Macro Tsimmis

intelligently hedged investment

Archive for June, 2008

BPZ Energy (BZP) update #12

Posted by intelledgement on Thu, 26 Jun 08

Great news! Our spec E&P play, BPZ Energy (BZP) today announced the signing of a non-binding memorandum of understanding with Shell Exploration Company (West) B.V., a wholly owned indirect affiliate of Royal Dutch Shell plc (RDS-B), which “allows both parties to move forward with their negotiations on a possible Farm-out Agreement (Agreement) with the ultimate goal of jointly developing Blocks Z-1, XIX and XXIII in Northwest Peru into large-scale oil and gas ventures, including regional power generation, gas supply for local and regional industry, and LNG,” according to the press release. The objective is to execute a binding agreement by the end of 2008. The stock zipped up 15% to close at a new all-time closing high of $28/share.

The memorandum outlines what the agreement would specify in some detail. Shell would commit up to $300 million for “2D and 3D seismic surveys in Blocks XXIII and Z-1, respectively, and the drilling of approximately 12 new wells.” BZP retains 100% interest in any oil and the two companies split any gas finds 50-50 in four specified areas; Shell gets an option to purchase a 50% interest in the oil in one area at prevailing prices between 2012 and 2015. Shell also gets an option to purchase a 50% interest in the gas-to-power project. Interest in any finds outside the four areas are split 51.75% for BZP and 48.25% for Shell. If 4 Tcf of gas reserves are discovered—enough to warrant a LNG project—BZP and Shell will set up a 50%/50% joint venture to develop it.

“This MOU to negotiate the final Farm-out Agreement is an important step for both BPZ and Shell,” stated BZP CEO Manolo Zúñiga. “With Shell as partner, we would have a company with the key elements needed to fully develop our assets: deep water expertise to develop the prospects in Block Z-1 that are in water depths from 500 to 1,000 feet; the ability to market and monetize the gas potential in our Blocks through large-scale projects such as LNG; and the access to people and equipment that will help us appraise the gas and oil potential more quickly…. I believe that we have found the right potential partner for BPZ. Accelerating the exploration and development of the assets we have in the three blocks under consideration will be beneficial to both companies, to BPZ’s shareholders, and to Peru.”

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Oilsands Quest (BQI) update #10

Posted by intelledgement on Thu, 26 Jun 08

“Thar’s gold in them thar hills.” (Black gold, that is.)

Our speculative Canadian tar sands E&P company, Oilsands Quest (BQI) today announced an 85% increase in the BBLS-equivalent estimate of how much bitumen is present in their Saskatchewan and Alberta properties, from 1.117 billion BBLS last year to 2.071 billion BBLS. The resource estimates were prepared by McDaniel & Associates Consultants Ltd., an independent energy consulting firm. The estimates cited are the “low” estimates included in the report (the “high” estimates amount to over six billion BBLS), and the area surveyed amounts to 8% of the total acreage of the company’s permit and license lands.

Of course, the real issue isn’t whether or not there are tar sands present, but rather how much it will cost to extract them and convert the bitumen to usable petroleum products. According to today’s press release:

Oilsands Quest and its engineering consultants have embarked upon preliminary engineering of

the first 30,000 barrels per day commercial project planned for the development of Axe Lake in

the specific area where the first series of reservoir tests are being conducted. Management also

continues to conduct advanced economic feasibility and risk assessment studies for full

commercial project development, including assessment of a “fast-track” approach to a first

prospective project, which could result in completion during 2012 or 2013. Oilsands Quest has

also commissioned a study of infrastructure and markets by Purvin & Gertz Inc. to assist in its

planning process. Development of a commercial project remains subject to regulatory and other

contingencies such as successful reservoir tests, board sanctioning and financing. 

This work will help define the projected costs, but in general, it is safe to say that so long as the price of oil remains around today’s close of $139.65—or even drops by 50% or so—we are extremely likely to be good to go here. If you don’t think oil will remain north of $60/BBLS going forward, then you probably shouldn’t be investing in a tar sands play.

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Vertex (VRTX) update #13

Posted by intelledgement on Tue, 24 Jun 08

We got some details from our development-stage biotech company, Vertex (VRTX), today with respect to their forthcoming phase 3 trial for telaprevir, the company’s anti-hepatitis C candidate drug…and the market was not happy.

Vertex already have one Phase 3 trial ongoing for telaprevir, focusing on treatment naïve patients. This second phase 3 trial is for patients who have tried and failed to cure their infections using the current standard of care (SOC) treatment—48 weeks of nausea-inducing interferon plus ribaviron—and the problem is that the design of the study differs significantly from the phase 2 study, even though the latter produced great results.

