SharperDingaan

The key words are "hedging each tier as he goes". If BP goes to zero he'll have a realized loss on his long position, offset with a realized gain on his hedge; net loss of zero. The capital is not at risk, & he'll earn a very high yield if the div holds up. He can also hold for a very long time if he doesn't have a ALM mismatch. SD

Just some rough numbers: Apr-26 (pre Q1-2010 earnings announcement) we had 90.473M shares trading @1.85 for 167.37M of MV. We're now issuing another 39.6M shares to total 130.077M. 167.37MV/130.077 shares = $1.28/fully diluted share = effectively todays closing price of 1.26. As each right is worth 10.9c (1.28-1.01)/2.2845, the current MV of our holding is $1.37/share. The rights convert on July-15. Q2 results are typically released late July/early August; so conversion will be without seeing the benefit of Q2 results. The rights have a 3 week life, so they'll list on the TSX sometime during the week ended Jun-25. Q2 has 3 weeks to go. Assuming no major changes Q2 should be materially better than Q1 (pricing, FX, etc.). Given that we have substantial improvements (refinancing, int cost, conversion, etc), most would expect the shares to go well above the 1.85 they were at pre-dilution; which is where we're trading at today. SD

Tilson is actually doing the right thing, so long as he's rolling into a position & hedging each tier as he goes. (1) 20% now to lock in the existing drop (2) 30% on a div cut/asset seizure (3) 40% on media coverage of the spill following a hurricane (4) 25% (10% balance+15% hedge gain) to ongoing foulups. The worst case assumption is a sale to Shell (assumed) subject to a liability cap provided by the UK government (effectively a TARP type emergency measure to protect UK pensions). If BP actually survives, the investment will end up looking like WEBs Coke & will be talked about for years. SD

Scan some of the european/asian industry magazines. Who are the major investment funds/drillers in the various global fields, who/where does their stock trade, & what are the dominant economics in those locations. If an offshore drilling $ were diverted from the US; where would it likely go ? & how would it show up there ? The underlying premise is that asian operators (CNOC, etc) operating in less regulated areas will be the major beneficiary, & that european/middle eastern players are in a better position to move $ than US players. The investment is probably via a fund (ETF, ADR, etc) not trading on the US exchanges, BP is a dominantly weighting, & there's sovereign backing. You might find Shanghai, Singapore, Dubai/Abu-Dhabi etc. particularly interesting ;) SD

The good news is that it's in only 500ft of water (more available options). The bad news is that if it is leaking, & they can't stop it quickly, the current moratorium may well extend to shallow water drilling as well. The wildcard is that the damage goes back to 2004; has it been leaking since then & authorities have allowed it to continue? or is the alleged leak something new that's just started? Should evidence surface that leak correction is being systematically deferred/ignored, an offshore shut-down is virtually guaranteed. SD

You might want to rethink: Agreed, by the metrics, the industry's last 5 years have been great; but we also know those metrics have been favourably inflated because of systematic reserve releases. The industry has structurally improved, but nowhere near as much as the metrics imply. Blindly adding weight simply for 'recency', could well be exactly the wrong thing to do. Every investor should be in insurance right now because, by the metrics, its currently 'cheap'. Many would suggest its actually not yet cheap enough, & that post hurricane season is actually the time to invest. There will be less capacity, higher prices, & the industry's structural improvements will still be in place - but the losses will have lowered the entry point & left the upside undiminished. 'Poetry' producing a return well above the blind following of metrics. First you hit the qualitative, then you hit the metrics. If the industry is sh1t, holding the best player within it is to still hold sh1t. SD

There is nothing wrong with ‘skimming’ a universe to ascertain its present state, but an investor cannot substitute it for ‘research’. Jumping straight to metrics, then basing decisions on nothing but metrics, simply proves that the investor knows the methodology - but is clueless as to application. Books & reading teach methodology; experience, an open mind, & open discussion teach application – provided the investor has the common sense/investment maturity to recognize it. The discussion is greatly facilitated when referenced to published facts (10Q’s, AR’s, etc). Most folks are quite willing to share insights, related experience, technical expertise, etc – but don’t expect them to do the work for you. It is one thing to suggest an approach, methodology, etc - but if you’re looking for an adviser you’re in the wrong place. Examples: The real value of NPV is realizing that the precise number is un-important, the true lesson is the timing & magnitude of the cash-flows; but to truly realize that, you have to thrash it out. Similarly - the actual P/E paid is un-important; the real variables are the growth rate & the length of your expected holding period. SD

MFC is fundamentally a wealth management company in an insurance wrapper, & not a valid peer. They are very good at what they do, they offset their riskier profile with higher quality risk management, & their practices are regulated by OSFI. This isn't an overleveraged/overexposed US or European insurer doing stupid things. SD

You might want to keep in mind that this is also often the retail investors biggest 'con'. SD

