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Sep 7

Another Hit for Coastal Energy

Oh, but if it wasn’t for the credit crisis…

I like to take big positions in stocks where I see an outsized opportunity in comparison to the risks.  Jump all in.  I believe that the advantage that active investing has lies in the opportunity you have to scale into a name where you see such an outsized reward.  It is in doing so that I have had my greatest success.  It has worked for me before with such stocks as Aur Resources, Avion Gold, Mercer International, etc.

That sort of opportunity exists with Coastal Energy…

If only it wasn’t for the credit crisis.

Coastal put out a news release today that showed some excellent results.

The Bua Ban North A-05 well was drilled to a total depth of 5,650 feet TVD.   The well encountered 81 feet of gross sand and 35 feet of net pay in the Miocene reservoir with 27 percent average porosity.   The well tested the Miocene reservoir on the eastern flank of the Bua Ban North A field.   The oil water contact in the well was seen at 3,770 feet.   The results of the A-05 well add an additional 1,200 acres to the structural closure area.

The A-05 tested the far northern extents of the “North-A” structure.  The following screen capture from the Jennings report put out today shows the location of the A-05 relative to other North A wells.  The light blue outline delineates the expected extent of the reservoir that Coastal has discovered.  You will quickly note just how much bigger the A-05 pool is compared to the other North A pools.

Coastal estimates that there is 108MMbbl of OOIP in the new pool.

Applying  a 30% recovery factor to the OOIP gives us 32MMbbl of recoverable resource.  The company just keeps adding resource at an incredible rate.  Overall, Coastal has discovered 90+MMbbl of recoverable resource this year.  This for a company that had 27MMbbl of proven and probable reserves at the end of 2010.

First Energy raised their estimate of proved and probable reserves for Coastal to an expected 82MMbbl by the end of the year.  They arrived at this number with the  addition of 10MMbbl from the new A-05 reservoir, which is conservative given the overall size of the resource.  First Energy raised their risked NAV for the company to $25 per share.  Jennings has a NAV of $21 for the company.

Based on company specifics alone, each well makes the investment more and more of a no-brainer.  If we take First Energy’s estimate Coastal is trading at about $12/bbl of reserves.  This is cheap for any oil company, but it is very cheap for a company that is growing at the rate that Coastal is.

So I continue to own a large position in the stock. Its just so unfortunate that Europe makes owning anything a hair raising experience.  If it wasn’t for Europe my position would be much larger.

Sep 5

A Very Important Day for Gold Stocks?

I have been working on a write-up of Argonaut Gold over the weekend.  I was expecting to post that write-up today, but circumstances have arisen that make other more basic questions more pertinent (by the way, the essence of my soon-to-come post on Argonaut Gold is the stock is cheaper relative to other gold stocks than I first thought).

However, first things first:

This looks a lot like the beginning of August.

Meanwhile the price of gold is up again.  It is almost at $1900/oz.  One of the popular gold related articles I have seen over the weekend is about how pension funds have no exposure to gold at all.  A bit of a buzz appears to be beginning.

Meanwhile, on Friday gold stocks staged a breakout.

Putting all of this together, Tuesday looks like a very important day in gold stock land.

Look, I have written before about how torn I am to own gold stocks right now.  I have sold down everything else in anticipation of the European mess getting worse.  In my actual account I have shorted banks to hedge the market exposure of my remaining oil stocks (I cannot short in the practice account I post to this blog so this account is more exposed than I actually am).  But I have held the gold stocks.  This is partially because it makes sense to me that gold will go up as the Euro disintegrates.  It is partially because, thus far, gold stocks have worked.  But I always hold in the back of my head the recollection of 2008 when gold stocks got hit just as hard (harder?) than the rest of the market.

So what will it be this time?

Clearly, unless things change drastically over the next few hours, North American stock markets are going to be routed on Tuesday.  And since Europe is the epi-center of that rout, it is reasonable to bet that the price of gold will continue to be higher on Tuesday.

