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Posts from the ‘Arcan Resources (ARN)’ Category

Out of Arcan

I sold out of the rest of my Arcan position this week.  I took the rest off at $1.18.  This was after I had sold the majority of my position a couple weeks ago (September 11th) at $1.25.

I had difficulty making up my mind on the stock.  The company could,  get taken over any day for a premium, and if that happens I will be kicking myself.  But I could also be sitting around for a long time waiting for that day.

I bought Arcan at $1.50 in July.  Thus, I’m taking a loss of about 20% on the sale.

The deciding factor for me was this chart, from a BMO research note on the company released two weeks ago.

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Week 55: Skittish

Portfolio Performance

Portfolio Composition

Click here for last two weeks of trades.

Portfolio Summary

I have reluctantly added some risk over the last couple of weeks  My cash position is down to $27,839 from $35,893 two weeks ago, which is a drop to 23% of total assets in my tracking portfolio.

The stocks I have bought have been added because I believe they are cheap.  I think that there is a reasonable chance that they will be worth significantly more over time.  But I do not add them with complete conviction.

The problem remains Europe.  And I remain wary of when the next shoe will drop.    Until Friday, the market had forgotten about Europe for the time being, but we have seen this happen before, and always with the same ending. Europe comes back and again trumps all else.  With Spanish yields rising to a new high on Friday (7.267%)  I am already questioning whether I have made a mistake by purchasing rather than selling stock.  I have already considered an about face.

You can see just how skittish I am by looking at how many trades I am second guessing myself on.  Three times in the last two weeks I bought a position only to sell it later the same day.  These weren’t planned “trades”.  I don’t play the day-trade game.  These were cases where I took the position and couldn’t handle the weight of it, and decided to sell instead of worrying about whether I had made a mistake by buying.

I am typically not so wishy-washy.  That the market has me going through convulsions speaks volumes to the uncertainty that exists at the moment.

As for the stocks I bought, those that I kept that is, I am confident that I got them at a decent price which, in the absence of more macro-malaise, will lead to eventual profits.  More on the individual position updates in the post below:

Company Updates

Radian Group (RDN), MGIC (MTG), MBIA (MBI): here

Arcan Resources (ARN): here

Phillips 66 (PSX):  here

 

Week 55 Update: Arcan Resource

I’ve owned Arcan before, but I have always had trouble holding onto it.  I think that in the aggregate I have probably lost a few dollars on the stock.  Yet here I am again to take another stab at it.

Arcan is an excellent example of why I follow the rules of:

  1. Never add to a losing position
  2. Do more of what’s working and less of what isn’t

With Arcan, I eventually sold out for good on March 23rd at $4.75.  At the time there wasn’t anything in particular that you could pinpoint that would suggest the stock was about to fall by more than two-thirds.  But what concerned me was that the stock wasn’t doing what it should be doing if things were going well. That is, it wasn’t going up.

And then there was the CAPEX.  My skittishness with Arcan and most other oil juniors has always been based on their level of capital expenditures in relation to their cash flow.   As I outlined in this post back in February, Arcan has been spending multiples more money than its been taking in.  You can’t just keep doing that forever.  It will work as long as the market sees you as a “growth stock”, but as soon as that music stops, well so do your funding sources.

Arcan has gotten themselves in over their head with funding and now they are going to have difficulty meeting their growth expectations.  The near-term outlook for the company is not terribly clear.

So why buy?  Well the stock is off 75% from its highs.  I think its all price in.

As well the company appears to be changing (perhaps by necessity) its spendthrift ways.  President, Doug Penner, said the following in the first quarter press release:

“I am excited about implementing Arcan’s next stage of development.  Having expanded rapidly in our first nine years of operation, we are maturing as a company, ensuring that our continued growth also delivers value for our shareholders over time. We are focused on reducing down‐time, operating costs and G&A expenses as we work to bring our capital spending more in line with our cash flow. We are also looking at all of our assets  strategically, and we will consider divesting non‐core assets as opportunities arise.”