BP has a cultural 'hubris' problem, that pretty much runs from the top down; were they in Capital Markets we'd be calling them GS. Interestingly they're both facing criminal probes, & have not been able to see their actions for what they really are. The world needs oil/gasoline, but it doesn't have to come from BP. BP gasoline sold through an Exxon station works just as well, but the refining profit goes to Exxon & not BP. Similarly a oil/gas lease doesn't have to be owned by BP. US leases can be retroactively re-assigned, & European/Mid-East leases can be acquired via takeover (Shell). SD

http://blogs.telegraph.co.uk/finance/ianmcowie/100006015/23-billion-shock-for-safe-and-steady-savers/ http://blogs.telegraph.co.uk/finance/rowenamason/100006019/bp-oil-spill-tony-hayward-faces-the-city/ Keep in mind that UK pension funds are holding 23B pounds of BP, & that the BP dividend is roughy 1 pound in seven of the industry total dividend income. Cut the div, or risk the US leases? SD

Assess if pharma is within our competency. If 'no', we'd reduce our sector risk by staying domestic. Do we have all the major 'names'? Are there hybrid securities - convertibles, warrants, options, etc. What fits within our risk tolerance & time horizon, & why. Is an alternate low fee index fund available. We would benchmark against a 5% weighting to the index fund. If we invested directly via a hybrid we'd want a minimum 3-5x the index return. If we could do it via a convertible we'd use margin to neutralize our positive carry, & weight higher. When it's not within your competency, the individual 'name' is pretty irrelevant. SD

Keep in mind that when a 'widows & orphans' stock materially cuts its dividend; the share price usually drops 35-40% - & it stays down untill the CEO is fired &/or some institution (collecting assets from those widows & orphans) commits to a sizeable equity issue. US presidents have often commented that one of their greatest challenges has been the management of American 'bloodlust' following an attack; & if you're one of the millions living on the US Gulf Coast, this slick is an attack. Given BPs safety record, & 'foreign' status; it is very difficult to see why a US president would not force BP to sell their US assets to other US sisters (Exxon, etc) - to appease both the public & the US oil industry. Most would expect a fall of at least another 50% over the next 4-6 months; & more still if there's a feeding frenzy &/or further UK/Euroland economic disruption. SD

You might want to look at the trading volume over the last few days. - If I wanted to buy (in quantity) who would I get the shares from?, & how? - If I really didn't think it a worthwhile investment, why is no one selling? Patience is a virtue SD

We try to use common sense - & not a specific $X, or %BV, price. 1) What is our sense as to the likely market/coy specific trend for the next 6 months of P(x) for +ve vs -ve outcomes. When it becomes net positive, & begins to trend up again - its time to consider repurchasing. 2) We treat it as insurance (& expect a net cost) against adverse events. There is minimal 'opportunity cost' if your default is a repurchase within 2 weeks of the price passing your 'sold' point. 3) On 'average' you have a 1/3 chance of being right (goes up, down, stays the same). Literature evidences that a short position (loss avoidance here) is more profitable than a long one. You enter the transaction because you think the 'down' % is > 1/3. To do it well you need to be able to correctly assess the probable impact of dominant macro trends over the next 6 months. Net direction & a 'sense' as to the potential strength, outweighing specific 'accuracy'. Notable is that if you're good at 'hedging', you typically suck at trading (different skill sets). SD

To use a world cup analogy; How is this any different from the crowd booing the referee for making bad calls in the lead up to the premier game? The refs are effectively controlled/work for a 'union' - the 'union' here is the US gov. The refs are exposed to bribery & game fixing - same thing for a credit rater, its just done differently The crowd has to assume impartial refs - same thing for the market using the ratings When the corruption/intimidation gets out of hand the refs refuse to ref, there's no game, the bookmakers & fans go ballistic, & refs (& their families) receive visits from 'legbreakers' wielding baseball bats. The equivalent is a ratings moratorium (not a problem if no one is actually using them), & threatening lobbyists all over the raters/gov. Hasn't happened yet because lobbyists are more effective than baseball bats? SD

Sell 1/2 the position into the market for cash, & sit on it. Repurchase (hopefully for less) at the end of the hurricane season. The cost is 2 commissions, offset by the cash difference of the hedge gain/(loss). This time around we sold our entire position as (1) we see the P(x) of the industry going lower as being roughly 3-4x the P(x) of it going higher, & (2) we see continuing Euroland disruption over the next 6 months. Essentially we're raising contingency cash & targeting specific industries. SD

WED-T They are a shell that's just bought the former core Cdn P&C business of KFS-T. Bought (cheaply) when KFS-T was forced to sell, backed by hard headed deep pockets, & very likely to resell the business (at a much better price) to another carrier 3 yrs out. Just had a ratings upgrade, some big shareholders (Alta Invstment Management Corp[40%], Goodwood, etc), & a small public float. Lot of possibilities if you're small & patient. SD

It may well be more realistic to think of BP as gone. The administration has the power to force the sale of BP's US oil rights to other players (untrustworthy operator, that needs the $ to fund a cleanup trust), & can choose to stand aside should public anger show up as a 'freedom fries type mania' that produces a boycott at the pump. And one hurricane roiling the water & 'topkill' will have a whole new meaning, complete with lurid media pictures to drive public opinion. 'Blackout' becoming the new BP word for bankruptcy? Let the media do its thing, & then reconsider. SD

