Macro Tsimmis

intelligently hedged investment

Archive for May, 2008

Transmeridian (TMY) update #21

Posted by intelledgement on Fri, 30 May 08

Well, we are not the only folks paying attention to the SEC filings of Transmeridian, our poorly performing Kazakhstani-centric E&P. The company announced yesterday that the AMEX—based on an analysis of the company’s 2007 10-Q filed earlier this month—has concluded that TMY “is not in compliance with certain of the AMEX’s continued listing standards,” and has until 5 June to file a plan for getting back into compliance.

If the AMEX folks are not satisfied, they can initiate a delisting process which would likely result in the stock being banished to the OTC bulletin board. This could make the stock a bit harder to trade but unless management gets their act together soon, interest in trading this stock is likely to decline regardless, if it even continues to exist.

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BPZ Energy (BZP) update #10

Posted by intelledgement on Tue, 20 May 08

Yet another example of creative dilution here provided by our Peru-focused E&P spec play, BPZ Energy (BZP)…the company announced today that they had elected an option to force the conversion of $15.5 million of debt with the International Finance Corporation (“IFC”) into 1,491,819 common shares of BZP. The terms of the the company’s debt agreement with the IFC stipulate a conversion price of $10.39 per share, exercisable at BZP’s option, if the closing price of the common exceeds $18.19 for twenty consecutive business days.

Triggering the conversion improves the balance sheet—which makes borrowing easier if we need more money in future—and eliminates the need to ever pay the loan back. It eliminates the interest payments on the loan, thus freeing up cash to fund current operations and capital projects. And it cements a relationship with a strategic partner (who is not likely to flip the shares).

Manolo Zúñiga, President and Chief Executive Officer, stated, “With the conversion of the debt into equity, IFC now owns approximately 10% of BPZ. In addition to IFC’s equity participation, we are currently negotiating a term sheet with them on a credit facility of approximately $200 million subject to a borrowing base calculated from our recently announced oil reserve report and will enable us to continue developing the Corvina and Albacora oil projects, as well as an additional $120 million debt facility to fund the development of our gas-to-power project. We are extremely pleased to have IFC as a financial partner and look forward to continuing to build shareholder value through our relationship.”

Nice work, guys!

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SELL Ultrashort Oil & Gas ETF (DUG)

Posted by intelledgement on Tue, 20 May 08

OK, time’s up…enough messing around. Losing money when we take a position consistent with our macro analysis but our timing is off or a particular company has problems that we did not foresee is one thing. Losing money betting against the macro is dumb. We are willing to be dumb in pursuit of an intuition up to 10%, but that limit was reached here with yesterday’s close (in four trading days!) so we are hitting the eject button today on this trade. In theory the notion that increased price yields demand destruction sounds good, and a short play will undoubtedly be viable at some point down the road…but for now, until there is hard evidence of demand moderating to south of the 85MM barrels of oil that the world’s producers can pump at full capacity, we are back to the sidelines (or the long side) here.

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Transmeridian (TMY) update #20

Posted by intelledgement on Tue, 20 May 08

Transmeridian (TMY) may be moving closer to providing an attractive opportunity to new investors who could fund a desperately needed increase in production. Yesterday, the company announced the appointment of four new directors to the board, all of whom were nominated “by holders of the Company’s 20% Junior Redeemable Convertible Preferred Stock pursuant to the exercise of the holders’ rights with respect to Board matters provided for in the certificate of designations for the junior preferred stock.”

With a fiduciary responsibility to all shareholders, those directors will be obligated to consider forgiving or delaying dividend payments if such a maneuver is key to obtaining fresh funding…and they are persuaded that said fresh funding is likely to benefit the company tactically (by enabling management to boost production and attain operational profitability) and strategically (by making the South Alibek field more attractive to potential buyers of the company).

Of course, now that they are on the board, another possibility is that they might conclude things are hopeless and throwing good money after bad is a dumb idea.

Stay tuned.

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BPZ Energy (BPZ) update #9

Posted by intelledgement on Thu, 15 May 08

BPZ Energy (BPZ) announced the results of an independent audit of the company’s natural gas reserves today: 104.5B cubic feet (bcf) of proven reserves; 283.6 bcf of proven + probable + possible.

This estimate covers just the Block Z-1 Corvina offshore field, which is up to now the only place the company has drilled (three wells so far, all of which three are producing oil and gas, a rework of a fourth well that only produces natural gas and is currently shut in as there is only limited market for it, plus they are working on a fifth). Manolo Zúñiga, President and Chief Executive Officer, commented, “This certification, coupled with the 60 million barrels of 3P oil previously certified, now brings the total certified reserves in Corvina to approximately 110 million barrels of oil equivalent. Considering that the Corvina oil and gas pools cover a total approximate area of 3,500 acres out of Corvina’s approximate 40,000 acres, and this is the first project of a portfolio of 50 mapped prospects within our 2.4 million acres, we are excited about the next steps the Company will be taking in the future. This certification now gives us the needed information to begin the final negotiations with the International Finance Corporation (IFC) on the gas-to-power project.”