Of course, with reduced spending will come reduced growth, and that is one of the reasons the stock has been decimated.  At $1.50 per share, which is about what it cost me on average to buy a position, we are getting awful close to the value stock territory.  The company has a $7+ NPV of its reserves.   Their production numbers haven’t been stellar, but they are showing stability and they should be getting past the initial flush declines and into more stable exponential declines on most of their wells.  AS well, the company should begin to benefit from the infrastructure spending of the last year, as the pipeline from Ethel brings down operating costs and we begin to see the fruits of the waterflood at Ethel in the second half of this year.   As I pointed out in that same article earlier this year, there is a clear difference between the Ethel decline curves and that of Deer Mountain Unit, where there is waterflood.

Arcan is simply a bet that the stock has gone down too far.  A move back to $2 would be a 35% gain and I could see it happening with nothing more than a bit of improved sentiment.

Week 38: Waiting on a move

Portfolio Performance

Portfolio Composition

Portfolio Trades

So first of all . . . .

I don’t know what happened with the AUM trade

I think there is a gliche with the RBC Practice Account because somehow I sold Golden Minerals (AUM) on Wednesday and ended up with a long AUM in Canadian dollars and a short AUM for the same amount of shares in US dollars on Thursday.  I am hoping the trade resolves itself (in my actual accounts this sort of matched trade in the wrong currency would automatically resolve) but if it doesn’t I will attempt to clean it up myself.  I wanted to point it out because my current portfolio composition looks a little odd as a result.

Buy more banks . . . .

I’m still buying financials and I am actively looking for more to buy.  I got a few more ideas from a new website that I have signed up to called stocktwits (its like twitter for stocks).  The names are: ORRF, FFNW, SNBC, and GBNK.  I haven’t done enough research on any of these names to make an assessment of them.

This week I added to both Shore Bancshares and to Rurban Financial.  I looked at both in more detail this weekend and I am happy with what I see.  I’ll try to put together a post on each shortly.  I’ve already seen a double in Community Bankers Trust, and I’m up 40% since my original purchase of Bank of Commerce Holdings but I have no plans to sell either.

This week I also noticed that one of the banks I held but sold, Xenith Bankshares, popped.  I may buy that one on weakness.  I’m also watching the newswire for anything on Atlantic Coast Financial.  ACFC has a brutal loan book and could very well kick the can at some point, but the stock also has a book value of over $19 (yes that is right, it is a $2 stock with a $19 book value) so it is imaginable that if the banks continue to be on fire the stock could move up rather substantially.

. . . .Less oil

I sold out of Arcan Resources this week.

Why did I sell? Three reasons.

  1. The company ran into some operational problems (again) that cut back production for a time
  2. Spring break up is upon us and while I’m not certain of the extent that Arcan is impacted I do know that the junior oil investment community tends to go on leave from April until June.
  3. I want to put my money in the best opportunities and right now the best opportunity is in the regional and community banks and in the mortgage servicers.

Maybe I am selling at the bottom.  I’m sure there are a few that would scoff at me selling after a 20% drop.  Stupid retail.  So be it.  The banks are going up right now and Arcan is not.  So I would rather own the banks.

To give you a taste of just how impressive the bank performance has been, consider these charts:

A couple new positions

I also have initiated a couple of new positions that I consider myself “restricted” in talking about, at least for the time being.  The first is Cal-Maine Foods, which is a large egg producer.  If you want to get an idea of my reasons behind the purchase, take a look at my recent tweets ( I also signed up for Twitter this week).

A second position that I started was Golden Standard Ventures.  Golden Standard is drilling in Nevada and they may have hit gold in the way of a Carline style deposit.  A real spec here, but one that from what I hear has a reasonable chance of working.

Can’t stay away: Arcan Resources and Second Wave Petroleum

If you remember, I sold both Arcan and Second Wave a week ago Friday.  That lasted about a day and a half.

