Sunday, March 22, 2015

Analysis of SandRidge Energy

“Degrees of ability vary, but the basic principle remains the same: the degree of a man’s independence, initiative and personal love for his work determines his talent as a worker and his worth as a man.” – Ayn Rand


Please read the disclaimer here: Enjoy the article, bitches!

Hey, I hope you guys have been doing awesome. I’ve been putting off writing about the oil investments I made for the Greedy Dragon portfolio as I only recently learned about the industry. Not unlike a horny 19-year-old choosing which hooker to bang in some brothel, my analysis was all over the place. But to really know how much I learned about the industry, I guess I need to put pen to fucking paper and write an organized analysis of an oil producer. With that said, let’s get down to business.

Updates on the Greedy Dragon portfolio: It has been a busy week for the Greedy Dragon portfolio. I took a position in Northern Oil & Gas and added to my position in Comstock Resources. I also sold my stake in Kumpulan Fima and Tifa Finance as well as the rest of my position in Uranium Participation Corp.

I bought SandRidge energy a few months back at $1.85 per share. The stock is currently trading at $1.64 per share. SandRidge Energy is a U.S. oil & gas company that primarily conducts exploration and production activities in the Mid-Continent area with the Mississippian formation being a key target. Most of the wells drilled in 2014 were horizontal wells. The following information in this paragraph is taken from the company’s 2014 Fourth Quarter Earnings Update presentation and 2014 fourth quarter earnings call transcript that I got from Seeking Alpha. The company aims to get the cost per lateral/well down to $2.4 million by the second half of 2015 from $3 million in 2014 (which is itself down from $3.6 million per lateral in 2012). The company has already realized savings of $250,000 of the $600,000 per lateral savings target at the end of February.  The company is seeing an increase in its Mississippian type curve estimated ultimate recovery (EUR) to 484,000 barrels of oil equivalent (BOE) from 380,000 BOE previously. The increase is due to higher natural gas and natural gas liquids EURs while the EUR for oil remains the same at 118,000 barrels. According to this website, “a production type curve is a representative production profile of a well for a specific play and/or area”. There was also an 8% increase in oil initial production (IP) and a 14% increase in natural gas IP. To get a better picture of the company’s 30 day IPs, cumulative production, EURs and 1st year decline rates, please refer to slide 7 of the Q4 earnings update presentation. At the target lateral cost of $2.4 million and the new type curve, SandRidge believes that new wells could generate an internal rate of return of 30% (the return will be lower if you include around $250,000 for saltwater gathering infrastructure per well) at flat $50 oil and $3.50 natural gas.

I don’t know if the company will be able to achieve its well cost target this year. I hope that they do. But I have to say that there are a lot of exciting things going on in the industry such as multilateral wells and long laterals. As oil producers become more experienced with those drilling techniques, there’s definitely potential for lower cost and/or more productive wells. It must be pretty fucking awesome being in charge of attaining a satisfactory return on the drilling program by deciding which drilling locations to develop and the types of wells to drill. I imagine it’s kinda like ordering a sandwich at Subway. Hmm, meatballs and steak mixes pretty well together. Maybe I should add some of that chipotle sauce and see how it goes…       

To estimate SandRidge Energy’s finding and development (F&D) cost, I divided the total cost incurred in 2014 for oil and natural gas property acquisitions, exploration and development by 2014 extensions and discoveries of proved reserves. This gives me a F&D cost of about $9.30 per BOE. The higher end of the company’s 2015 guidance on its cost of production is at $18.10 per BOE (the sum of per BOE lifting costs, production taxes and total G&A costs). So, the total cost to find, develop and extract their reserves comes up to $27.4 per BOE. Based on the lower end of SandRidge’s production guidance, excluding the effects of derivatives and assuming the company realizes current price levels less guided differentials for its production, it would get around $22 per BOE. Note: I’m assuming that the NYMEX Natural Gas price and Henry Hub price is the same.

