suggest that the S&P is overvalued by 50 to 70%" I think that is a funny statement. Which valuation measures suggest this? Does anyone really think the S&P could drop 70%, especially without a dramatic drop in earnings? There would be dirt cheap stocks after a drop like that. I tend to think he just wants the market to drop, because that would make his job easier. It is incredibly difficult to effectively manage that much money with a lot of the market at fair valuations, so he will probably have people pulling out capital from his management. Tough for him, good for people with smaller asset management operations that can find value in smaller stocks.

I have bought some NROM today since it is down after earnings. Call me crazy, but I actually believe that the exceptionally bad weather has negatively impacted a lot of businesses temporarily...

WRES, Warren Resources. It is very cheap on a cash flow basis, around P/CF of 3X, and EV/CF of around 4.5X. Going forward it should be cheap on earnings basis as well(currently one time items are bumping up earnings, soon TTM EPS might look very high). It has American operations, is growing production, is very cheap valued on an assets basis, and has relatively new management. It is tough to see much downside unless management makes a stupid deal. They are looking for a 200M acquisition funded by debt and have made bids, but were outbid. If a decent deal is done it could make the stock more attractive, as these tiny resource companies seem to get overlooked pretty easily. I think its undervalued because it is small and has bad bad management in the past.

Some of the Bakken producers either already are or will soon start funding capex with their operational cash flow. It won't be long before we see exactly how much production can be grown from sustainable cash flows. All oil is eventually depleted, and the bakken wells have high decline rates... but there are a lot of companies with a lot of acreage. Plenty of companies are projecting big increases in production for next year. That second article seems like it is taking a doom and gloom slant on something most people involved with the Bakken are fully aware of, including the people projecting production rates into the future. IIRC, most of the estimates have undershot the actual oil that has gotten pulled out of the ground...