Sometimes selling a stock can make you think about it more clearly.  Such was the case with both Arcan and Second Wave.  In fact I spent last weekend working through their prospects.  I hope to post on this soon, but for now, let me just say that the work reiterated to me just how much potential these two companies have.

The main reason for not owning both of these Beaverhill Lake producers is because they are spending a lot more then they are taking in.

They really have been spending a lot more than they take in.  The original reason I reduced my position in both companies last fall was because with Europe appearing on the precipice, being invested in companies in need of capital seemed like a poor proposition.

However Europe seems to be back on the back burner.  For Arcan and Second Wave, spending a bit more then you make is not such a bad thing anymore.  It can actually be perceived as a good thing; growth and potential and all that jive.

The reality is that the prize at Swan Hills continues to prove itself up, and the NAV of both companies will likely continue to rise as they drill more wells.

Perhaps the kicker for me was the news release put out by Second Wave last Monday.  In the release SCS announced a number of new boomer wells in and around the existing boomer wells that they (with the JV with Crescent Point) and Coral Hills have been drilling.   But more importantly, SCS announced the success of a well drilled far to the south of this existing “sweet spot”:

[Second Wave] completed its 100% working interest 01-17-062-10W5 Beaverhill Lake light oil well in south Judy Creek with an initial two day flow test rate estimated at 800 bbl/d of light oil further delineating the Company’s south Judy Creek land base.

The 01-17 well (big red circle) is well to the south of the existing sweet spot and it opens up a whole mess of land in between.  A lot of those southern sections are 100% interest for SCS as well:

While we are somewhat away from proving up the sections in between, the 800boe/d success gives me a lot of confidence that they will be proved up over time.

I ran the cash flow numbers on 2012 based on their expected average production of 3,850 boe/d and $95 oil and I figure they can generate around the $85M mark of cash flow.  I will post that cash flow analyis more thoroughly in a later post.   For now, suffice to say that my estimate compares favorably to the $85M CAPEX estimate that the company had in their February presentation.  Perhaps the days of spending in excess of what you make are soon to be over for Second Wave?

Future Catalysts?

I see a couple of catalysts for Arcan and Second Wave that made me want to stay out of the stocks.

I think that the biggest catalyst to get me back into both stocks in short order was the spector of the upcoming reserve report of both companies.  I suspect that the reserves for both Arcan and Second Wave are going to show some excellent numbers, potentially with NPV10 estimates decently above the current share prices.

Arcan has the additional catalyst of the waterflood of Ethel.  I posted late last year how quickly Ethel production was declining without waterflood.  I wrote:

If you look at the average Ethel and DMU production curve, you can see the effect of the waterflood taking place at DMU versus Ethel.  Ethel wells do appear to stabilize at a lower level. The following chart looks strictly at horizontal Ethel and DMU wells drilled after Jan 1st 2010 (I didn’t want to confuse things by adding data from old completions) averaging out the monthly production for all wells at that point in their decline.  Producing day rates are used.

Now it has to be pointed out that the post 6 month data for Ethel is a single well (the 10-27).  So we are not dealing with a large dataset here.  Still, I think the conclusion can be made that Ethel wells drop off quicker and stabilieze at a lower rate without the waterflood.

Presumably with waterflood one would expect that Ethel type curve would shift up to where the DMU curve is.  One mitigating factor to this improvement might be reservoir quality.  The sands at Swan Hills have often been thought to thin to the south.  On the other hand, Arcan’s completion techniques have improved quite dramatically lately with the move to the larger acid fracs (another detail that was provided in the Q2 MD&A).  This is witnessed by the significantly higher IP30 and IP60 results produced by these presumably thinner sands at Ethel.  So this may help the Ethel wells outperform.

Its a bit of a guessing game until you get some data.