Gold stocks can only do one of two things.  They can follow gold and confirm their break-out from Friday, in which case I would argue that this is only the beginning (if gold stocks do decouple from the market then I suspect this will be the confirmation to many that things are different this time and that gold stocks are an inverse correlation to the evolving euro-crisis).  Or they can fall back, demonstrate it was a false breakout, and show that they will fall with the market just like in 2008.   In this case they will likely end up falling hard as all the momentum buyers from last week run for the exit.

Its quite a stark set of outcomes.

And that is why I suspect tomorrow is a very important day for gold stocks.

Sep 4

Week 9 Portfolio Update: Par!

Well almost.

I am $300 from being back to even.  Considering that the portfolio was created at the beginning of July, and that since that time the market has been somewhat horrendous, I do not think this is too bad of a result.

But it would be nice to start making money again.

There was not much action in my portfolio this week.  I sold a bit of Arcan, a bit of Coastal, and a bit of Lydian International.  In all 3 cases my selling had nothing to do with the company performance and everything to do with Europe.  Its unfortunate that I have to make investment decisions based on Europe.  I would much rather just pick stocks.

It is an interesting to think of what my portfolio would look like if Europe wasn’t on the verge of implosion.  I think it would look quite different.  First, I would own much more of Coastal Energy, and some more of Arcan Resources.  I would also own a decent position in Second Wave Petroleum.  I would likely have held on to Leader Energy Services.  And I don’t expect gold would be going through the roof, so while I would probably still own Jaguar, OceanaGold and Lydian, and Argonaut, but I would have smaller positions in all 3.  These stocks would not be as enticing if gold was still at $1200/oz, which I expect it would be ex-Europe.

The real upside in the gold stocks is the upward revaluation to reflect something closer to spot, along with the ever present possibility (as long as Europe is still the EU that is) that spot will continue to go higher.  If Europe was just being Europe (dull 1% growth), I would likely prefer to own other commodities that were leveraged to emerging world growth.  But alas, Europe has taken on the mask Faust, choosing a devil’s bargain over boringly flat GDP, and the outcome looks to be much the same, with the EU being on its way to hell on earth.  So gold stocks it is.

Sep 3

Goldman Research Note to Hedge Funds

Goldman Sachs published a research note a couple weeks ago that did a very good job summarizing what is frightening about the  state of the world economy right now, and why I have reduced my exposure to everything but gold stocks and a few special situation oil stocks and banks.

The research not is discussed on FT here:

And the actual powerpoint was posted by ZeroHedge here:

While the powerpoint focuses on 3 distinct items (the US economy, the European debt problems and China’s potential credit collapse) I think the most important points for us investors are made with regard to Europe.

Europe’s problems have the potential to evolve into something really bad, it could happen really quickly, and the outcome would be widespread among all stocks.   Its the sort of situation where we will wake up one morning and the world will have made a dramatic change for the worse.

So those problems need to be at the forefront of every investment decision right now.

I have snipped 3 slides that I thought were particularly poignant.

First, this slide demonstrates how leveraged the European banks have become.  They have grown assets well in excess of deposit growth.

To cover the gap between deposits and assets, the banks increased their wholesale borrowing.

The problem is that wholesale borrowing is short term.  A “bank run” is much easier to precipitate when your funding is made up of overnight, 7 day and month long durations.  If you ask me, this is a recipe for a nasty storm.  High leverage to likely insolvent assets that have been bought with funds that can be pulled away in an instant?  Yikes!

Last slide I’ll post.  PIIGS debt.  Whether or not the German courts and German government agrees to EFSF, you have to remember that the size of the EFSF is not big enough to handle Italy and Spain.  I have a feeling that if the market gets euphoric next week when the EFSF gets the head nod from Germany, it won’t last long.

So obviously, Italy and Spain are the keys here.   Further signs of stress in those countries is a sign to get out.  And ominously, Italian and Spanish bonds are rising again…
Italy:
 
Spain:
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