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Posts from the ‘Oil Stocks’ Category

Scaling back on Rock Energy

Third short post summarizing some recent portfolio moves.  First two are here and here.

Thoughts on Rock

Every once in a while you luck out and get in just ahead of the crowd. It doesn’t happen very often; usually you have to wait months before an idea begins to play out (ie. my extended comatose with Extendicare).  So when it does happen quickly, you have to enjoy it.

I first bought Rock back in August in the $1.60’s. I added to it in the $1.80’s and again in the $1.90’s. Two months later its sitting at $3.35 and has been as high as $3.70. That’s quite a move.

Nevertheless, the biggest thing that has happened to the stock between then and now are people waking up to it being cheap (I am told that Keith Schaefer for one, a newsletter writer, has apparently said some positive things about the stock).  And that gives me pause. Read more

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Waiting for Novus and adding more Canadian Oil Juniors to the Portfolio (Pinecrest, Palliser)

I have been adding more Canadian oil junior positions.

If you recall, I started my endeavor into the domestic oils a month and a half ago, when I purchased Lightstream Energy and Penn West.  That didn’t last long; I quickly jettisoned those names after doing more research, deciding that neither was particularly cheap, and recognizing that there were other, smaller names that were more attractive.

The first names I went with was Novus Energy and that was followed by Longview Exploration, and Rock Energy.  Of the three I felt the most comfortable with Novus and made that position the largest.  This week, an article came out in a Hong Kong paper (I believe if was the Economic Times) that Novus was about to be taken out by a Chinese company called Yanchang Petroleum (you can access the translated article here, and one version of the original here).  The news was clearly leaked, Novus wasn’t ready for it to be released, and the stock has remained halted for the last 3 days.

If the article is to be believed, the value of the transaction is going to be a windfall for shareholders.  According to the article the purchase price is $500 million, which after subtracting debt and accounting for stock options would still mean over $2 per share.  Given that Novus is an 8% position for me, this would be a huge gain. Read more

Week 65: Doing the work

Portfolio Performance

The turn in housing

– Michael Burry – Scion Capital

The housing market has turned.

Being that it is a huge, lumbering tanker, it takes a long time to slow down and redirect.  The changes happen slowly enough that you can miss them if you are focused on the wrong details (price increases and to a lessor degree sales increases) and not enough on the right one’s (inventory).  All that matters is that prices are cheap, rates are low, and inventory has come down to levels that leave many cities firmly entrenched as sellers markets. Once buyers stop seeing themselves in the drivers seat, their attitude changes from one of waiting for a better buy to that of getting in before its too late.  The vicious circle is replaced by a virtuous one, and sales and price increases will follow.  Nothing lasts forever, and the US housing collapse didn’t either.

Falling inventories had to lead the housing turnaround, and that is what we are seeing now.  Nationwide in August housing inventories fell from 8.2 months of supply a year ago to 6.1 last month.

Read more

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.

Read more

When the facts change: Getting back into Equal Energy

I have been inching my way back into a position in Equal Energy over the last week and a half.  On Thursday, with the stock dropping back to $3.40 (on the Canadian exchange) I increased my position significantly.

Of course I sold Equal at an even lower price.  I began selling in May with a third of my position at $3.35, another third at $3.20, and the rest at $2.85.

So why by back now?

Well, some of the facts have changed.

Three key events have occurred that have changed my opinion on Equal Energy

  1. I read the SeekingAlpha posts on Equal by Nawar Alsaadi
  2. Drilling of the Mississippian has begun
  3. Central banks around the world are easing

Read more

Breaking my rule for Pan Orient

One of the rules that I try to follow is not to add to a stock that has fallen below my purchase price. I have been burnt a number of times by doing this.  I have ended up trapped in the position, and further averaging down only adds to the problem.

The rule, like all rules, is not of the steadfast sort, and so I do break it from time to time.  But when I break it, I do so tentatively, I think about the consequences, and make extra sure that my decision makes sense.

I broke the rule with Pan Orient on Tuesday.

I had a fairly small position in Pan Orient and had been waiting for something of a correction before I added to that position.  I didn’t expect the extent of the correction that occured, but after some reflection I decided to add to the stock.

The news that sent the stock down was this news release. What sent the market scurrying was twofold; news that the L44 block exploration was not finding economic oil, and probably more importantly the news that the L53 block was experiencing a relatively high water cut.

In particular, in the news release the company said that the L53-DST3 well had been producing at 540 bbl/d of oil with a 60% water before it was shut-in and cased to perform a sidetrack of a deeper zone.    In the February 27th news release the L53-DST3 well was producing at 1,200bbl/d of oil with no water cut.

This is potentially negative news, but its really anybody’s guess at this point just how negative it is.  Since the reservoir is high porosity / high permeability it could be water from coning.  It could also be that the perforated interval extended down below the oil/water contact or that it partially perforated a water zone.  There are also plenty of examples of fields that successfully produce at high water cuts for years.  The downside is that the watercut may be creeping into the oil zone and continue to increase with time until the well is uneconomic.  Only time will tell.

The market neglected to put any value on the good news from the release.  The L53-DST3 well tested a slightly lower sandstone zone (1,179m TVD versus 1,142 to 1,163m m TVD for the previous 2 zones) and that zone was flowing at 400 bbl/d.

In the L53-D2 well, Pan Orient tested the 5 zones that it had previously not tested but had referred to in the original news release of the L53-D2.  In that January news release the company said:

Pan Orient is pleased to announce that the L53-D2 exploration well is currently on 90 day production test flowing 27 API degree oil at a rate of 1,015 barrels per day through 17.8 meters of perforations between 1110.8 meters to 1154.7 meters measured depth (860 to 890 meters true vertical depth), within one of six conventional sandstone reservoir intervals interpreted as oil bearing based on oil shows while drilling and open hole log and pressure data analysis.

The news release on Tuesday told us that 5 untested zones have now all been tested and all 5 were found to be oil producing.  One zone tested at 929 bbl/d of oil while two others tested above 500 bbl/d.  These zones are in addition to the originally tested zone from the January news release that tested at 1,1015 bbl/d and produced 40,917 bbl in the first quarter, which if you assume it was flowing for the full 90 day period means that the well flowed at an average rate of 454 bbl/d for that period.

The bottom line for me is that Pan Orient is finding a lot of oil zones and even if a couple of them don’t work out to be as wonderful as say Coastal’s Bua Ban, they are still going to produce a lot of oil and book a lot of reserves from them.

At this point it comes down to valuation.

Thailand production averaged 2,725 BOPD in the month of March, of which 1,702 BOPD was produced from Concession L53 and a combined 1,023 BOPD from Concessions L44, L33 and SW1. Production in the first quarter of 2012 averaged 2,541 BOPD.  Based on the March production number and the basic shares outstanding of 56.7M, Pan Orient is valued at $52,000 per flowing barrel.

According to slide 5 of Pan Orient’s January 9th presentation, yearly cash flow at 2,500 bopd and at $100/bbl WTI should be around $60M, and at 3,000bopd it should be $68M.  Again, with 56.7M shares oustanding, that puts the valuation at around 2.5x cash flow.

The company has cash and working capital on hand of $58.5M according to their January 9th presentation.  So about $1 of the current shares price is attributable to cash.

Capital expenditures are expected to be $37M for the year so 2,000 bbl/d of cash flow more than covers capital expenditures.  With the cash on hand in addition to the cash flow Pan Orient has a CAPEX cover that is rarely seen in the oil and gas junior industry.

I just think this looks over done.  I wish now that I had waited another day to buy, as the stock trades at $2.50 whereas I added at $2.76.  But I didn’t want to wait too long.  The company will be releasing a reserves update on the L53 structure within a week or two and I think that could be a catalyst for the market realizing it has overdone the downside.

 

Selling: Coastal Energy, after the mistake of buying back

Two weeks ago I looked pretty smart when I sold 2/3 of my position in Coastal Energy at a little over $18.  Last week I looked shrewd when I bought back that position at $16.50.  This week I looked stupid as the stock tanked and I sold.

Its quite possible that I sold at what will prove to be the bottom in the stock.  That would be unfortunate.   But while the timing of my transaction may have sucked, I believe the spirit and intent was right on the ball.

I sold out of Coastal on Thursday after they announced their end of year results.  They had also announced disappointing results at Bua Ban South on the same day (actually the night before) but that had nothing to do with why I sold.  I sold because the year end results showed a disturbing decline in production offshore.  The company did not address this decline very clearly in the news release.

Here is what the company said:

“2012 has also begun extremely well. We have drilled and tied in a handful of additional wells at Bua Ban North which have further boosted production. These wells were tied in during the month of February and brought average offshore production for the entire first quarter up to 21,100 bbl/d. Our current offshore production is 22,500 bopd.  

The  company had previously announced a little over a month ago that they had 26,000 boe/d of production offshore.

The Company has two more wells to bring online at Bua Ban North. Current offshore production is averaging 26,000 bopd, bringing total company production to 28,000 boepd. The rig is now being mobilized to Bua Ban South and is expected to spud the first well there by the end of February.

Now I may have gotten worked up over nothing, and I know of a few players smarter than I that used the dip as a buying opportunity.  $15 is a reasonable price for the production that Coastal has, and there is the opportunity that they will find much more.

Nevertheless, it was what I didn’t hear as what I did hear that made me sell.  I have been in too many situations that followed this script.  And more often than not, the reason that the reasons aren’t stated is because they are something to worry about.

Is that the case here?  I have no idea.  Maybe its operational, mechanical, one-time, short term, or some other adjective that can be dismissed and forgotten.  But the company didn’t say that, when they could have said that, and instead they didn’t say much at all.  So I took the approach that I will ask questions later.

Coastal has been a great stock for me.  Even though I sold out for good after a 25% decline (from $20 to $15) I still pulled off almost a 4-bagger.  It was probably my history with the stock that kept me in it as long as I was.

So of course I wish I would have sold it 3 weeks ago.   But I have learned that decisions need to be made based on current circumstances.  If you do not do what you believe is right today because of a mistake you made in the past and if you hope instead for a return to those past conditions to correct the mistake, you will get killed more often then not.

When I couple the uncertainty of the news release with the opportunity I see to redeploy that capital somewhere else where I believe the opportunity is greater (see my recently finished post on Mortgage Servicing Rights and my post from last week’s portfolio update where I stepped through the breakouts of numerous regional banks), it seemed to me the right thing to do.   Perhaps in a couple more weeks it will look stupid for having sold it when I did.  Be that as it may, you can’t forsee the future, you only have the past as a guide.