So what does it mean to production?  Two things.  First, with the waterflood implemented you would expect that the existing wells at Ethel would deliver a higher rate.  I’m going to speculate that, on average, this would be about 40bbl/d for the post 2009 drills.  This would add about 350bbl/d of production to Arcan.

Since that time Arcan has drilled a number of additional wells at Ethel.  I would estimate that once in full operation, if the 40 bbl/d per well increase number holds up one could expect around 500 bbl/d extra production from Ethel.  But it could be more, and at least in the short run, likely will be more.

Out with the Old, In with the New: Arcan Resources and Reliable Energy

Updated:  I mistakenly stated that Arcan had spent $40M on the Stimsol purchase.  It was $24M.  I got my original information from a Scotia report, which read: we note ~$40M of the uptick was associated with the purchase of StimSol and for land.  I mistakenly read this as $40M for Stimsol.  I also  sleepily referred to Stimsol as a frac fluid producer when of course they produce acidizing chemicals and solvents for de-waxing.

On Monday in the mid afternoon Arcan released third quarter results that I was less than impressed with.  I was lucky enough to receive a google alert on the earnings release before the market fully reacted. I quickly halved my stake in Arcan in my on-line portfolio.

As I wrote on the weekend, in my real portfolio I had already substantially sold down my position.  With the release of the quarter I sold more, dropping it to a rather miniscule 1% weighting.  With the stock is trading in the mid-4’s two days later it appears to have been the right thing to do.

Was the quarter that bad?  On the face of it, the production numbers were ok.  Arcan produced 3,680boe/d in the third quarter. This was somewhat disappointing since the company had stated as far back as July 20th that they were producing 4,400boe/d. Growth is trending upwards, but the company really needs hit their exit guidance of 6,000boe/d to prove to the market that they have built a solid base to grow off of.

And while the company provided 4th quarter guidance of between 4,600boe/d and 4,800boe/d and exit guidance of 6,000boe/d, they did not give an estimate of current production.  I always wonder about this.  While it is not necessary for a company to provide a current production number, you have to think that if they don’t it isn’t because they have good news to share.

Overshadowing the production figures were the 3rd quarter capital expenditures by the company.  Arcan spent a rather extraordinary $87M in the quarter.   This is far and above the already high levels of CAPEX that the company spent in the previous 2 quarters.  It is also far and above its cash flow. Now $24M of this capital was spent buying Stimsol, a maker of the acidizing blend that Arcan uses.  But even subtracting out that sale, Arcan still spent almost $63M of capital, or 5x its current cash flow.

Given the future capital expenditures alluded to in the quarters report (road building, a pipeline from Ethel, remediation of the existing pipeline at Morse Unit, waterflood at Ethel), one has to expect this trend to continue going forward.  To be fair though, the recent debt and equity offering the company made does give them the money to fund these expenditures.

While CAPEX went up, netbacks came down.  Netbacks in the quarter were $41.90, versus $55 in the second quarter.  Of course much of this can be attributed to the Swan Hills fires in the summer (the company said this amounted to $10-$15/bbl) which was a one-time cost, but in addition at least some of the increase is attributable to Ethel production, which right now is being shipped by truck to the Morse Unit.  The situation is explained by the company in the clip below, along with an ETA of the first quarter of 2012.

Arcan estimates a significant reduction in operating expenses in the first quarter of 2012 due to a number of activities which are currently underway. These activities include completion of the construction of a high grade road system that connects the DM2 through Arcan’s Ethel property into Morse River, the commencement of pipeline infrastructure along the new road system backbone that will allow production in Ethel to flow to the DM2 oil facility, and the construction of pipeline infrastructure to facilitate water injection in the Ethel area. Arcan is also working on resolving issues with the clean oil pipeline which flows from the DM2.

Arcan is still on the right path, they are just moving more slowly down it than I would like to see.  The problem with moving more slowly is that Arcan is valued quite highly compared to its peers, so slower than expected growth leaves lots of room for downside questioning.

