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Jul 31

Oneida Financial – Local MHC Continues to Make Good

I got introduced to the idea of buying regional banks stocks about 6 months ago. Two separate catalysts piqued my interest in the idea:

Last summer I read the David Einhorn book, “You Can Fool Some of the People All of the Time”. In that book, which is about a fraudulent business development company called Allied Capital, Einhorn spends a chapter outlining his investment philosophies. One of the ideas he puts forth is investing in mutual holding companies. Seth Klaman has been another proponent of investing in MHC’s.
Tim Melvin’s trade of the decade. Melvin, a fairly well known value investor, believes that the small regional bank stocks have been beaten up well beyond what is justified and that their recovery represents the trade of the decade.

After spending a few months getting to understand the banking industry, and scouring the net for cheap MHC’s trading below or at book value, I stuck money into a couple of them, with one of those being Oneida Financial. Now, in the 5 or so months that I’ve owned it the stock has done absolutely nothing. You might want to take that as neither a good or bad thing in this market. Oneida has bounced back and forth between 8.40 and $8.80, but does not seem in any hurry to break out in either direction.

I have already written an extensive write-up on Oneida’s regional banking business and why I picked Oneida as one way to play this trade of the decade. I’m not going to go further into the details of my reasons here. I’m just going to focus on their second quarter results.

Another strong quarter for earnings. Oneida earned 24 cents for the quarter. Stripping out loan loss provisions they earned 25 cents. Over the past 4 quarters their earnings have been 84 cents basic and 91 cents after stripping out loan losses. Below is a chart of their earnings over the last 5 years. There has been a steady upward march over the past two years.

I bought Oneida in part because I thought they were cheap based on earnings power. They should easily be able to earn a $1 next year, meaning they are trading at less than 9x earnings on a forward basis. What I have been waiting for is for Oneida to begin to grow their loan book again. Its been shrinking (albeit at a small rate) since the 2008 debacle. This looks like it might be starting to change.

Oneida’s loan growth is a bit tricky because they sell of much of the fixed rate loans they generate. So to get a true picture of their loan generation, you have to add back the fixed rate loans that are being sold off. Below is a chart of loan growth at Oneida showing both growth before and after accounting for the fixed rate loans sold. Up until this last quarter loan growth has been negative since Q2 2009. That changed this quarter with the uptick.

Deposit growth declined somewhat in Q2 from the last few quarters. Nothing to worry about yet though.

The company continues to sell below book value and tangible book value. More importantly, book value continues to grow at a smart pace.

Jul 29

Coastal Energy Results are Worth Buying More on

The results from Coastal Energy last night are incredibly good. I have bought more of the stock this morning.

At Bua Ban the company announced that two wells, the B-06 and B-08, tested at 2,000bbl/d each. The company has, thus far, drilled 7 wells into the Miocene structure at Bua Ban North B. The company had estimated before these tests that they had found about 50MMbbls at Bua Ban North. With these results blowing away expectations, you have to wonder how much more is there. Keep in mind that Coastal’s year end 2010 reserves were 27MMbbls of oil. So they have basically tripled their reserves with the discoveries thus far at Bua Ban North B.

Below is a map of Bua Ban.

Now these estimates of recoverable reserves at Bua Ban North B, which are impressive in themselves, are before we even touch on the Bua Ban North A discovery, of which Coastal has already attributed about 10MMbbls of recoverable reserves. And the real big prize is if it turns out that Bua Ban North A and B are one in the same. If the two reservoirs are really one big reservoir, the reserves could double or more.

The new discovery at Songhkla was also a positive, though maybe not as big of a one.

The Songkhla H-01 well was drilled to a total depth of 9,256 feet TVD and encountered 32 feet of net pay with 20 percent porosity in the Oligocene interval. A drill stem test was performed and the well produced 1,000 bopd with minimal initial pressure drawdown of the reservoir. The crude has an API gravity of 29 degrees. The H-01 well has the potential to produce in excess of 3,000 bopd using an electric submersible pump (“ESP”). The Company has spudded an appraisal well to delineate the reservoir.

Its too early to know how big this reservoir is, but Coastal was attributing an unrisked OOIP of 6.7MMbbls for the Oligocene. It doesn’t appear that the Oligocene was the primary target, and so the release of the H-01 results could be taken somewhat negatively as there was no mention of the higher Miocene interval where Coastal had a much higher potential OOIP.

This morning Canaccord raised their target on Coastal to $14.75. This is based on a NAV of $14.75. First Energy already had a target of $18.75

I bought some more Coastal this morning at $10. Its tough to buy anything with this silly debt ceiling issue overhanging everything. But these results, in my opinion, are too good to pass up.

Jul 28

The Good, the Great and the Ugly – Start with the Ugly and OceanaGold

Lots of news and lots of portfolio changes so far this week. When earnings season come I’m generally adding and removing positions on the fly depending on whether the results are meeting my expectations. Add to that the debt ceiling issues and the need to hold more cash than usual with that uncertainty, and you end up with a lot of changes. I want to talk about 4 items in the next few posts.

The Good – Oneida Financial released solid results yesterday and Lydian International released a solid economics study
The Great – Coastal Energy announced some extremely good results
The Ugly – OceanaGold…

I’m going to start by talking about OceanaGold in this post.

What can you say other than what a terrible update! Lower production and much higher costs (61,335 ounces of gold at cash operating costs of $921 per ounce) than anyone would have expected. The chart below looks frighteningly like a hockey stick (we don’t know costs per tonne for the quarter yet). You can’t even blame the cost increase on the New Zealand dollar. Costs are spiking regardless of currency.

Investing in gold companies right now is turning out to be difficult. More difficult then is worth while. The market is not giving the companies any respect for the current price of gold, and the companies are almost all disappointing.

I sold out of OceanaGold this morning in the first six minutes after the market opened. When a company announces an obviously bad result, and you are fairly small fish as I am, you have to take advantage of the situation by selling BEFORE the market figures out what the new fair value is. In the case of OceanaGold, I sold at $2.58, which was a lot less than I would have gotten yesterday, but a lot more than I would have gotten a couple hours later. As you can see below, it took a couple tries before I finally got someone to buy my shares. Unfortunately if I wouln’t have put in such a high bid at the open I might have been able to get out in the 2.60’s. Oh well.

I’ll take another look at OceanaGold some day, but right now I have been disappointed a couple times in the stock, so I’m walking away for a while.

Jul 26

Oritani Financial Posts a Solid Quarter

Three banks I follow, Oritani Financial, Oneida Financial and Eagle Bancorp or Montana reported earnings in the last couple days. I want to look at each, and I will start here with Oritani.

I don’t own Oritani but it is a reasonably priced and well run regional that I follow closely. Their CEO, Kevin Lynch, has an extremely low tolerance for non-performing loans, which is why non-performing assets are down to 0.50%.

With earnings of 0.52/share the bank is trading at 26x earnings, which isn’t particularly cheap on that metric.

Book value of the stock is $11.45, meaning the bank is trading at 1.13x book. But not reflected in book is around $50M, or $1/share, in REO (real estate owned). Now this isn’t foreclosed real estate owned, but instead its JV real estate that the company bought in the past for the purposes of capital appreciation.

The company is showing extremely strong loan and deposit growth. The loan growth is particularly impressive because so few companies are growing their loan book right now.