The estimate is as of 29 Feb 08. The auditors are the same guys who prepared the oil estimate—Netherland Sewell and Associates, Inc. The NG is valued at only $2.10/MMCF—if it were in the USA, it would be more like $10 or $12—because the market for it is limited, but once the gas-powered electricity generation plant is constructed, there will be a reliable market for the natural gas, there will be a more reliable power supply for Peru and Ecuador, and BPZ Energy will reliably make money coming and going.

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Beazer Homes (BZH) update #10

Posted by intelledgement on Thu, 15 May 08

Another nail was driven into the coffin of Beazer Homes (BZH), the homebuilder company we are short today, when they announced their 1Q08 and 2Q08 results today after the market close (Beazer’s fiscal year ends 30 Sep). There was little comfort here for those hoping for a turnaround in the residential housing market.

Year-over-year revenues were down 37% from 1Q07 to 1Q08, and down 51% to $405.4 million from 2Q07 to 2Q08. 2Q08 was the sixth consecutive quarter of red ink, and the worst one yet, with a loss of $229.9 million, ballooning from a loss of $57.2 million in 2Q07. The company lost $138.2 million in 1Q08 compared with $79.9 million of red ink in 1Q07. Closings also declined Y-O-Y, by 25% in 1Q08 and by 43% in 2Q08. New housing starts were down 30% Y-O-Y in 1Q08 and an utterly alarming 51% in 2Q08. So, the decline appears to be accelerating.

Meanwhile, the investigatory pot keeps boiling. The company received an order from the SEC requiring they cooperate to determine if violations of federal securities laws, “including, among others, the anti-fraud, books and records, internal accounting controls, periodic reporting and certification provisions thereof,” were committed. Beazer is cooperating with the SEC and the DOJ (which is also investigating potential criminal activity mostly relating to Beazer’s treatment of their customers) and they hope to negotiate settlements. However, management stated: “no settlement has been reached with any regulatory authority and the Company believes that although it is probable that a liability exists related to this exposure, it is not reasonably estimable at this time.”

The stock closed today at $9.60 but was significantly lower in after-hours trading once these results were released.

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BUY Ultrashort Oil & Gas ETF (DUG)

Posted by intelledgement on Wed, 14 May 08

OK, this is against the macro. Medium term, we expect the US consumer economy and the dollar to collapse and precious metals to be the place to ride out the economic storm, and long term with the Asian buildout (after a pause to adjust to the demise of American demand) continuing to drive demand, for commodity prices in general and energy in particular to head north.

At this point, however, the price of oil appears to be way ahead of itself. Demand is moderating (and will moderate more as the US consumer pulls back). While the pace of new supply coming online is slowing, we are not nearly out of oil yet. In the short term, the Fed is not likely to cut interest rates any further—and the ECB is likely to—which should result in a rally in the price of the dollar.

Therefore, we think that $125 oil is unsustainable in the short term, and are looking to ride DUG here for a reverse spike to near the $100 mark, and perhaps below it.

Proshares’ UltraShort Oil & Gas ETF seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Oil & Gas IndexSM.

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Beazer Homes (BZH) update #9

Posted by intelledgement on Mon, 12 May 08

Our short position in Beazer Homes (BZH) got a nice boost today in the wake of restated 1Q07 and 2Q07 earnings released by management along with long delayed 3Q07 and 4Q07 reports (their 4Q07 ended 30 Sep 07). The restatements were necessary because “the Company’s mortgage origination practices related to certain loans in prior periods violated certain applicable federal and/or state origination requirements,” according to the press release. LOL that is a bit of an understatement; in point of fact, the company is under investigation by the Justice Department and the SEC for potentially illegal practices that harmed not only shareholders but customers.

The bad actors who orchestrated these transgressions were fired earlier this year, and press release details a series of steps the company has undertaken to strengthen their internal controls to prevent a repeat. Furthermore, management intend to negotiate with the Feds and SEC in hopes of settling for a fine. So while a risk of criminal proceedings against the company remains, management appear to be doing a good job of dealing with these issues.

But if fallout from the shenanigans appears to be under better control, the new data revealed in the 3Q07 and 4Q07 reports confirms what we already expected: no hint of a turnaround in the decline of Beazer’s residential home construction business. Of course, these data are now 8-to-11 months old—Beazer suspended reporting quarterly results while they conducted an internal investigation and scrubbed their numbers—and we got the gist of the bad news last November when they reported preliminary numbers. But the new 4Q07 details are sobering:

  • Net loss of $155.2 million compared to $83.7 million of income in 4Q06
  • 3,949 closings down from 6,268 in 4Q06
  • Revenues of $1.10 billion down from $1.83 billion in 4Q06
  • 982 new homes ordered down from 1,921 new homes ordered in 4Q06

For 2007 overall, Beazer lost $411.1 million ($10.70 per share) compared to income of $368.8 million($8.44 per share) in 2006. BZH closed today at $9.46, down 5% on the day.