All flowing boe numbers are based on the latest production estimate provided by the company.

With some of the proceeds of Arcan I bought a position in Reliable Energy.

Reliable Energy released their 3rd quarter results on Tuesday morning.  While Arcan produced a decent production increase while spending a lot of capital, Reliable showed similar production increases (production has almost doubled since the 3rd quarter), while spending more closely in line with their means.

Moreover, a look at cash flow shows that Reliable will be more able to spend within their means in the coming quarters.  Reliable generated $3.8M of cash flow in the 3rd quarter with a netback of $65/bbl.  As of their latest production estimate they are now producing about 500bbl/d more than they averaged in Q3.  At $60/bbl netback that would work out to about $3M additional per quarter in cash flow.  That puts the yearly cash flow somewhere around (maybe slightly above) the $25M per year range.  The capex budget for 2011 is $25M.

Midway, Arcan and others have had to spend well beyond their means to grow production.  In some environments that is not a deterrent.  In our current liquidity strained environment, it is.  Reliable looks to be in a better position to do that, at least in the short term.

The other important consideration with Reliable is that they are beginning to ramp up into the 2nd of 3 consecutive quarters of drilling.  Reliable basically moves to the sidelines during spring break up, and so they tend to see decent production gains through the winter months as they spend a disporportionate amount of their yearly CAPEX budget during that time.  The drilling and completions in Q3  is responsible for the production increases so far in the 4th quarter.  With a little luck it will continue going forward.

The company trades at about half of what Arcan does on a flowing basis.  At $47,000/flowing boe (see the above chart where I compared flowing boe numbers for a number of juniors) the company is reasonably cheap compared to its peers, especially considering they are producing high netback light oil.  On a reserves basis the company trades at close to its 2010 NPV10 of $0.19.

I suspect when their 2011 reserves report comes out (likely not until late in the first quarter) it will show a significant increase over the 2010 reserves.  The 2010 reserve report (available on Sedar) gave them 800,000bbl of undeveloped reserves and 400,000 of developed producing reserves.  The 400,000bbl was likely entirely vertical drills.  The undeveloped works out to the equivalent of about 8-10 horizontal locations depending on the evaluators productivity per well guess.  In the next report that number should go up pretty substantially.   Up to the end of the 3rd quarter Reliable had drilled 10 successful hz wells this year so offsets alone should double that number.

In all, Reliable Energy looks to me like a better bet for near term price appreciation than Arcan does.

Week 21: Getting Worried Again

(current positions shown at end of post)

The benchmarks that I compare my portfolio performance to have begun to trend ominously down.  I am a little concerned about what the market will do next week now that Thanksgiving is over and investors are looking more soberly at a pictrue of Europe that really should perhaps not be viewed without a good bottle of scotch.  Of course the rumor making the rounds tonight is that the IMF is going to set up a massive bailout fund for Italy and that has the market soaring.  Count me a skeptic here.  Morgan Stanley put out the following note on the subject:

The Italian newspaper La Stampa reported over the weekend that the IMF is preparing a €400-600bn loan at a 4-5% interest rate for Italy. We would view this report skeptically, as even a credit line amounting to the lower end of the reported range would eat up the entirety of the IMF’s available $385bn (as of Sept ’11) forward commitment capacity. The only workaround would involve substantial IMF quota increases, a measure that would require the support of the US Congress.

The bottomline is that while stocks may be rising on the news, yields in Italy have hardly fallen this morning, an German yields are actually up.  There simply is no easy Sunday night fix for this crisis.

Europe Still Dictates my Decisions

What worries me is that in the end it is the ECB that has to step up and fill the void and there is more than a little evidence out there that the ECB has no intention of coming to the rescue of profligate governments.  There is a very good article in the NYT this weekend called As Crisis Mounts, Europe’s Central Bank Stands Back.  The article explains the ECB position.  Printing money to buy the bonds of countries facing funding problems does not solve the underlying issue. And the ECB is not necessarily going to step in.  Witness the following:

“I think markets are going up a blind alley thinking there’s going to be a common euro bond or thinking that the E.C.B. is going to act as a lender of last resort,” Norman Lamont, the former British finance minister, told Bloomberg on Friday. “I think Germany would rather leave the euro than see the E.C.B.’s integrity affected.”