The lower end of the company’s 2015 production guidance was for 9 million barrels of oil, 4 million barrels of natural gas liquids and around 15 million BOE of natural gas. All of Sandridge’s estimated oil production for 2015 is hedged and most of its liquids are hedged (The company’s hedges for 2015 cover 10.164 million barrels of oil; NGL barrels hedged at 3:1 ratio to oil). However, a significant portion of the production is hedged with 3-way collars. Unlike a 3-way in the bedroom, a 3-way collar isn’t all that hot when the price of oil dropped as significantly as it did. Of course, I would rather have a 3-way collar than no hedge at all, but it’s not optimal. Anyway, based on my calculations the company’s hedges will allow it to realize $79.93 per barrel for its oil in 2015. In my calculations, I assume that oil prices will remain constant at $45.72 (Friday’s WTI crude oil closing price). I also assume that all the oil swaps will be applied before the 3-way collars are applied to determine the hedged price. While oil is expected to make up only 32.14% of the company’s estimated production in 2015, it should be the largest contributor to revenue.

The company’s debt of $3.195 billion as at December 31, 2014 is also quite a large amount. But the debt only starts maturing from 2020 onwards which gives the company some time to deal with its debt.

One of the issues with horizontal wells is the steep decline in production rates. SandRidge’s new type curve for its Mississippian wells show first year declines of 80% and 62% for oil and natural gas production rate respectively. According to the earnings call transcript on Seeking Alpha, the CEO said “I will say that at the start of the year, if you just halt the drilling altogether for the whole company, we’re on a 35% exit-to-exit decline.” I’m not particularly worried about the company running out of places to drill new wells to sustain production. According to the company’s 2014 Q4 presentation, the company has 3,212 future drilling locations in the Mississippian formation, 401 future locations in the Chester formation and 147 future locations in the Woodford formation. SandRige intends to develop 182 gross laterals in 2015. I’m more worried if oil prices stay at these low levels for a prolonged period of time as that could result in the company having fewer drilling locations that are economically viable.

Note: I don’t know if each drilling location will translate into a new well or new wells. I just don’t know enough about the industry yet.

I know that there’s still a lot of stuff I need to learn about the O&G industry. And frankly, I’m fucking psyched! It’s like when I was a kid playing pokemon. Every new fact I learn about the industry is like encountering a new pokemon that I want to catch. Thank you for reading. Take care and stay rational. 

Saturday, February 28, 2015

Revisiting stop losses and position sizing

Hey, I hope you guys have been doing well. After learning more about the oil industry, I’m ecstatic about the potential opportunities that the sector presents. The attractive investment opportunities available plus the awesome video games I’ve been playing lately equals to good fucking times for me. Anyway, I’ve been thinking about position sizing and stop losses. I know I’ve written a little about those risk management techniques a while back. But considering all the stuff that has been going on lately, I think it’s a good time to revisit these concepts.

Update on the Greedy Dragon portfolio: I recently took a position in Comstock Resources and increased my position in Natural Resource Partners. Please do your own research before investing in anything. I also reduced my stake in Uranium Participation to raise some cash.

I now think that stop losses definitely have a place when it comes to riskier investments. I personally have never imposed a stop loss on any of my investments as I was confident that I could tell when an investment got impaired. I guess I was wrong as there were times when I only realized a permanent impairment when it was too late and incurred hefty losses. In most circumstances, I still think that I would avoid using stop losses. However, I definitely should use stop losses when it comes to investments that are exposed to sudden devastating risks. Risks that could just come out of the corner and curb stomp your position before you even realize that an impairment has occurred. One example is my investment in National Bank of Greece (NBG). The bank could be managed prudently (and I think management have indeed been doing a decent job, considering the hand that they were dealt) but shareholder wealth could still get destroyed due to a government that’s against austerity coming into power. I’m not saying that NBG’s shareholders will lose their shirts (again), but the risk of investing in the bank certainly has increased due to the new anti-austerity government taking over. I definitely would have been better off if I was stopped out of the position with a 25% loss or whatever; now I would be happy just to recoup my initial investment.

Disclaimer: If you’re a shareholder in NBG, please do your own research before deciding what to do with your position. Don’t rely on this article for investment advice.

