Macro Tsimmis

intelligently hedged investment

Archive for January, 2008

Transmeridian (TMY) update #14

Posted by intelledgement on Thu, 31 Jan 08

Transmeridian announced today after the close that the deadline for CEO Lorrie Olivier to pull together the financing to take the company private at $3/share has been extended until 15 February. According to the press release, “the company remains in communication with other interested parties. The merger agreement permits the company to solicit competing offers for the acquisition of the company until the financing condition to TMI’s obligation to commence the tender offer contemplated by the merger agreement is satisfied.”

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BPZ Energy (BZP) update #3

Posted by intelledgement on Thu, 31 Jan 08

BPZ Energy (BZP) has issued a press release concerning yesterday’s tanker incident. Fortunately, no one was killed, although ten Peruvian sailors remain hospitalized. There was no damage to any BZP facilties, although their four wells have been shut in pending a company investigation. Is this situation a major problem for the company? How well are they handling it? LOL you know our opinion, but read the press release and judge for yourself.

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BUY BPZ Resources (BZP)—again

Posted by intelledgement on Wed, 30 Jan 08

OK, today we have more proof the market is irrational, if anyone needed it.

A Peruvian navy tanker transporting oil for our Houston-based E&P caught fire and sank today, and the stock is following suit, down 15% at this writing on heavy volume. If you don’t own any BZP, this is a great opportunity to buy. This company has an excellent relationship with both local and national government in Peru; this unfortunate accident is in no way a material event…has no bearing whatsoever on BZP’s great prospects for developing natural gas, oil, and—looking ahead a bit—electricity generation plants to serve Peru and Ecuador. See our original buy rec for more details.

This is a mindless shoot-first-and-ask-questions-later reaction by the market. We don’t see anything out there we like better than BZP around $11 and are buying a second tranche here (on a buy-on-close basis).

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Clinton-Obama: win-win-win

Posted by intelledgement on Wed, 30 Jan 08

Now that John Edwards has dropped out of the race for the Democratic nomination, we have a situation similar to the Reagan-Ford race in 1980—no matter how close it is, either Hillary Clinton or Barack Obama is virtually assured of a majority before the convention. The last mathematical hope of the Democratic “pragmatists” yearning for a deadlock at the convention that would open the door to a seemingly stronger general election candidate (e.g., Al Gore to the rescue) was that Edwards would stay in and hold enough votes to deny either of the frontrunners the nomination on the first ballot. So much for that.

Both Clinton and Obama are polling weakly in general election trial heats. Clinton has always had high negatives. Obama is less well known and his negatives are not be as solidified. There probably isn’t much Clinton can do to overcome her negatives. And a worsening of the economy or the situation in Iraq by November—which normally would be expected to help the challenging party’s nominee—might not work so well for Obama because it would highlight his inexperience.

Given that the Democrats seem locked into fielding an underdog ticket in November, they would be smart to double their bets here, and engineer a compromise Clinton-Obama ticket. This is a win-win-win proposition!

Clinton wins because landing Obama as the VP assures her of the nomination, and doing it now enables her to start moving to the center that much earlier than John McCain or Mitt Romney will be able to. And long-term, win or lose, her ground-breaking place in American history is cemented.

Obama wins because he can’t lose. If the Democrats pull an upset win in November, he gets four-to-eight years of experience that make him bulletproof when he runs again (presumably in 2016). If they lose, Clinton gets the blame and he gets the legitimacy of having been on the national ticket and is well set up for another attempt, if he so desires. And long term worst case assuming this is his one shot (as his wife insists), a losing VP candidacy trumps a losing bid for the nomination as an historical mark in history.

The Democrats win because they solidify their base not just for 2008 but beyond, by fielding an exciting, glass-ceiling busting unity ticket. And the next time it will be better (as it was for Al Smith and then JFK). And worst case, maybe it wouldn’t be so bad politically to lose in 2008 and let the GOP deal with the problems they have allowed to fester. If the Democrats are right on the issues, another four years of failed GOP policies could well set the Dems up for decades of ascendancy.

But how could it happen, given the growing antagonism between Clinton and Obama, and Obama’s repeated assertions that he will not accept second fiddle? Simple: Gore to the rescue!