As reported here earlier this month, Vertex reported excellent results for patients administered an experimental 24-week treatment including telalprevir for the first twelve weeks (and interferon plus ribaviron for the whole 24 weeks):52% were still virus-free twelve weeks following the end of the treatment. Typically when such patients undertake the SOC treatment a second time, it cures them 10%-to-15% of the time.

However, the new Phase 3 trial includes tests of regimens of telaprevir for a full 48 weeks, plus another 48-week test where patients get interferon and ribavirin alone before getting any telaprevir. The focus on 48-week treatment cycles in the phase 3 trial implies that the FDA are not likely to consider accelerated approval of telaprevir based on the phase 2 results (24-week treatment cycles were employed in the phase 2 trials).

Some investors had hoped that the excellent phase 2 results—given the fact that those trials included unusually large numbers of patients—might lead the FDA to grant limited approval for the use of telaprevir in 2009 for patients whom the SOC failed to cure, which population is sorely in need of better options. The new study design appears to quash those hopes, and consequently, the stock closed down 5% today.

For our part, we remain confident that telaprevir will—sooner or later—become a critical component of the SOC for hepatitis C treatment, and that the potential there justifies hanging in here.

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Sterlite Industries India Ltd. (SLT) update #6

Posted by intelledgement on Wed, 18 Jun 08

Grupo Mexico (GMBXF) brought up the heavy artillery in their duel with our Sterlite Industries (SLT) over the copper assets of bankrupt Asarco on Friday, offering up to $500MM more for a total of $3.1B. The funds—along with another $1B of cash in Asarco’s possession—would be earmarked to settle more than $5B of environmental and asbestos lawsuit claims against Asarco. GMBXF reportedly would also drop their longstanding lawsuit against Asarco.

Back in May, SLT’s bid of $2.6B had been declared the winner over several competing lesser bids (including one from GMBXF) in a multi-month, bankruptcy court-approved process. Sterlite are reportedly mulling legal action should the Asarco board of directors decide to trash that result in favor of Grupo Mexico’s new bid, but clearly they have a fiduciary duty to consider a better offer should one be forthcoming.

If the GMBXF offer is as good as it looks, Sterlite may have to either up the ante or settle for the thanks of the Asarco creditors, who should certainly be grateful to SLT for getting Grupo Mexico to make a serious offer after years of delay.

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Neurocrine Biosciences (NBIX) update #7

Posted by intelledgement on Tue, 17 Jun 08

Our “other”—the one that is not Vertex—development-stage biotech company, NBIX, announced today the completion of the treatment portion of their phase 2b study designed to assess the impact of their GnRH Antagonist elagolix (which is what the company are now calling NBI-56418) on bone mineral density (BMD).

Elagolix is intended a potential treatment for endometriosis, a common medical condition characterized by growth of tissue like endometrium, the lining of the uterus, beyond or outside the uterus. The BMD study is important because past attempts to deploy GnRH Antagonist treatments for endometriosis have been marked by signficant adverse effects on bone metabolism. The company believes that elagolix, a non-peptide GnRH, will be better tolerated than anything currently on the market.

According to the press release, the first data from the study should be available in September. Still no word on any partnership deals for elagolix, in case anyone besides us is still wondering.

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Élan (ELN) update #12

Posted by intelledgement on Tue, 17 Jun 08

Today we got proof that bapineuzumab works…sometimes.

Our premier biotech company Élan (ELN), in conjunction with partner Wyeth (WYE), today released selected preliminary results from their Phase 2 study of their anti-Alzheimer’s disease (AD) drug bapineuzumab (AAB-001). The bottom line: while overall, “[t]he study did not attain statistical significance on the primary efficacy endpoints…[p]ost-hoc analyses did show statistically significant and clinically meaningful benefits in important subgroups.” Basically, the drug appears to help patients who are not carriers of the ApoE4 gene. Carriers are at greater risk for early onset and more severe AD and unfortunately, bapineuzumab not only fails to help such patients but they suffer more adverse effects than non-carriers.

The good news, though, is that for non-carriers, “post-hoc analyses showed statistically significant and clinically meaningful benefits associated with bapineuzumab treatment on several key efficacy endpoints, including the Alzheimer’s Disease Assessment Scale (ADAS-cog), the Neuropsychological Test Battery (NTB), the Mini Mental State Examination (MMSE) and the Clinical Dementia Rating – Sum of Boxes (CDR-SB),” according to the press release. (Of course this does not necessarily mean that these patients had improved cognition; just that they did not decline so far as the placebo group. We would not necessarily expect to see actual improvements, as bapineuzumab is designed to slow down or stop the damage to the brain that leads to the symptoms of AD, but not to repair the damage.) Non-carriers account for between 40% and 70% of the AD patient population in the USA

The market took this as good news on balance, in that bapineuzumab’s mechanism of attaching to the beta amyloid plaques that break down nerve cells in the brains of AD patients—thus allowing the body’s immune system to clear them out—appears to work, at least in some circumstances. ELN was up 11% to $30, the highest close for the stock since 2002.

