SharperDingaan

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

Might we suggest waiting untill we actually see the peliminary prospectus (Sedar, website, etc). All that we actually know is that it has been a work-in-process, it now appears to be complete, & we should see the actual details in a day or so. SD

Uccmal: You might want to sell down some Leaps & go long common on a margined basis once we know the outcome of hurricane season. Yes you give up some leverage, & hedging does have a cost, but does it really matter if the whole industry is down 15-20%? SD

Keep in mind that you're really making 3 bets here; The euro players include an FX bet that the Euro will be stronger on repatriation than it is today: ie, a great return on Sanofi could turn into a loss if the Euro materially worsened. If you dont want this risk its US makers only. It makes more sense to allocate > 5% to the sector, & 1 name; a long term warrant, option, convertible that limits the $ investment or reduces the risk. Your premise is that the entire sector will improve; to get a bad result, the individual maker has to perform materially below the average for the group. Somewhat unlikely. 5% spread over 2-3 names is minimally different to the typical index fund. To make it worthwhile you need to do materially better than the indexer to cover your additional cost; if you just do the same as the indexer that is highly unlikely. SD

Couple of possibilities: All CDS's have a maturity date, most don't go more than 6 yrs, they still have the TARP funds, its getting on 2 yrs since the bailout. If 1/3 of the exposure has matured the remaining 2/3 now has 50% more liquidity coverage - significantly reducing the overall risk. MTM's are materially better today than they were when TARP funds were released, even post Euroland disruption. Much of the difference is quasi-permanent, & effectively additional equity; not part of the leverage formula, but acting as though it were - significantly reducing the overall risk. Sell an asset at its MTM, there is no impact on BV - but the remaining assets have more equity backing them, & leverage declines. Swapping debt for an asset spinoff, is the same thing but cheaper. A $ of operating loss produces less of a NI loss - significantly reducing the overall risk. If Katrina II shows up tomorrow what really happens. TARP 'maturities' get pushed out, additional $ get injected, the payout drain essentially flows up to the US Fed - significantly reducing the overall risk. What's left? Lots of potential gain for comparitively little risk - if you have the tolerance. SD

There are at least 5 longer term secular trends: (1) More digital & less print advertising reducing global paper demand (2) More consumer packaging in the developing world increasing global demand (3) Rising fibre costs as trees become worth more alive (carbon credits) (4) Municipally driven green substitution to paper versus plastic packaging (rising landfill fees) raising global demand (5) Rising environmental focus on transport costs/energy usage increasing the premium on nearness. The short game is P&P consolidation into vertical integration - & size matters. Fewer, bigger & greener plants, & multiple ‘other’ income streams. Volume to spread the FC over, & income from both electricity generation & the sale of annual carbon credits. The long game is the paper recycling business, but very different from today. Essentially a few local plants, drawing their SOP from nearby cities, & part of the urban waste collection system. Market rate for the SOP, less a municipally paid disposal fee. Production going primarily to low quality packaging & grocery bags. The plants themselves acting very like utilities in public/private partnership. Obviously we think the NBSK plants should go. They are very good plants, & run by very capable people, but we just don’t think that SFK is really capable enough to give them the support that they really need to move forward. Selling to a US buyer - or diluting to a smaller stake in a much larger but independent entity, makes far more sense. SD

Its worth thinking of the see-saw. Large numbers of fairly well capitalized carriers on one end, all collegially doing the same thing, & progressively moving closer to the fulcrum. Increasing, & additional, risks on the other side moving further from the fulcrum. A small change on either side, producing a disproportional effect. SD

Just to stir the pot! We think it'll be somewhere around .75-.85x BV, with a downward/neutral bias vs upward - & by late October/early November; we also have our full position hedged. An illuminating exercize is to compare the closing price 2 weeks following an earnings release/to the reported BV, for each of the last 20 quarters (5 yrs). Then graph & add the significant events that were occurring at the various times. When Katrina hit the multiple was around .7x We have the gulf coast full of oil slick, its warming up the sea (raising hurricane severity), we're coming into the hurricane season, & the head of Lloyds has pointed out that the industry is unduly stressed. High payouts funded by suddenly less liquid assets (eurobond investments) & delayed reimbursements (BP), is not a good combination in an average year .. & if this turns out to be an above average year? Hopefully it doesn't happen. SD