Clinton should have someone approach Gore and ask him to endorse both candidates as a first step. Then as a second step, she can deputize Gore to initiate negotiations with Obama about the parameters of the VP job in a Clinton administration. This would ring true because Bill Clinton and Gore had just such a series of discussions in 1992, and Bill Clinton kept his word to share governing with Gore to an unprecedented degree. And an appeal to party loyalty would be apropos—clearly having Obama and Clinton articulating a duet from February to November would better communicate the Democratic message than having them sniping at each other for the next four months or so.

Effecting such an agreement would strengthen both candidates in ways that no other action could. It would raise Obama’s stock as a savvy and capable politician, and it would help soften Hillary Clinton’s image as power-obsessed and unwilling to compromise. The whole here would be greater than the sum of the parts…possibly greater enough to produce a win in November; certainly enough to constitute a win for all time!

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BUY Oilsands Quest (BQI)—yep, again…conditionally

Posted by intelledgement on Thu, 24 Jan 08

Despite today’s positive news about Oilsands Quest obtaining exploratory permits for another 45,000 acres, BQI’s stock price closed down again today, and is now $3.39, only four cents higher than our purchase price last July. We suppose The Street is worried [a] that the coming economic slowdown will reduce demand for oil, [b] that costs for in situ processing of oil sands are rising, and [c] a combination of local and global environmental concerns will make it increasingly hard to fund oil sands projects.

We agree that there could be a temporary slowdown in the demand for oil due to  an economic setback, but we still think the odds are that won’t happen before we have an opportunity to cash out here. We agree that in situ costs are rising, but in the long run, the demand will keep oil prices high enough to make it economical to produce. And Saskatchewan regulators are not disposed to let local environmental issues derail development…as for global concerns, we expect some Big Energy player or other to snap up BQI and cash us out long before it becomes clear (if it ever does) that there is no way for humanity to process oil sands and use the resulting oil without endangering the ecosystem.

In short, we loved BQI six months ago at $3.35/share and would love it even more today at a lower price. Therefore, we are entering a good-till-canceled order to buy another tranche here at $3.02/share—ten percent lower than were we bought it in July—if the price dips that low.

This would be our second “double down” (in the wake of our two purchases of GSS). We really want to use this portfolio to pursue a wide variety of speculative plays and tying up double portions of money for two stocks is not consistent with this objective. Having said that, however, we did not see a more compelling opportunity than that second tranche of GSS at $3.08 and if we can get more BQI at $3.02, it would fall into the same category.

We are treating these double dips as short term plays. We will sell the second tranche of GSS at $4.50 and sell the BQI (if we get it for $3.02) at $6…or sell either or both sooner if a better target-of-opportunity presents itself and we need cash.

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Oilsands Quest (BQI) update #5

Posted by intelledgement on Thu, 24 Jan 08

Oilsands Quest (BQI) management announced today the expenditure of some of those monies raised with their shares offering late last year for the acquisition of the exploration rights to an additional 46,080 acres of land in Alberta. The cost was CDN$10,010,880 plus an annual rental fee of CDN$64,512. The acreage is contiguous to the land in Alberta that BQI already has…which in turn is contiguous with their Saskatchewan holdings. All told, the company has exploration rights to nearly 1.25MM acres now, including 0.61MM acres of oil sands properties in Saskatchewan, 0.14MM acres of oil sands properties in Alberta, and an additional 0.49MM acres of oil shale properties in Saskatchewan.

Looking ahead for the year, the company is presently conducting their annual winter exploratory drilling program which this year consists of operations in both Saskatchewan and Alberta. We should expect some preliminary results from the company this Spring and then more comprehensive results from third party analysts later in the year. This summer, if approved by Saskatchewan, BQI are expecting to start a pilot program of oil sands reservoir testing at three sites within the Axe Lake Discovery which should produce up to 600 BBLS/day of oil. The company are presently evaluating existing in-situ recovery techniques in laboratory testing and reservoir simulation studies to define this field test program, which will evaluate reservoir response to varying temperatures and pressures of steam and steam with solvents. The company plans to use the results to design an in-situ test program of up to 10,000 BBLS/day that is planned for start-up in 2009, subject to regulatory approval.

Looks as if quite a bit of the $75MM the company scored in the Nov-Dec 07 round of financing will be put to good use over the next 18 months or so.

