Sold out of Equal Energy

I exited my position in Equal Energy last week.  I took the hit.

I had originally bought Equal at a little over $4.  I sold out the rest of what I owned last week at $2.85.

Why take the loss?

I decided that I would rather take the loss then wait for the outcome of the strategic alternatives process.  I’m worried about the repercussions if that process does not end well.  I’ve watched a few of these processes go badly in the last couple of months.  The result to the share price wasn’t pretty.  Take a look at Second Wave and Ithaca for a couple of examples.

In the Calgary Herald today there was an article on the struggling junior resource sector in the city.

There are 17 companies currently in strategic alternatives processes that are advertising and being broadly shopped. That’s about 65,000 boe/d,” he said. “And there are 35 asset packages, giving us another 76,000 boe/d.”

With this many companies on the selling block it is a buyers market out there.  That doesn’t bode well for Equal.

A second concern is the Hunton.  The Hunton is a solid producing asset when natural gas and natural gas liquids prices are decent.  It is not as solid when prices are as weak as they are now.   70% of the NGL production from the Hunton is ethane and propane.

I have written before about my concerns with respect to ethane and propane.  NGL’s are commonly talked about in the same breath as oil.   They are all “liquids”.  Except they aren’t; ethane and propane are not oil. They do not have the same end uses as oil and therefore can have a completely different supply/demand dynamic then oil.

Moreover, Conway propane prices, of which Equal has said the Hunton NGL pricing is based, have gone from bad to worse over the past couple of weeks.  You can access the Conway weekly pricing along with other marketing hub pricing here.  Some of the price decline at Conway has been due to short term bottlenecks that will go away, but not all of it.   If you look more broadly at propane prices across the west they show a broad based decline.

I could be totally wrong about my decision.  Equal could sell assets tomorrow, or even sell the whole company, and I would lose out for having sold.

The decision is really one based on risk and reward.  The risk is that if Equal announces that they are no longer pursuing strategic alternatives the stock could drop suddenly and I could be left holding the bad.  The concomitant risk is the ever present problems in Europe.  The reward of course is that with the right sale the stock could rise to $4, or maybe more.

In the current environment I have decided to not take the risk and instead forgo that potential reward in the name of capital preservation.