I’m kinda gambling here as I should just cut my losses, grab some Haagen-Dazs to feel better about the whole thing and call it a day. But it’s a small position so I guess I’m just going to let it ride. I know I’ve said many times that I would be happy if stock x or stock y dropped another 50% as I would be able to get even more value. Well, that’s not the case with the riskier investments as a lot of the capital losses could very well be deserved. I will admit that I should have avoided making any investments in Greek banks in the first place as the country has so much debt that a lot of things could go wrong. I should also have foreseen something like this happening because a country with a big government that has been spending beyond its means for a long time doesn’t just embrace free markets and financial discipline overnight.  

Another possible use of stop losses is to protect big gains in cyclical investments as it’s more or less inevitable that these investments will experience another bust. The only thing that’s uncertain is when the bust will happen. It could be very dangerous holding onto a cyclical stock when it is going into a bust; just look at shale oil stocks, some of them were 80+% off their highs and may never see those highs again. So, a stop loss can be used to reduce the risk of the investor giving back all of his gains or maybe even more when the bust eventually happens. However, putting stop losses too early on cyclical investments could result in you missing out on huge gains if those investments were simply hitting a speed bump instead of entering a bust. It’s difficult to know when to start using stop losses in the case of cyclical investments, but I guess it depends on how much returns the investor is personally satisfied with. I would like to clarify that I would only use stop losses to protect gains and not to mitigate losses when it comes to cyclical investments. I know that there is a chance that the oil and coal stocks I invested in could see their prices plunge even further. However, instead of limiting my losses, I would rather take the losses with the knowledge that I have the potential to make some badass returns if those stocks survive this rough patch.

My opinion on position sizing hasn’t really changed much. I limit the size of my positions based on risk. If I could invest in a high quality company like Google at 5 times earnings (it would be fucking awesome if I ever have the chance to invest in Google at such a low valuation) then I wouldn’t lose a second of me time (masturbation) even if the position made up 30% of my portfolio. Similarly, I would limit riskier investments to a small percentage of my portfolio. Also, I will generally not double down on those positions unless there is a change in their fundamentals or the size of my portfolio grows significantly. That’s why you don’t see me buying more NBG or Mongolia Growth Group even if their stock prices have dropped significantly.       

So, these are my current views on stop losses and position sizing. I hope you guys found this article useful. Thank you for reading. Take care and stay rational.

Sunday, February 8, 2015

Analysis of Alpha Natural Resources

Please read the disclaimer here: Enjoy the article, bitches!

Sup guys, today I will be analyzing a company that I previously added to the Greedy Dragon portfolio but didn’t write about as I was busy with other stuff. Alpha Natural Resources is a coal mining company that’s listed on the NYSE (stock code: ANR). I first took a position in ANR at $2.23 per share and added to my position at $1.54 per share. The stock closed at $1.16 per share on Friday. I don’t think that things have deteriorated significantly enough for me to reassess my investment in ANR so I’m not worried about the paper loss. And no, I’m not the kind of asshole that dismisses his investment mistakes as mere paper losses (I may be an asshole, but I’m not that kind of asshole).  I will readily admit that I made investments where the fundamentals eventually got impaired and I had to accept that the losses were permanent. Investing in coal mining companies right now is risky because some of them might actually go bankrupt if coal prices remain at depressed levels for a prolonged period of time. However, I think that I have a chance at making some serious money if I can find coal mining stocks that are able to survive this rough patch.     

Excluding depreciation, depletion & amortization, asset impairment & restructuring, and amortization of acquired intangibles, ANR experienced a loss before tax of $53.74 million for the quarter ended September 30, 2014. There may be other non-cash expenses and non-cash income, so the company’s financial performance may actually be better or worse.  You might be wondering why I don’t just look at the cash flow statement to find any other non-cash items. Well, it’s because the cash flow statement in the quarterly report was for 3 quarters, and the prices ANR got for its coal could be different in each quarter. I want to know how the company is doing with coal prices that are as recent as possible (coal prices could have fallen even further since September 30, 2014. I just hope that if there was a decline in coal prices, it wasn’t a significant one as that would suck dick). It’s really important for investors in coal mining companies to check the realized coal prices and financial performance of their investments often.

While ANR did lose money in the quarter ended September 30, 2014, the company does have a significant cash buffer. The company had cash and cash equivalents of $809.41 million and short term marketable securities of $374.52 million as at September 30, 2014. ANR’s long-term debt of $3.71 billion is indeed a significant amount, but the company does have some time before the more sizable chunks of its debt starts to mature.  As at September 30, 2014, the company’s current portion of long-term debt was $176.94 million. The company has $153.65 million of debt maturing in 2015 and $345 million of debt maturing in 2017. It’s from 2018 onwards where more sizable chunks of its debt start to mature.