Instead, the E.C.B. insists, euro area governments must amend their errant ways. “Governments need to ensure, under any circumstances, the achievement of announced fiscal targets and deliver the envisaged institutional and structural reform programs,” Mr. González-Páramo said in London on Friday.

This is true.  However what printing money does do is it avoids a full scale banking crisis and the commiserate deflationary recession brought on by the insolvency of Italy or Spain that results from the funding problems.

If the ECB chooses not to engage in significant bond buying, and to stand aside as Italian and Spanish yields march higher, markets will rightly conclude that a deflationary recession must be priced in.  And this isn’t going to be goo for any asset, save perhaps US treasury bonds.  It isn’t even going to be good for gold.

It is with that line of reasoning that I remain 50% cash, and while I am not allowed to short in my online portfolio, I am 50% hedged with shorts against my long positions.  My long positions remain significantly skewed towards the gold stocks.

Portfolio Moves:

I didn’t buy or sell any stocks this last week in my online portfolio. This was not entirely the case however for my actual portfolio.   In particular, I sold some Arcan early in the week this week.  My overall exposure to Arcan in my online portfolio  is about 5%.  In my actual portfolio it is now only 2%.  In addition to Arcan, I have a small position in Midway (about 1%) that is not represented here.  Let’s talk for  a second about the problem with these stocks.

Why you should be Wary the Oil Juniors:

Both Midway and Arcan are junior oil producers.  Arcan has a large (96,000 acre) position in the heart of Swan Hills.  I have written extensively on the company here.  Midway has a fairly large (33,000 acre) position in the Garrington Cardium and a reasonably sized position (23,000 acres) on the fringes of Swan Hills.

Both Arcan and Midway show strong growth in production, as witnessed below:

       

Based on their growth both companies look like great investments.  And they are… in the right environment.  The problem comes with the particular environment we find ourselves in.  We live in a credit constrained world.  Based on events of the last few months, most notably of late the escalating problem that even the Germans are having trying to raise money, and one has to wonder how well companies that are not self-financing are going to do.

The downfall of Arcan and Midway is that they are anything but self-financing.

With European banks teetering on the brink it just doesn’t seem like a great time to be taking much of a chance on companies that need cash.  I have reduced my exposure to Arcan and have decided to leave my exposure to Midway at its current level unless we see some sort of resolution across the ocean (as if).  I likely will wish that I had done the same steps here online.   Unfortunately Arcan fell rather substantially last week and I am reluctant to reduce the position now at below $5/share.

New Short Position in Deutsche Bank:

The other move that I made that is not expressed in the online portfolio is that I add a short position to Deutsche Bank.  I have been trying to add a short position in this stock for months.  Its hard to get the shares to short with.  I finally had some luck and shorted it at $34.  I have been reading about the company regularly in FT.  This is one leveraged bank.  The tangible assets to equity ratio is 60:1.  To compare, when researching the regionals, I wouldn’t look twice at a regional bank that had a ratio above 10:1, and many of the one’s I found most attractive (Home Federal Bank of Louisiana for one) had ratios of less than 5:1. This makes DB the most underfunded bank in the EU.

Secondly, DB relies on wholesale funding for short-term liquidity to a greater degree than most. Below is how Deutsche Bank stands in comparison to other EU banks with regard to the Net Stable Funding Ratio (NSFR), which is often used as a proxy for determining a banks reliance on wholesale funding.

It seems to me that the combination of high leverage and reliance on less than stable sources of funding are a recipe for a liquidity squeeze for DB as Europe continues to get worse.

Current Portfolio: