Posts from the ‘Pan Orient Energy (POE)’ Category

May 23

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.

May 14

Week 45: The Trouble with Value Traps

Portfolio Performance

Portfolio Composition:

Trades

Where are the gains?

What is really frustrating about my portfolio performance is how well I have done on individual stocks while making so little money overall. Its been such a wasted opportunity.

Here is a short list of some of my winners since the beginning of this year:

The obvious question that occured to me was how is it that these stocks that make up a substantial part of my portfolio (PHH Corp and Newcastle are two of my three largest holdings) can be up an average of 42% and my portfolio as a whole is only up about 10% since the beginning of the year.

When I went back through the history of my performance for the year so far it became clear that really, most of the problems are the result of two mistakes.

I bought the stocks of two oil companies and oil company stocks have been pummelled
I compounded that mistake by averaging down in each case

Averaging down is such a dangerous game. In the long run it can work out for you at times, but at other times it can really stick you into some tough spots. I averaged down on Equal Energy, which I originally bought at $5.50, when it got to $4.00. It proceeds to go down to $3.00 before finally recovering recently to $3.40 where I have perhaps compounded my potential for a mistake by averaging down again.

I also averaged down on Pan Orient. I bought an initial position in Pan Orient at $4.00. The stock collapsed on poor results in Thailand and I averaged down at $2.75. The stock is now $2.30.

Averaging down is the symptom, but the cause that underlies both of these situations is that both are value traps. Both stocks are really quite cheap. Of course they were really quite cheap when I initially bought them and they were really quite cheap when I averaged down. They just got cheaper. In the case of Pan Orient, the company has $1 per share of cash on hand, is able to generate $1 per share of cash from their current level of oil production, and have some upside to be realized from the new discoveries in Thailand. In the case of Equal, they generated $2 per share of cash flow last year and continued that trend in the first quarter by generating another 50 cents. At $3 they are trading at 1.5x their cash flow generation.

The problem is that the wisdom or folly of averaging down is not a clear cut case. If I look back on the times that I have been trapped by value, I can name just as many cases where I ended up a big winner as I can cases where the value was never realized. I sat underwater some 40% with Tembec at one point before the market recognized the turn in the pulp cycle and the stock tripled from where I bought it. Had I not doubled down with Western Canadian Coal in early 2009 I would never had had the truly phenomenal gains that came from the stock going from 50 cents to nearly 10 dollars. To site a recent example, I tripled my position in Community Bankers Trust when the stock hit $1, which was down 30% from my original $1.30 purchase. Now its $2.25.

I appreciate the wisdom of the Gartman axoim that you should never add to a losing position. And in many cases I follow this axoim and I walk away from a stock simply because its not working out. But there are cases where the value appears to me to be so clear that to walk away from it just because the market acknowledges even less seems foolish. Such is the case right now with Equal and Pan Orient. The same sort of scenario could quite easily be in the process of developing with Atna.

So what do you do? What I do is I sit down every weekend or two and review these two holdings and the thesis behind them and generally I end up drawing the same conclusion that I originally did. In the cases of Equal and Pan Orient I remain convinced that both stocks have to trade higher at some point. So I hold and wait. And I hope that Europe doesn’t completely implode in the mean time (see my last post on cat and mouse).

Out of Shore Bancshares

I sold out of Shore Bancshares on Friday as I warned that I might. Here is a case of a stock just not working out the way I anticipated. Over the long run the bank is probably going to be just fine, but as I have already pointed out the non-performing assets are not trending down and so it is perhaps going to be a while before the market gives shore the “just fine” green light. In the mean time I have been looking at some other names that are perhaps better banks to be in right now.

Out of Atlantic Coast Financial

I really wanted to hold onto my small position of Atlantic Coast Financial. Its a lottery ticket to be sure, but its not very often you find a bank with a book value of almost $20 per share trading at a share price of $2. Nevertheless, when I read the news earlier this week that the Chairman of the Board was resigning from his position because he felt the board and management were not working hard enough to put the bank back on its feet, I felt I had no choice but to sell. I was somewhat surprised that the fall out since then has been minimal. The stock is essentially trading at the same price it was at the time of the announcement. That may actually be the best sign the company has given that they are turning around. It remains on my radar screen, and on my google alerts.

Maybe not a Gold Stock reversal

I thought that we had a classic reversal in gold stocks on Wednesday. But now, not so much. As I pointed out at the time, I am not a technical trader and generally pay no attention to such things and perhaps I should continue in that vein rather than trying to pick points that clearly aren’t working out.

I wouldn’t say that my theory that Wednesday was the gold stock bottom is dead, but its certainly on life support. I sold some Golden Minerals that I had bought and in an account I don’t track here I sold the Newmont I had added.

Apr 19

1 Comment

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.

Mar 7

Buying when you don’t want to

The hardest posts for me to write are the one’s where I have to write that I bought a bunch of stocks on a day where the market was down a lot. Its tough because I am worried I will be proven wrong. Its extra tough because I am notoriously early and so I have been wrong many times before.

The market really tanked today and nothing tanked harder than the junior gold and oil stocks. I had lightened up significantly on the gold stocks last week; I exited Canaco Resource, OceanaGold and a significant portion of Aurizon Mine. Unfortunately I used some of the proceeds to buy Pan Orient Energy, which took it on the chin today.

Nevertheless there is some truth to the old adage that the best time to buy stocks is often when you don’t want to. Today I didn’t want to buy anything. I even had half a mind to sell it all and stand away.

But having thought it through, I am having trouble making sense of the idea that this is the start of something big. I have become a convert to the idea that the LTRO has taken out much of the systemic risk potential. The prices of periphery bonds suggest as much; even after today’s shellacking Italian and Spanish bonds sit near their lows. The TED spread and Swap spread hardly moved at all and currently sits at 40 and 27 respectively, well of their highs of 60 and 55. The bank stocks, while hit hard, did not lead the way down in the way they did in August.

It just doesn’t feel to me like it did in August, or in November for that matter, when the fear was palpable. Yes, we are worried about Greece and what is going to happen. But the evidence does not suggest that the big players are that worried. If they were we would see more signals of the stress in the bond market.

Which makes sense. By this point everyone knows about Greece. Everyone who had money at risk with Greece should have been able to figure out how to take it off the table. That yields aren’t rising in the periphery suggests that the real problem, that a Greece default would cause a domino effect, is not in the cards.

What I bought

I’ve had good luck buying Aurizon under $5 in the past and so I did so again today, restoring my full position in the stock. I also bought more Golden Minerals. Golden Minerals is a stock I had been tempted to sell when it got to $10, but I got a little greedy and decided against it, only to watch the stock fall back to $6.80 today, which is not too far away from my original purchase price. The stock is reasonable at these levels; the company has $2 cash on hand per share and a 6Moz gold equivalent resource.

Interestingly, Rick Rule was on BNN yesterday and he had some positive comments on Golden Minerals in this clip (I’m not really sure how to embed video from BNN).

Since last Wednesday its been a swift fall for many gold stocks. My bet here is that the latecomers have been fleshed out and that with stocks like Aurizon and Golden Minerals approaching their 52 week lows once again, we are close if not at the bottom.

I also added to Pan Orient. This will be the last time that I add until I see the stock begin to rise again. For the time being I will sit tight with what I own.