Cardboard
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Posts posted by Cardboard
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"The equity hedges since 2010 have now cost $3.7 billion in BV which represents about 40% of BV."
And that is a friendly comparison. If you compare to the stock portfolio with a year end value of $4.9 billion that is 76%. Compared to 2013 year end values of $3.9 billion that is 95%.
That is not hedging. These are losses from pure short selling. Hedging is normally a small percentage of your assets or an inverse investment with an assymetric payout.
I mean what are they trying to protect against? Most of the money is and has been invested in bonds which have benefited from 35 years of decline in long term interest rates. In other words, that is investing pretty much directly into an hedge or one that benefits from deflation.
IMO, the CPI derivatives are fine or a small percentage of assets and extra spice to the deflationary nature of a large fixed income portfolio. The equity hedges I don`t get.
Cardboard
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Regarding Sandridge, I invested in it thinking that it would get sold. Bottom line is that someone got greedy and asked for too high of a price: Prem, TPG-Axon or management. Or the assets are truly not interesting at all.
It was cheap at $100 oil but, not so now. This is about the worst company you would want to invest in for a declining energy market and it sure did!
It has too high debt and leverage and management acknowledged that in their latest conference call. It has high costs: salt water disposal, electricity generation, etc. They have worked hard on that or to reduce these costs along with well costs, but it is not like they are operating in a well developed infrastructure area like the Permian, Eagle Ford or in Alberta. And the reservoir has high natural gas content or just above 50% and pricing for that is not looking to improve any time soon with more coming from the Marcellus and severe restrictions on liquified natural gas or to help exports.
What I don`t get about Prem is that if he is convinced that we are entering some kind of depression or that the risks are high, then you don`t touch Sandridge or even Exco. He keeps on talking about the possibility of commodities collapsing in his annual letter, but then buys two companies that require very high energy prices.
The problem here with the approach is that you can hit not one but, two zero`s: CPI derivatives turn worthless if the economy doesn't implode, but just slows down. Sandridge equity turns near worthless if oil remains in the $50 to $60 range for a year or two. Both of these investments seem to only work well at the extremes.
Buying BP would seem more adequate. It is certainly cheap so it meets the value criteria and likely can survive a depression. SD surely cannot.
Cardboard
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That to me is an amazing feat and an incredible reminder to us "traders" about avoiding losses:
"We sold Tesco shares throughout the year and are now out of the position. (The company, we should
mention, has hired new management, and we wish them well.) Our after-tax loss from this investment was $444 million, about 1/5 of 1% of Berkshire’s net worth. In the past 50 years, we have only once realized an investment loss that at the time of sale cost us 2% of our net worth. Twice, we experienced 1% losses. All three of these losses occurred in the 1974-1975 period, when we sold stocks that were very cheap in order to buy others we believed to be even cheaper."
You can argue that Berkshire`s net worth keeps on increasing and that if he holds on to losers long enough that he can minimize the impact from their eventual sale vs Berkshire new net worth, but for the math to work out you need a fantastic ability to avoid the number of losers and/or avoid their losses being large and/or everything else being great.
Cardboard
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Russia does not store oil for China! They have oil in the ground or available as produced...
The only way that oil can go to $10 is once storage in the U.S. is completely full and that people accept anything for it since they have nowhere to put it. In reality, it will be a very short term phenomenon, if it occurs: Shutdowns will occur, pressure will build on U.S. to export (they already started by going around the law) and rail cars will head to the Canadian East and West coast to ship it out. There is also 36 million barrels of spare capacity in the Strategic Petroleum Reserve which they would be crazy not to fill up if prices head that low.
Demand for oil has been going up for years if not decades at a very steady pace. It tracks very closely population growth. And it makes sense since more people means more cars, more need to transport goods, more plastic, more rubber, more fertilizers, more heating demand.
EOG or the largest U.S. shale producer announced no volume growth this year. This goes completely against the mentality that all of a sudden shale production cost nothing and can expand add infinitum without new drilling. And this is one of the best managed operator in the shale. Many marginal players are forecasting declines in production. Once bank reviews occur in April/May, expect even more capex reductions from various players which will lead to production declines.
Cardboard
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If they go with a trust route it will be a very profitable IPO. People pay crazy prices to get their hands on the royalty income.
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That is right, but notice that he bought about the maximum a fund normally would. What it tells me is that he sees an opportunity here worthwhile enough for him to go do it despite the size of the stake vs his fund.
FYI, Bellatrix trades currently at metrics that are very similar to Talisman Energy at the lows last year. And has an activist already on the board or Mr. Lewis from Orange Capital. However, contrarily to Talisman, it only has desirable assets in the WCSB and is much smaller. Percentage of natural gas produced vs liquids is also quite similar to Talisman.