You might find the following algorithm usefull: [(((Geology x Tech x Proven Reserve)/Collection )-1)+1)^N x (market price/break-even price)]/PV(COD) = >1.0. Geology is your knowledge of the oil traps characteristics, pressure, porosity, etc. Tech is the reliability & availability of existing technology that can exploit the oil trap. Proven reserve is the total amount of oil that you can actually extract. Collection is the amount of proven reserve you can extract from the trap & deliver to market every year. N is the expected extraction life of the proven reserve. Market price is today’s commodity price. Break-even price is the minimum commodity price you need to make the project viable. PV(COD) is the present value of the future cost of developing the field & bringing the oil to market. Technology is the primary multiplier; until you punch holes into the target zone with successful results, you can’t prove that you have either the geology or an economic reserve. If you’re near an existing collection system that you can tie into, your break-even price & COD drops rapidly. Same thing if you can drill multiple wells from the same central platform. And what you cannot do today you may well be able to do 10 years from now; extract more from an existing field, drill deeper, etc. Market price is only a secondary multiplier. The more above break-even it is, the more $ you can invest in collection; to sell more product into the market, & in additional drilling to increase total extraction. Notable is that if you just buy someone else, the primary risk is market price; the average price/bbl for the proven reserve is enough to pay for acquisition, extraction, & the required return. It can be easily hedged, & most technology advances work in your favour. The deep sea wild-cat is effectively the opposite extreme, & an all or nothing bet. Screw up, & the tendency is to reinvest the high cost of these wells in the least risky alternative. SD

LessthanIV: We’re saying the same thing, but we’ll agree to disagree on interpretation. Per NI 45-101. Rights are being offered to both FFH & the public at the same price. Oversubscription is being offered to both FFH & the public at the same price. If there is under-subscription the UW is required to dump the under-subscription into the market, from which FFH &/or the public can buy whatever they want. Under the standby FFH has agreed to buy the under-subscription out of the market at a fixed price. The simplest transaction is a direct purchase from the UW, versus a matched block trade crossing the trading floor for the entire under-subscription at the agreed price. The market price right after the trade will be the agreed standby price. NI 45-101 is fully complied with. SD

The preliminary prospectus is the bible, there is no ambiguity, & it outlines the details of the transaction. What IR inferred 2 weeks ago is irrelevant, the terms of the offering have simply changed since they spoke. The price is defined by formula. It will be no worse than the lower of the 40 day VWAP, or the 5 day VWAP immediately prior to the filing of the final prospectus (p18). The actual number will be known when they file the final prospectus - & they have untill Oct-31 to file. We know this is the minimum price, because if the shares were trading for less; the issue will undersubscribe, & FFH will be required to buy. You can actually subscribe for 119%+ of your allocation (using up your proportional portion of FFH's ownership position [p19]). SD

We're saying the same thing. Everybody gets to subscribe at the same price; but if there's not enough subscription - FFH will take up the subscription shortfall at 20% off the subscription price, & is restricted from reselling any of these cheap shares back into the market. SD

We’ve looked over the preliminary prospectus at www.sedar.com, & honestly don’t see any issues. The offering record, commencement, & expiry dates are all undefined (p3). The only restriction is that the final prospectus must be filed by Oct-31-2010 (p-18) if the standby agreement is not to lapse. The 40 day record period could start as late as Sept-02. The 20% discount applies only to FFH, only to whatever they take up under the standby, & they cannot resell anything they take up under the standby (p-4). FFH will be paid 400K for the standby, & had no involvement in the prospectus; it intends to exercise its proportional share of the offering, as do most of the FBK directors. The Deb conversion privilege will be re-priced to reflect the dilution, but the call period remains Dec-31-2010. 40M of rights proceeds + 75M of SGF funds + 28M of GECap funds will retire 143M of existing revolver debt. Speculation: Following completion, they would seem to have more than ample capacity to call the Deb issue. If so, the Debs are effectively call options expiring Dec-31-2010 & paying a 7% coupon, that will retire at either 101 (default) or above (in stock). What’s not to like? They can delay the issue long enough to include closing prices that reflect Q2 (& presumably better) results. Same thing if a RBK asset sale is announced over the interim. Reduced dilution & glowing analyst reports to further boost valuation. We’re also seeing evidence of recent insider buying, & declarations of further buying via the rights issue. Again, what’s not to like? SD

We did a surface look at offshore vs onshore drilling, re future (1-2 yr) flow of drilling $. Its very dependant on location, sovereign/culture, & age of field. The Yellow Sea/West Africa is very different to the North Sea & very different again to the Grand Banks/Arctic. Where practice is well established (the vast majority of drilling) we expect continued drilling, but with additional costs (upgraded BOP's, more testing & standby requirements, additional graft, etc). The frontier stuff is effectively dead. We expect cancellation costs to essentially wash. Operators cutting day rates on their SP rigs to keep them working, more/easier holes being drilled in shallower waters to use up the remaining 2010/11 budget, & a 5-10% difference going to land drilling. 2011/12 is the watershed. Medium-term (3-5 yrs) we see the frontier $ shifting to Oil Sands/Coal Research, and an industry rethink/upgrade of existing technology. SD