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May 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Thu, 12 Jun 08

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 0.45 135.00 -13.46% -77.16% -86.47% -75.93%
ELN 04-Apr-07 129 13.90 1,801.10 25.04 3,230.16 -4.75% 13.92% 79.34% 65.79%
VRTX 18-Apr-07 57 31.65 1,812.05 28.63 1,631.91 12.19% 23.25% -9.94% -8.95%
NBIX 22-May-07 158 11.33 1,798.14 4.93 778.94 -9.21% 8.59% -56.68% -55.82%
BQI 13-Jul-07 565 3.35 1,900.75 4.57 2,582.05 5.06% 12.01% 35.84% 41.55%
GSS 19-Jul-07 451 4.19 1,897.69 2.96 1,334.96 -10.84% -6.33% -29.65% -33.41%
GSS 24-Aug-07 613 3.08 1,896.04 2.96 1,814.48 -10.84% -6.33% -4.30% -5.57%
SLT 5-Oct-07 111 19.75 2,200.25 22.14 2,457.54 6.49% -15.07% 11.69% 18.50%
BZP 19-Nov-07 245 9.77 2,401.65 22.74 5,571.30 16.74% 103.40% 131.98% 391.59%
BZP 30-Jan-08 186 11.27 2,104.22 22.74 3,623.28 16.74% 103.40% 101.01% 722.76%
WB 1-Feb-08 -57 39.99 -2,271.43 23.80 -1,414.46 18.35% 37.42% 37.42% 167.12%
BZH 24-Mar-08 -214 10.99 -2,343.86 6.95 -1,487.30 37.22% 6.46% 36.54% 446.33%
cash -4,194.60 7,672.15
ISOP 03-Jan-07 10,000.00 28,536.37 7.96% 30.63% 185.36% 110.98%
Global HF 03-Jan-07 10,000.00 11,148.64 1.84% 0.32% 11.49% 8.05%
NASDAQ 03-Jan-07 2,415.29 2,522.66 4.55% -4.89% 4.55% 3.15%

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—or minus for short positions—the 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: In the long run, we like oil, as the continuing buildout in Asia will ensure demand tends to challenge supply, and it also serves as a hedge against the declining dollar. Be that as it may, $125/barrel seems too high, too soon to us, and accordingly we took a position in an inverse ETF that goes up 2x any daily decline in the price of crude (and vice versa). However, the market disagrees, and it only took six days and a high print of $132.78 to decrement our position by 10%. Mindful of John Maynard Keynes’ famous oberservation that “Markets can remain irrational longer than you can remain solvent,” we hit the silk. In March, Goldman Sachs analysts forecast a spike as high as $200/barrel. While we still think that is unlikely anytime soon, we’re no longer willing to bet on a near-term decline.



Another excellent month, up 8%. We beat both the NASDAQ (+5%) and the Global Hedge Fund Index (+2%) for the fourth time in five tries this year. The big picture for banking and housing clouded up in May, and our short positions lead the port for the month: BZH up 37% and WB up 18%. On the energy front, BZP was up 17% on continued strength in the price of oil and improved reserves data, BQI was up 5% and the outlier was TMY, which produced nothing but more bad news and sank another 13%. Our biotech plays were mixed: VRTX was up 12% on no particular news, ELN lost 5% and NBIX shed 9%. On the mining front, SLT was up 5% but GSS was decimated (approximately) by 11%.

We still think the market holds it together through the Olympics at least and the USA election most probably. By around then we will have to review the energy plays and possibly the mining and biotech plays, and we could be looking for more shorting opportunities.

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Sterlite Industries India Ltd. (SLT) update #5

Posted by intelledgement on Thu, 12 Jun 08

Some interesting developments in the Sterlite-Asarco-Grupo Mexico saga that began last month.

First, here is an article referencing the opinions of several analysts (Macquarie, Merrill Lynch, and UBS) to the effect that the deal on the table is good for Sterlite.

Second—and here’s our favorite bit so far—Grupo Mexico is now claiming foul in the bidding process that resulted in acceptance of Sterlite’s $2.6B bid for Asarco—the company Grupo Mexico have owned since 1999 and are accused of stripping of choice assets prior to taking it into bankruptcy in 2005 to avoid environmental and asbestos lawsuits—because “it was denied key information that would have allowed it to properly value Asarco.” LOL

Third, the US government has weighed in on the side of Sterlite, saying in papers filed with the bankruptcy court that blocking the sale as demanded by Grupo Mexico would delay resolution of the claims of the creditors for years.

So far, things seem to be going Sterlite’s way.