I own none of BXE at the moment because I am involved with names that I believe are even more attractive but, it is very tempting.
Cardboard
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They have achieved their objective: who is going to trust them now for the next 5 years in terms of supporting prices?
If a banker or investor was previously willing to support a project breaking even at $60 when oil was stable at $90 with the implied price support of Saudi Arabia, what kind of spread from that break-even is going to be asked going forward? How much hedging is going to be requested?
Cardboard
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"In 2008 investing in banks was risky, where in 2012 it was a no-brainer. Right now, investing in oil seems risky."
It wasn`t a no-brainer in 2012. Back then or late 2011, people on this board were looking at the large number of other assets on BAC balance sheet and coming up with all kinds of speculations that this was worthless. There was also a strong feeling about the disintegration of the Euro and that it would wipe out capital and create a depression.
However, what was really interesting about BAC back then is that it had declined very significantly or much more than the other banks while the issues being discussed could have wiped out other banks similarly. Of course, BAC had its own issues (JPM and C had many also as we found out later) and TARP was in place. So it seemed less risky than in 2008, but if the future had turned out differently (recession, Euro disintegration, etc.) it could have turned out to be a very bad time to invest in banks.
IMO, oil at this price has its own TARP or its natural decline of production. Estimates vary between 5 and 9% globally. While I have no idea if the demand will remain stable or not, I know that it won`t go down by such percentages for any sustained basis. I know also at these prices that producers are running scared and cutting spending at faster rates than ever before. Goldman Sachs just released research after Friday`s rig data and indicated that it was the fastest decline (in percentage) for rigs in use.
Cardboard
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Regarding names, I would tend to invest with a restructuring mentality in the energy space. So quality of assets matter, not a hedge book that will expire in 18 months or a clean looking capital structure.
Sam Zell mentioned that he was looking and investing in bonds of energy producers since they all came down by a similar percentage if the enterprise was seen as weak with little regards to the quality of the assets backing these bonds.
The same is true for common shares of producers. Higher debt than average and a small hedge book = share price down 70 to 90% since June.
PWT is great IMO since they have great assets and are now very well managed operationally. When you start looking at metrics such as Entreprise Value per BOE produced, EV per BOE in the ground and netbacks, you realize quickly how crazy cheap it is. No need to be highly optimistic about the oil price.
Nawar at Investor Village makes a solid case.
Cardboard
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Oil IMO was the canary in the coal mine and we are starting to see it big time in China. Numbers tonight were not good.
Right now, this very low price for oil is a huge benefit to importers such as China, Japan and Europe.
While the U.S. still imports over half its needs, I remain unconvinced of the net benefit as 13% of all jobs created since the Great Recession were directly tied to energy. I would suggest that it is much higher than that when you add steel, pumps, electrical components and everything related. Quality of these jobs vs the others also matter.
However, besides numbers, IMO it is the psychological impact that is the biggest issue since it has been taken down much too far, way too fast by greedy shorts. Instead of just being a nice boost to the economy (say oil at 60-70$ to work out the oversupply), this dramatic sell-off is making people take a pause and asking questions. They now worry about deflation and a recession ahead.
Cardboard
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Highly deflationary. The kids who killed oil at the large banks will soon regret it badly. The IYF is heading down fast.
Cardboard
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A few clarifications are in order from my original post based on many comments:
I tend to buy deep value stocks. I look for stocks with the largest discrepancy between price and value.
When I mentioned dividend stocks, I had in mind companies that have a problem that seems fixable and offer in the meantime a decent to high yield. This is not your Blue Chip stock with a dividend that grows every year.
And yes I am from Canada. In the U.S., waiting a bit to move from short term to long term changes a lot your rate of taxation.
Cardboard
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Honestly, I may be totally wrong on the direct oil price impact on the U.S. economy. However, I think that some do not remember how much of a saving grace this was to U.S. employment after 08-09. These jobs were not come back jobs but, totally new ones. It was even called the industrial revolution for a while. GE is one company that benefited tremendously from that trend and invested heavily to produce the equipment necessary for oil & gas. Steel producers benefited. All these plants are not located in the producing States. Rail roads such as Burlington got really busy because of the oil boom. I don't think that people realize how big this is. It did not exist before 08.
High oil prices used to be really bad for the U.S. when it was importing almost all of it. It was obvious. But, now that it is producing it and the kind of capital being spent to drill, collect, maintain and transport it, how big of an impact is it to the economy?
On the other hand, I am certain that the high USD will be a large drag on S&P earnings. If earnings forecasts are down along with uncertainty due to unpredictable currency movements and you have a recipe for a big down year. Then it hurts pension accounts, the rich, etc., confidence goes down and the economy suffers.
Cardboard
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People are foolish to believe that the steep oil price decline won`t hurt America. The shale boom was a huge driver of economic growth over the last 5 years and not just for oil producing States. Go ask GE or Caterpilar for example. These were all high paying jobs impacting a myriad of other businesses.
Moreover, the oil decline was accompanied by a very sharp move up in the USD which will hurt multi-nationals earnings. This is now very apparent in the earnings that were published today. Also, how are these companies going to be able to predict their earnings with any kind of certainty when you have such fast and unpredictable moves in currencies as we have had lately?
Expect sharp revisions downward to S&P earnings and potentially lower targets or with a lower multiple since they will be much hard to predict than they were.
Cardboard
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http://www.investorvillage.com/smbd.asp?mb=4288&mn=161829&pt=msg&mid=14568849
Nawar posts some interesting information from time to time on oil.
Considering how fast shale production in NA did ramp up, I think that people will be equally surprised as to how fast it will come down. Take away speculative financing (no doubt, this is happening) along with very high decline rate and you have a recipe for NA production to reverse rapidly. If this has truly become the global swing factor or marginal production then this bear market in oil may not last anywhere near as long as some people anticipate or by extrapolating from history.
Cardboard
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Maybe some hope and time for companies that are levered.
Reading Gasfrac's announcement that they are entering CCAA protection:
http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aGFS-2244427&symbol=GFS®ion=C
This passage hit me in the head:
"Under the CCAA proceedings, it is expected that the corporation's operations will continue uninterrupted in the ordinary course of business, and obligations to employees, key suppliers of goods and services, and the corporation's customers, after the filing date, will continue to be met on a continuing basis. Under the initial order, the corporation's management will remain responsible for the day-to-day operations of the corporation, and to the best of the knowledge, information and belief of the corporation, there are no intended material changes to the management team or the composition of the board of directors, and the continuity thereof is anticipated to continue throughout the CCAA process."
Gasfrac was doing poorly well before oil started to decline. Their services simply did not sell. So it was the nail in the coffin for them.
For levered oil & gas producers with good netbacks, infrastructure and assets, this is a completely different story. By that I mean that one company could trip a bank covenant, find or negotiate a small bridge loan, decide to enter CCAA and by the time this is getting sorted out in Court, the oil price could be vastly different than today. After all, there is no problem selling oil. It is just that selling oil well below what the industry needs to make a profit is a whacky situation.
So say that LTS is forced into bankruptcy because they cannot continue meeting all their obligations under current oil price, they would then continue operating under CCAA until a resolution is agreed by the Court. This could take many months. By that point, oil could be back to $70 or $80 and with it solid cash flows to meet current obligations and they could find much easier a buyer for their Bakken asset for example at a solid price.
Considering that so many of these companies are in the same situation and despite their now low market caps, we are still talking billions in assets, it is quite possible that the Albertan court system could be overwhelmed and this process could take a lot longer than it normally would. Enough time to flush out speculators, the industry to rationalize and for oil to go back to a more normal equilibrium price or closer to the long term price indicated by the futures.
With Wilbur Ross circling and outfits such as the Canada Pension Plan Investment Board having expressed interest in a Talisman Energy bid, it is also not that hard to imagine some sort of profitable funding advances being made to preserve assets and Canadian employment at companies under duress that could turn out to be just temporary duress.
Cardboard
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"It seems to me that the obvious lesson is missing from your list, and it's called diversification and risk management."
That is definitely a fair point and a missing lesson, but not obvious.
Concentration, which is often touted on this board, was the reason for my success early on. More diversification would have saved a lot my losses post July, but not all.
The problem with diversification is the definition. Diversified within Canada may mean a disaster in the coming year if things don't improve for energy. I can also easily conceive a few scenarios at this point where the S&P tumbles by 50% in the coming year. So diversified within the stock market does not work.
Risk management is also tough to define. Do you buy puts against all your position and by that I mean 100% correlated or direct if not, you are fooling yourself by the level of protection. And isn't forcing yourself to hold cash when you are finding values a speculation on the future direction of the market?
If you doubt that this can happen to you too then ask yourself the following:
1- Who predicted that oil would go down to the $40's a year ago? Who was foolish enough to buy this product at $100 when rail cars, vessels were all apparently over-flowing with it in H1 2014? This is the most important commodity in the world after all. Not a tulip or some internet start-up.