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Vertex (VRTX) update #6

Posted by intelledgement on Wed, 23 Jan 08

Vertex (VRTX), one of our biotech plays, issued a press release this morning announcing the long-anticipated initiation of a Phase 3 trial for their anti-hepatitis C protease inhibitor, telaprevir. Unfortunately, there was bad news mixed in with the good, and the stock is down over 10% today and has set a new 52-week intraday low.

The good news is that company management and the FDA have agreed on the basic design of a telaprevir trial, with the objective of proving the efficacy and testing the safety of 24-week telaprevir-boosted courses of treatment to replace the current 48-week standard of care (SOC), and enrollment starts in March. There are three arms in the trial:

  • First 24-week treatment—eight weeks of interferon, ribavirin, and telaprevir followed by 16 weeks of interferon and ribavirin
  • Second 24-week treatment—12 weeks of interferon, ribavirin, and telaprevir followed by 12 weeks of interferon and ribavirin
  • 48-week treatment (SOC control)—48 weeks of interferon and ribavirin

The bad news is that the FDA are also insisting on an additional 48-week study “to develop additional sustained viral response (SVR) and relapse rate data with 48-weeks treatment duration that confirm results from the Phase 2 studies, thereby providing additional evidence supporting the 24-week regimen in the Phase 3 trial.” That is what Vertex says the purpose of the 48-week trial is, but it doesn’t scan for us: unless telaprevir is less effective when dosed for a longer period of time, these results would presumably favor a longer dosing. And that is bad because telaprevir’s two advantages over the current SOC are [a] greater cure rate and [b] shorter course of treatment. Take away [b] and the product would be a lot less attractive. The Phase 2 trials clearly demonstrated that telaprevir offers HCV patients an improved chance of a cure with a shorter course of treatment; don’t know why the FDA wants to test 48-week courses of treatment for telaprevir but we have to hope if the drug is as effective and safe in Phase 3 as it was in Phase 2 that the agency will approve it for use in 24-week treatments regardless of what the 48-week trial shows, and let patients and their doctors decide what works best for them. It would be weird if the FDA approved the product but limited use to 48-week courses of treatment—no one would use it—but then it was weird to reject provenge and it was weirder to reject indiplon, so who knows? It is already weird to require a pointless 48-week trial.

In any event, there is worse news: management does not expect final results from these trials until mid-2010, about 12-to-15 months later than investors had been anticipating. This is probably the biggest reason the stock is selling off. Aside from the fact that the extra year of operations with no telaprevir revenue—plus the added expense of the pointless 48-week trial—means Vertex will need more cash (which probably means more dilution for shareholders), the delay appears to give all of telaprevir’s would-be competition a lot more time to mount a challenge. One hopes that the FDA will not lower the bar here for potential competitors, and if they all will face similar delays, then telaprevir’s lead in the race to be first-to-market is still intact. Regardless, however, now the competition have an extra year to showcase drugs that have a less requiring regimen (one needs to take telaprevir every eight hours for eight or twelve weeks) or are more effective, so overall, risk here has increased. If telaprevir were approved today when there is no better alternative, that’s one thing, but if approval comes in three years, who knows what forthcoming alternatives may discourage HCV patients from trying telaprevir.

In any event, whatever the FDA’s purpose might be in insisting on the additional 48-week trial, the worse still news is that VRTX management are still haggling with them over the design. Who knows when it will start enrolling? Under the circumstances, even management’s projection that the final results will be available in mid-2010 has to be taken with a grain of salt.

This one is definitely not looking as good as it used to. Stay tuned.

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SELL United State Oil (USO)

Posted by intelledgement on Wed, 23 Jan 08

We are selling here on increased risk of a deep recession. A reduction in US demand at this point would affect energy demand in the rest of the world to some extent, at least temporarily. We expect to be back long here, as energy remains a good long-term play, but we anticipate getting back in at a better price point ($70 or less).

As for IXC, long term, as stated, we see energy assets as strategically benefiting from high demand, and the effects of the current downturn on the broader energy complex will be ameliorated to some extent by short term lower oil prices (as it will improve the crack spread and thus profit margins at refineries). If things continue to deteriorate, then we will reevaluate the value proposition of stepping aside on IXC as well, but for now we are holding on there.