I think I will conclude the article here. It’s kinda short as I’m only analyzing the survivability of the company and not long-term profitability. I hope you enjoyed reading this article anyway. Thank you for reading. Take care and stay rational.

Wednesday, January 28, 2015

Analysis of Hong Leong Industries Berhad

Please read the disclaimer here: Enjoy the article, bitches!

Hey guys, the “Greedy fucking Dragon” is back and ready to tear shit up! I won’t be surprised if some of you thought that I’ve jumped off a high building or something as everything I’ve touched recently seems to have turned to fucking disasters (at least that’s how most people would see it anyway). But I’m not worried about the investments I made unless there’s a permanent impairment to their businesses. In fact, I had a feeling that the natural resource stocks I invested in would drop some more. But I still took some positions anyway as I didn’t want to miss out in case natural resources suddenly turned around. I’m in no way defeated by these paper losses. In the words of Vic Mackey, “I don’t step aside, I step up.” However, I’m not adding to my natural resource positions right now because I’m looking for a further correction and/or other resource stocks with decent balance sheets and cost structures. Unlike a Coca-Cola, the riskiness of a resource stock can change quickly as the company can take on a lot of debt or burn through a lot of cash to develop its reserves. That’s why I think it’s important to own a few companies instead of just doubling down on a single company in the resource space. The Greedy Dragon portfolio also doesn’t have much cash left (only about 10%-15% of the portfolio is in cash), so I need to bring up the cash balance of the portfolio before making any significant new investments. Now that we’re done catching up, let me get down to business and analyze Hong Leong Industries which I took a small position in earlier today at RM 4.4 a share.        

The company’s activities consist of the manufacturing and sale of ceramic tiles, manufacturing and sale of fibre cement and concrete roofing products, and the assembly and distribution of motorcycles, scooters and related parts. For the quarter ended December 31, 2014, the company achieved annualized returns on equity and assets of 18.03% and 12.77% respectively which is actually quite good. The company has a pretty strong balance sheet with RM 323 million in cash and cash equivalents and only RM 160.59 million in borrowings.

Adjusted net profit note: The return on equity and return on assets figures in this article are arrived at by using an annualized adjusted net profit (which I calculated on my own) as input. I calculated the adjusted net profit by excluding other operating income and income from discontinued operations. I also used the Malaysian Statutory tax rate to calculate the company’s tax expense instead of using the tax expense reported in the quarterly report.

Other than the solid balance sheet and returns on capital, what attracted me to Hong Leong Industries was its low valuation and healthy dividend yield. Based on the company’s common shares outstanding of 308.356 million as at December 31, 2014, and its annualized adjusted net profit attributable to common shareholders of RM 168.92 million (which I calculated by myself), the company would have earnings per share of RM 0.547. Taking today’s closing price of RM 4.4 a share, the stock would have a P/E ratio of 8.04. It’s possible that the results for the quarter ended December 31, 2014 is better than average and annualizing it would therefore result in the P/E ratio I calculated being lower than what it actually is. There’s also a chance that my calculation of adjusted net profit attributable to common shareholders is overly optimistic. But I’m not really worried as I think there’s enough of a margin of error. In 2014, Hong Leong Industries paid out RM 0.27 a share in dividends. At the stock’s closing price of RM 4.4 per share, it would have a dividend yield of 6.13%.

Adjusted net profit attributable to common shares note: I calculated adjusted net profit attributable to common shareholders the same way I calculated adjusted net profit except I deducted 25.6% for profit attributable to non-controlling interests. I arrived at 25.6% by dividing the reported profit attributable to non-controlling interests by the reported profit for the period in the income statement for the quarter ended December 31, 2014.

One risk I see with owning shares in this company is a slowdown in the property market affecting some of the company’s businesses. I have no idea when a slowdown in construction will happen or what its impact would be on the company’s profitability. But unless a drastic crisis occurs, I think the company has the financial strength to survive. Thank you for reading. Take care and stay rational.