2- Who predicted that the Swiss would let down their cap on their currency?
3- Who thought that the oil price would now be seen as a concern by most central banks regarding deflation? A cost saving should be seen as positive, no?
4- How many things happen in any given year that no one ever thought possible?
In any case, I cannot stress enough how important it is to build a fortress of value holdings, to always remain skeptical and humble.
And no, I don't think that this board is responsible with too much: "group thinking". There is generally always someone expressing skepticism or presenting issues to any thesis. It is anyone's responsibility to sort through it.
Cardboard
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As I enter 2015, I do feel horrible. After a wonderful start to 2014 or being up just over 40% in June, I am now down 50% from that lofty level. My portfolio now needs to double to just get back to that important psychological level. Trust me it is hard to accept. You look at the value of your portfolio and you realize that you are now back to where you were 2 or 3 years ago. You feel like dumb shit.
The main reason for the disaster is being heavy into oil & gas name since 2013, not selling enough of them between May and July and using my cash reserve to buy more of them too early or in September and October.
Despite the dangers of investing in commodities related names, here are the lessons that I believe should be useful to all value investors:
1- Whenever your price to value ratio of your portfolio goes above 50% you have to get worried. Or a portfolio of at least doubles based on a reasonable fair value assessment.
Back in 2013 and 2014, I could not find very many sources of value. Some oil & gas names however seemed to meet the test, so I bought. Where I got wrong is to not sell all of them when the remaining upside based on my reasonably calculated fair value appeared to be only 30 to 40%. They were barely doubles when I got into them anyway, so the test would have also kept me clear of that entire area.
Food for thoughts: There are many people invested in BAC on this board currently. I exited the name at around $15 in 2013 after buying in late 2011 around $5 because I could not see more than a 30 to 40% necessary jump to fair value over the next 18 months. So I will simply say just be careful if you are holding something for little upside left. It means that your margin of safety has declined significantly.
2- Whenever you feel knowledgeable and are making great gains each week or month you have to get worried.
Every time I started to feel great in my 18+ years of investing, there was a humbling moment right around the corner. And being a value investor and having relatively long holding periods (2 to 3 years), it takes a while to shake out the facts that you assumed were right and to react adequately. So if you start feeling intelligent, please look carefully at your portfolio, weightings, cash balance and hedges.
There were signs that oil production was in a bubble. I actually visited Fort McMurray in July and could not believe the level of activity. It was impossible to predict $48 oil, but to realize that optimism was too high back then, not hard at all. There was also a small supply glut in NA from the time I bought in 2013. When the price did not spike much after the Ukraine issue and ISIS, it was a big danger sign.
3- Whenever I bought a stock with an appealing dividend, it almost always got into trouble.
This must be a disease affecting many value investors. I would have to look long and hard in my trading history to find a stock with an above average yield that did not result in, at least temporarily, significant losses. These stocks are often decent value, held artificially high by the dividend and ripe to be taken down hard on any more bad news. Dividends should never be part of your thesis.
4- Whenever delaying taxes is on your mind, you are prone to make big errors.
I was sitting on big gains in June. Selling all oil stocks to meet my point #1 met an issue in my mind or a large tax bill this year. Not being my number one reason, still slightly thinking about it affected my judgement.
How often have you lost money because you held on to a stock in November and December only to sell it in January at a lower price to avoid paying taxes that year? And all you are doing is delaying the tax bill by one year. So basically, all you are saving is the capital cost on that tax bill for 12 months. In fairness, you also have decreased installments. However, at a maximum rate of 25% of your capital gain in Canada and at the rate that things can change in the stock market, it is not worthwhile at all playing with fire IMO.
5- Whenever a thesis is brought to you by an "expert" be skeptical.
I don't care if it is Watsa, Ackman, Buffett or whomever. These guys rarely make money with the idea that you have retained and it is often the one that will make you lose money.
You really have to make an idea for yourself about an investment and remove from your head target prices, buyout possibility or whatever rosy scenario someone may have mentioned. It includes things that are said on this board and that stick in your mind. It is something very hard to do, but you have to purge from your mind anything positive or that is not a cold hard fact.
For example, Sanjeev had mentioned that TPG-Axon would try to sell Sandridge. Sanjeev is successful and right much more often that he is wrong, but that thing stuck in my mind and seemed to make a lot of sense. This was reinforced by Cooperman's $10 target. Fairfax also held a very large position and Watsa mentioned publicly that SD was worth $20. The CEO mentioned not that long ago $15. Unfortunately, TPG-Axon was likely greedy and did not do the sale. Maybe they could not either. The reasonable target now if things don't change rapidly, is much less than $5.