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BUY TO COVER Beazer Homes (BZH) & Wachovia (WB)

Posted by intelledgement on Tue, 22 Jan 08

OK, while we still think the USA economy is headed for a big fall, we can’t fight city hall here. Today’s emergency 75-basis point cut by the Fed illustrates that Ben Bernanke is finally taking calls—or at least cues—from Jim Cramer. Apparently the Fed is willing to do whatever it takes to keep the fig leaf from falling off and revealing the true state of the USA economy. Consequently, while in the long run, this maneuver probably seals the doom of both Beazer and Wachovia and many other real estate and financial concerns, in the short run, the prospect of easy money and easy credit will make it appear as if their chances of survival have increased.

This is a bad move by the Fed, strategically speaking. It puts more pressure on the already weak dollar and goodness know how anyone can think that a problem engendered by too much easy credit and deficit spending can be solved by more of the same. We are just digging ourselves a deeper hole here, in the long run.

But tactically, the pressure on the Fed to act now is overwhelming. Politically the Republicans prefer avoiding a meltdown here to losing the election 1932-style. And were there a collapse here, Democrats when they came to power would hardly be in a grateful mood vis a vis the Fed leadership. Financially, there are major players in very deep trouble (UBS, Lehman, Bear Stearns, Citibank, Bank of America, and others in addition to Wachovia). If one or two of companies such as those started rolling over, it could likely precipitate a panic akin to 1929 or 1987. While in the long run, a purge is what we need, in the short run lots of influential and powerful people would be seriously hurt (along with most everyone else) and so they yammer at Bernanke to save them…even if it is only a temporary reprieve. Who knows? If we can just hold on for another six months or a year, maybe aliens will land and sell fusion technology to a cabal of big energy companies relieving pressure on the environment, making power much cheaper for everyone, and stopping the transfer of wealth to OPEC, all without upsetting too many shareholders.

Thus, we expect the Fed to keep cutting rates here, and keep injecting liquidity into the system…and the market to anticipate the presumed future effect of these cuts: that the economy will respond by revving up a quarter or two down the road. Accordingly, we expect the prices of real estate companies and financials in general—and BZH and WB in particular—to climb back up to where they were when we sold them short, or higher.

And we will be looking to short them again by then, because in reality, the consumer is tapped out, and inflation will be worse, so we don’t think there will be any recovery to speak of; indeed we expect that post-election, things will get significantly worse. Indeed, in the case of Wachovia Corporation, things are already significantly worse: they reported their 4Q07 results today, and by any account, these were extremely disappointing. The company earned $51MM in the quarter, a 98% decline from the $2.3B of earnings booked a year ago. This amounted to three cents/share; analysts had been expecting 33 cents. For the full year, earnings declined 19% to $6.3B from the $7.9B earned in 2006.

“The continued turmoil in the capital markets and the dramatic change in the credit environment diminished our fourth quarter results substantially,” stated Wachovia CEO Ken Thompson. Reflecting the deteriorating situation, the bank included a $1.5B provision for losses, 50% higher than the provision they had stated they expected to take just last month…which itself was 100% higher than the estimate they had originally published in November of last year.

WB’s negative surprise, however, was trumped by the positive surprise of today’s “shock-and-awe” emergency rate cut by the Fed. Never mind that it was easy credit pumping air into the real estate bubble that got us into this mess in the first place; for now the market consensus appears to be that more easy credit can get us out of it by rescuing the banks with gift profits that may offset their losses enough to allow them to survive. As we write, WB shares are up sharply on the day.

So for now, we are stepping aside. The day when we toss the moneychangers out of the temple is coming, but it isn’t here yet.

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SELL Fording Canadian Coal Trust (FDG)

Posted by intelledgement on Tue, 22 Jan 08

We are taking our profits here due to increased risk of a recession. We still believe these coking coal assets are on the table as a result of the looming change in the Canadian tax code that essentially makes the royal trust corporate form obsolete, and that the restructuring will be at a relatively higher price. But increased risk of a serious recession here raises the likelihood that the restructuring may occur at a valuation that, while relatively higher (that is, FDG will be repriced higher relative to their peers) could be absolutely lower (because the price of everything will be reduced). In any event, should overall market conditions improve, there will be time to get back in here, if we have not allocated the funds elsewhere at that point.

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