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Transmeridian (TMY) update #22

Posted by intelledgement on Wed, 11 Jun 08

Chinese money has won the day in Kazakhstan, and if our expectations about the value of the South Alibek field there—the rights to which are owned by Transmeridian (TMY), our depressed E&P play—are anywhere near accurate, the Hong Kong-based United Energy Group Limited (UEG) has pulled off a coup, snapping up a 60% interest in the company for $215MM.

According to the press release, the deal must still be approved by TMY shareholders, but with the alternative a death spiral, most likely beggars won’t presume to be choosers here. Presuming the deal is consummated, there would be about 293MM shares outstanding when UEG converts the preferred stock they would be getting to common, and they would have paid about $1.23/share. The stock zoomed up 33% in the last half hour of trading today after the announcement to close at 53 cents/share, so there is most likely more room to the upside here, although given the company’s recent history of announcing deals that don’t happen, we’d be surprized to see the stock approach anywhere near $1.23 until the deal actually closes.

Our basis is $3.30, so for us it’s just a matter of cutting our losses. Still, worthwhile to hold here for that prospect.

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BPZ Energy (BZP) update #11

Posted by intelledgement on Tue, 10 Jun 08

Finally! Our spec E&P play, BPZ Energy (BZP) announced yesterday that they received clearance to transport crude from their CX-11 platform to the nearby Talara refinery. We have been waiting for this approval for months; now the leased transport barge Nu’uanu, filled to its 30,000 BBLS capacity, is on its way to Talara to deliver its first new shipment since production was suspended following the sinking of the Supe in January.

BZP also announced that the Nomoku, their Floating-Production-Storage-and-Offloading (“FPSO”) vessel (actually, a converted barge)—the first in service in the history of Peru—is now in position near the CX-11 platform and is being prepared to receive crude production.

The unexpected administrative delays incurred in obtaining the clearance for oil transportation will result in the company missing their 2Q08 production targets. However, previously announced 2H08 and 2009 Corvina production forecasts have been confirmed.

Meanwhile, drilling on the fifth Corvina well, CX11-20XD, continues on schedule and is expected to be at total depth by late July. BZP also plan to spud the CX11-15D well shortly after completion of the 20XD. Management expect this well to also take approximately 90 days to reach total depth, and to be completed and tested late this year. The drilling rig will then be moved from the CX-11 platform to the Albacora platform. BZP have successfully completed the well control on the three shut-in oil wells located at the Albacora platform, and the platform refurbishment program continues. Drilling will begin late this year once the platform is fully refurbished.

BPZ Energy have also signed a two-year contract, with a third-year option, to secure a second drilling rig (PTX18), which will be initially used onshore to drill an exploratory well in Block XIX, the “Pampa la Gallina” prospect. The targets for this well are oil from the Heath formation and gas from the Mancora formation. The Pampa la Gallina well should be spudded late this year; it will be the first in a series of wells aimed at appraising the Mancora Gas Play. Management believe the Mancora Gas Play extends approximately 60 miles, from Block XIX through onshore Block XXIII and into offshore Block Z-1’s Piedra Redonda field. This well, in Block XIX, is expected to cost approximately $8 million and will take approximately 90 days to drill and complete. The PTX18 rig is contracted from Petrex, BZP’s current drilling contractor, for a period of three years. This rig is capable of drilling to approximately 14,000 feet, and could be modified to drill from an offshore platform.

Initial engineering designs are in progress for the new CX-14 platform for the Corvina field. This platform will have up to 16 slots, which are expected to enable the company to complete the development of the Corvina field; it should be ready by mid-2010.

Negotiations are ongoing with the International Finance Corporation for approximately $200 million in senior debt. A term sheet is expected in the next few weeks, with closing sometime in the third quarter. BZP expect to use the funds to kick off the gas-to-power project, as well as to continue the development of both the Corvina and Albacora fields.

Manolo Zúñiga, President and Chief Executive Officer, stated, ”The permitting issues with our transport barge for Corvina only slowed our progress temporarily, and will not have long-term effects on our strategy. We are pleased to be once again selling oil to the Talara refinery and we will press forward to ramp up production. Now that the FPSO is moored near the platform, we should be able to efficiently sustain oil production which will allow us to give our investors a better picture of production rates moving forward. The production we are going to deliver to the Talara refinery is in many respects as important to Peru, and to the region of Tumbes, as it is to BPZ. I have personally been involved in face-to-face discussions with multiple agencies in Peru to provide information as requested to assist in the review of BPZ’s development plans.”

Mr. Zúñiga continued, “We are progressing nicely on all other fronts, including Albacora, which is expected to add significant reserves in 2009. Furthermore, the contracting of a second rig gives BPZ the ability to work on three simultaneous projects by year’s end: Corvina, Albacora, and Block XIX. I am pleased with the progress we are making in these areas of our operations, where we continue adding key people which will help move BPZ forward as both an oil and gas producer and future power generator.”

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