It was not that hard for me to realize that this investment was much worse than all my Canadian oil & gas names: higher debt, tougher reservoir with lower oil content. What kept me in was hope of a take-out.
6- Oh yes. Hope is an investor worst enemy!
Cardboard
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Smallcap,
You will have to do research on your own from mineral resources departments as stated in this article which is a very good one IMO:
http://news.yahoo.com/column-breakeven-shut-prices-oil-wells-kemp-000100628--business.html
However, I know from the producers that I own that decline rates are very real and right in line with what you have heard. I also know that these so called cost reductions or new efficiencies that people are now talking about on this board are a joke.
The reality is as follow: producers have introduced newer drilling and fracking technologies (I say newer because fracking has been done for decades) on their best prospects first since it was risky and oil prices were lower back then. So the cherries have been picked already in NA. On average what is left are tougher reservoirs. So sure water flooding, gas injection, multi-stacked drilling and other techniques will be implemented faster now since they are better known, but it will only offset higher costs from these tougher wells.
These techniques also cost a lot of money. Even after assuming reduced rates from drillers and service companies, I doubt very much that much of NA is worth drilling at current prices. EOR will be a better option, but it is nowhere near enough to offset decline rates.
There is a reason why WTI is about to surpass Brent.
By the way, I was wrong about the Global decline rate at 7%. It is actually 9% as per this article. So the math gets even more interesting.
Cardboard
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The same "professional investors" are now ganging up against copper and its producers since yesterday.
What was the magical support price on copper?
Cardboard
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So, basically what you are saying is that these so called professional investors are smarter than Harold Hamm, the Saudis and countless oil & gas executives who did not further hedge their production? Who never anticipated for prices to collapse so much?
To me, and the way you are describing it, it sounds like that they are entirely behaving as a herd rather than anything else. They are traders and are probably short now to make money where they lost it or on the long side. They are not "insiders" as you mentioned unless for some oil trading houses or the Saudis if they played the short game in secret.
Regarding commodities and small investors, it is not much different than them investing in the general stock market. They will lose big also in any market if it comes down hard.
Relative to your U.S. statistics, it is only one data point in the picture of countless data.
By the way, I like your $82 figure and that is where I believe oil needs to be around over the next couple of years to balance supply and demand.
Cardboard
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It is funny now that this board has so many experts on global oil production or mainly that it will only go up forever no matter what is the price! Where were these people when oil was above $90? It is back then that a prediction about a coming collapse due to an oil glut would have resulted in big profits.
FYI, there are about 1 million barrels per day coming from stripper wells in NA. These wells produce just a few barrels per day and have been in place for a very long time. Unfortunately, we are now at a price that it does not even pay the electricity, maintenance and transportation cost for them to continue operating.
We also have capex cuts ranging from 25 to 75% at most if not all NA producers. A lot of these are occurring at firms where they are seeing 30% decline rates on their existing wells.
Globally, the natural decline rates for existing wells is around 7% and I guess logic would dictate that this percentage will only go up if shale is so important. So that is 6 to 7 new million barrels per day that need to be produced just to maintain current production. On top of that, it is forecasted that the world will consume 0.9 million more barrels per day in 2015 or 93.3 million b/d from 92.4 in 2014 or a lowered forecast from the IEA report in December. So you have to add almost Two Canada's per year just to offset the global decline rate and additional demand.
We also have a few countries that will face bankruptcy soon: Venezuela, Russia, Nigeria, Libya, possibly Iran. What do you think is going to happen to oil production or even more important oil development in these countries once unstability both political and financial really takes in?
Cardboard
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I recall seeing a chart recently about net long non-commercial contracts for crude. It was trending right around 0 before the QE Era, then moved up continually to the long side until the recent crude price slide. It was then heading straight down and fast.
I suspect this was largely hedge funds and pension funds allocating a tiny percentage of their enormous assets into non-traditional investments.
Once this reaches 0 again we may see more equilibrium for the price of oil since the so called glut is not that obvious to see based on global inventory reports.
Cardboard
History repeats itself?
in General Discussion
Posted
http://www.nbcnews.com/id/29495753/ns/business-oil_and_energy/t/oil-producers-running-out-storage-space/
With the difference that OPEC did not cut yet and that the U.S. is doing well, it is amazing how similar the story is to today. Of course, there are other differences like the size of U.S. production, better car effiency, but I would also argue that the world is now bigger and global GDP higher.
By the way, number of U.S. drilling rigs in use are now down 43% according to Baker Hughes. Down between 40 and 60% at every other down turn.
Cardboard