You might want to listen to what the head of Lloyds has just told you. (1) This "perfect storm" will lower all boats; & do it very quickly if there is even just 'average' hurricane damage in the US Gulf Coast (2) All P&C carriers should expect to trade at lower multiples by year-end. Then keep in mind that oil slicks heat up sea water by absorbing more of the solar gain; & that the warmer the water, the stronger the seasonal hurricane. SD

Nice to see the insider buying just after we rolled some of our debs into additional common ;D Good catch, gordoffh SD

Keep in mind that GS common is only attractive - if its future actually looks something like its past. The current financial reforms are changing the playing field, & most folks would expect multiple rounds of reform versus just one round. We know there are clear conflicts within this firm, those conflicts are representative of the street, and regulators need an example. We know that GS made a trading profit on every day of Q1, at the same time that many of the trading calls they gave their clients went south. Most would suggest the either the GS 'house' calls were better than they were giving their clients (so what were their clients paying for), or GS was betting against their clients (by breaking client confidentiality, &/or insider trading against their clients positions). We know that the extraordinary accomplishment also occurred while GS was undergoing an SEC originated criminal probe of broadly similar circumstances, & that GS has chosen a negotiated settlement with penalties alleged to be $1B+. If GS is broken up, as part of an industry restructuring, prior metrics are pretty meaningless. The good news is that it threatens the PAR repayment certainty of the prefs; driving up yield & magnifying the volatility. The offset is market rate resets that put a floor value under the pref. SD

The % is principal based vs codified. Would a prudent person deem your ownership % a material consideration (disclose) or an investment (don't disclose)? Own >5% of a Sched-A Bank, major life insurer, & you'd probably want to voluntarily disclose (or risk OSFI making the institution involuntarily disclose it). In most other cases about 10%, subject to whatever you're allready disclosing in your own literature. SD

You might want to consider that we don't measure 'opportunity cost', & we don't pay our advisor for it. We pay only for realized & unrealized (MTM) gains. Opportunity cost is nice but if you ultimately didn't invest in the opportunity - what's the point SD

We need to recognize that the RBK plants were an opportune investment, but they don't really reach their full potential within a cross-border ownership structure. They would be better off under a US buyer, & SFK wouldn't have the debt load - or ongoing quarterly FX impact. The real question is what is the highest & best use for the NBSK plant. (1) Buy up woodlots to drop the fibre costs & operate as stand-alone plant ? or (2) Vertically integrate into another Cdn producer at the top of the cycle ? Long term, vertical integration is a lot more certain & less risky. We know there are moving parts, they have master capital allocators behind them, its a small community, & mgmt is incentivized to get over $3.50-$5.00. There is growing evidence of share movement into stronger hands (todays early trading), & increasing conviction that Q2 may well be a blowout. SD

You might want to think these through.... As a NA investor we recently looked at NBG versus a dominant European property firm; an 8 yr euro holding, over different ends of a higher risk spectrum. We found that it was effectively a bet on macro events. For NBG: (1) Continuing & worsening Euro disruption, (2) Euroland restructuring & sovereign ejections (Greece), (3) Successful capital controls & loan principal redenomination, (4) Bank of Greece support, (5) Subsequent Greek high street inflation, (6) Current & future FX rate. We concluded that 8 yrs wasn’t long enough, & that even if NBG were 60% cheaper – you still couldn’t compound at enough to make it worthwhile. You were better off temporarily investing your $ in a petro currency (Canada) & buying NBG ‘X’ yrs from now; the same $ investment buying 1.5-2.5x more stock. Surprisingly, except for (4) & (5) the same things applied to the property firm; the only new factor was the current commercial debt refinancing crunch. It was also better to make the investment through someone else (ie: FFH), versus directly. The wildcard was how the domestic populations of crowded Euroland might react when unemployment rockets, social safety nets are cut back, generational aspirations are crushed, & the more radical elements manipulate social tensions for political gain. The current Greek & French riots could seem pretty tame, & Europe doesn’t have a great history (Bosnia, run up to WWII, etc). How much is the exposure worth to you – when it’s essentially all left tail risk? SD

Agreed. The good news is that the macros (euro disruption, chile pdtn, etc) are now forcing events, & all parties need a practical solution. Nobody can afford to do nothing anymore. SD

A little too raw for our tastes but if you're nimble - look at NBG (TSX) We dont think the Euro will collapse; but everytime a 'fix' goes in this thing jumps $.40-$.50, then falls back on coverage of the increasing street protests. Hard to see how it cannot trend down a lot lower over the next 6 months or so. SD