Exhausting Market, Pan Orient releases news, Gold stocks take off (again…)

Man is this ever a difficult market to invest in.  Stocks are up, stocks are down.  Gold is down, Gold stocks are down, oh wait now gold stocks are up. Oil and oil stocks are down, now oil stocks are up, now they’re down again.  Mortgage stocks are holding up, now they are way down, now they’ve recovered it all and then some.  Its quite insane.

All of this is because no one has any idea what is going to happen if Greece leaves.  Well first of all, no one has any idea if Greece is going to leave.  And if they do leave, then no one has any idea what is going to happen next.

Dennis Gartman wrote the following today:

Panic then is in the air. Confusion then reigns. Liquidity trumps all other concerns and in that environment we can imagine almost anything happening. We can imagine the Yen moving two or three Yen… higher and/or lower. We can imagine gold moving $50/oz.… readily… higher or lower. We can “see” the dollar moving 2-3 EURs… higher or lower, and in that environment we wonder what trades, if any, make even a modicum of sense?

He’s right. It’s a crapshoot right now.

Its binary.  If Greece doesn’t leave the Euro then we can pretend its all good for another few months or maybe a year.  If Greece does leave the Euro then its equallypossible that A. Nothing much of anything happens, at least outside of the Eurozone itself or B. Complete chaos ensues around the world. You can probably make the argument that the delta between A and B is +/- 20% on the markets.

It just isn’t something that can be accurately priced in ahead of time.  The consequences of Greece leaving are, to put it in the terms Donald Coxe has used, existential.  Yet this is the problem that the market is struggling with and the result is a rollercoaster and Im tired of it.

Pan Orient News

In the midst of the chaos Pan Orient released news today that they sold their 60% interest in a number of their Thailand offshore land blocks for about $170M.

Pan Orient has operated working interest in 4 offshore concessions in Thailand: Concession SW1 (SW1); Concession 44/43 (L44); Concession 33/43 (L33); and Concession 53/48 (L53).  This sale was for everything but the L53.  TheL53 concession is the concession that had the recent discovery that first excited and then disappointed the market.

In total Pan Orient had 19MMbbl of proved and probable reserves in Thailand at the end of 2011.  I wasn’t able to find where they break out the L53 reserves from the other concessions but if I use a rough ratio based on 2011 production, somewhere around 17MMbbl were sold.  This puts the selling price at about $10/bbl.  That’s not too bad.

On a flowing barrel basis, according to the Annual Information Form these concessions produced 1,306bbl/d in the fourth quarter of last year.   That would make the selling price $130 per flowing bbl, which again is not bad.

These blocks have not been given much value by the market because they have had production problems and reserve writedowns.  These blocks are producing from volcanic formations that are not commonly oil producing rock, there was skepticism in the market regarding whether these formations would be able to sustain production, and that skepticism was proven to be valid when Pan Orient took a technical revision of 12.5MMbbl on their year end reserve report.  To get $170M for these concessions now is really quite surprising. I was shocked.  Honestly I had to read the news release like 3 or 4 times to make sure I wasn’t missing something.  The blocks sold don’t even include the block that has had the recent discovery. Yet here you had a $2 stock that had just sold a piece of their assets, and not even really the core piece, for about $2.80.

Almost as shocking was that the stock opened after the halt at $3.25 and traded as low as $3.10.  Have we reached the point where cash is not even worth cash any more?  If you do the math Pan Orient had somewhere around $60M in working capital (mostly cash) before this sale.  This sale adds about another $160M (after netting out the working capital changes) or so.  So that’s about $220M total cash.  The stock has 60M shares fully diluted so that puts cash alone at $3.80 per share.  If the market wasn’t so awful and everyone wasn’t worried the end of the world was nigh I think the stock would be have traded quite a bit higher.  I added some shares at $3.25 (though to be clear, as I wrote before I had sold some shares late last week when I sliced 20% off almost all my holdings, so these shares were essentially just adding back about half of those).

Gold Stocks rising? Maybe?  Could be? Or more wishful thinking?

Also today, gold stocks took off.  In my umpteenth attempt to time the bottom for gold stocks, I bought a few more Newmont calls, added to my position in Atna, and added a position in OceanaGold.  OceanaGold is a trade, pure and simple.  If gold falters again and the stocks look weak, its gone.  If not I will ride it back above $2.

The action in the gold stocks has been interesting.  There has been 4 days over the past two weeks where Newmont  has risen while gold has fallen.  I figure that is about 4 more days than that has happened in the previous 6 months.

I have no idea what is going to happen to gold or to gold stocks next.  What I do know is that it makes sense that gold will rise in the face of a declining and potentially collapsing Europe.  The recent response of gold to the Euro decline makes very little sense to me. Lately it has been that if the Euro falls then gold falls about 2-3 times more.  Basically the market is saying that if there is a collapse of the Eurozone you would be better off going long Euro and short gold than the other way around.  Clearly this is not a sensible conclusion.  Gold should be, after all, the negatively correlated asset class paper currencies.  As the faith in paper currencies decline, gold should rise.  Look I’m not a gold bug.  I have no idea whether a gold standard would succeed or fail.  But I do know that gold should act in opposition to currencies, and this certainly seems like a rather good environment to be betting against paper currencies.  And so it is that I make a bet on a few gold stocks once again.

Exhausting…

I have to say though that the stress of these swings is getting to me a little.  With respect to Pan Orient in particular, I was quite worried that because the market is so awful and everything has been tanking on even the slightest bit of bad news that if Pan Orient released bad results from their Indonesian well (which is what I figured was the reason for the halt) that the stock would crater further. I really felt relieved when I read the news release and it was anything but bad.  However I was a little surprised with just how relieved I felt.  It was one of those moments when you kind of look at yourself and think wow, I’m really quite stressed about all this aren’t I.  Not surprising I suppose.

The only thing I know to do to have less stress is to have more cash.  Cash is, after all, the negatively correlated asset class to market stress.  I’m 35% cash right now.  I have said before that I want to be 50% cash by the Greek Election.  I stand by that, and will be working to get there by selling into any rallies.