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Oilsands Quest (BQI) update #9

Posted by intelledgement on Mon, 12 May 08

Another day, another dilutive stock offering from Oilsands Quest (BQI), our under-capitalized oilsands play.

This time it is 12MM shares offered at $4.20/share; the stock closed today at $4.31. The company needs money to fund their field testing program—to determine the optimal process for converting bitumen to oil—and continued exploration of the huge block of land in Alberta and (mostly) Saskatchewan which they have mineral rights for. They have no current revenue, nor any realistic prospect of revenue in the near term. Thus they sold shares three times in 2007 and now once so far in 2008. We expect continued fund raising sales of equity over the next several years and project the number of shares outstanding will rise from some 220MM now to over 600MM by 2015. (Here is our latest valuation model.)

We currently have a GTC open order to get buy more shares of BQI at $3.03, but the chances of that executing are looking less and less strong and we will probably be canceling it soon to pursue another opportunity with those funds. If we didn’t already have a position with a basis of $3.35, we would not hesitate to open one here at $4.31. There are 10B barrels of oil equivalent (BOE) estimated to be present under the acreage which BQI have the mineral rights to. Assuming that half of that is recoverable at a cost of two-thirds the market price for oil or less, BQI could be on the way to being a $20B company within the next decade…if they don’t get bought out first. Even with over 600MM shares outstanding by then, buying here at $4.31 affords you a compounded annual growth rate of 30% or better between now and then. (This, of course, also assumes that demand for oil does not dissipate between now and 2015 for whatever reason, as discussed in our original BUY rec.)

And if you do buy in, don’t sweat the dilutive sales of stock to raise operating funds. This management team owns lots of stock, too, and they know that if we can bring this project off ourselves—even though we have to give up some ownership—in the long run it will be better financially for us than totally selling out to a big company along the way would be.

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Apr 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Mon, 12 May 08

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 0.52 156.00 -41.57% -73.60% -84.37% -75.43%
ELN 04-Apr-07 129 13.90 1,801.10 26.29 3,391.41 26.03% 19.61% 88.30% 80.34%
VRTX 18-Apr-07 57 31.65 1,812.05 25.52 1,454.64 6.82% 9.86% -19.72% -19.13%
NBIX 22-May-07 158 11.33 1,798.14 5.43 857.94 0.56% 19.60% -52.29% -54.42%
BQI 13-Jul-07 565 3.35 1,900.75 4.35 2,457.75 10.41% 6.62% 29.30% 37.91%
GSS 19-Jul-07 451 4.19 1,897.69 3.32 1,497.32 -2.92% 5.06% -21.10% -26.11%
GSS 24-Aug-07 613 3.08 1,896.04 3.32 2,035.16 -2.92% 5.06% 7.34% 10.90%
SLT 5-Oct-07 111 19.75 2,200.25 20.79 2,307.692 16.67% -20.25% 4.88% 8.73%
BZP 19-Nov-07 245 9.77 2,401.65 19.48 4,772.60 -10.35% 74.24% 98.72% 365.92%
BZP 30-Jan-08 186 11.27 2,104.22 19.48 3,623.28 -10.35% 74.24% 72.19% 785.70%
WB 1-Feb-08 -57 39.99 -2,271.43 29.15 -1,698.03 -7.96% 23.35% 25.24% 151.88%
BZH 24-Mar-08 -214 10.99 -2,343.86 11.07 -2,368.98 -17.14 -48.99% -1.07% -10.09%
cash -4,194.60 7,945.90
ISOP 03-Jan-07 10,000.00 26,432.68 -1.06% 21.00% 164.33% 108.56%
Global HF 03-Jan-07 10,000.00 10,947.21 1.59% -1.49% 9.47% 7.08%
NASDAQ 03-Jan-07 2,415.29 2,412.80 5.87% -9.03% -0.10% -0.08%

Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# shrs multiplied by price per share plus value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2007 inclusively) provides a CAGR of around 15.1%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 10.1%. Note that for the portfolio, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 2% rate of interest on the listed cash balance.

Transactions: None.

News:

Comments:

We were down 1% in April, our fourth losing month out of 16 so far. We also trailed both the NASDAQ and the Global Hedge Fund Index for just the fourth time. A bad month for us, but otherwise a pretty good month: the NASDAQ was up 6% while both our shorts lost money as the big picture for banking and housing appeared brighter to investors. (We don’t see it that way, unfortunately, although we do think the sun is likely to stay out through November.) Our biopharma stocks were strong, especially ELN. BQI up 10%, BZP down 10%…normal random Brownian motion for speculative E&P positions. SLT recovered some losses and is back in the black for us overall. TMY continued their spectacular meltdown.

All in all, a pretty quiet month.

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