I’ve been listening to the most recent Chris Martenson podcasts. In the following podcast, Martenson interviews Rick Rule (December 9, 2011). Rule recommends investing in undervalued junior oils. He gives the following scenario: A junior oil has 1 billion in Net Present Value, a market capital of $300 million. A larger producer will take out the company for $700 million because of the derisked oil and the larger producer knows that it can make money off the holdings of the junior oil holdings. This is well worth listening to for all those who are investing in resource companies, as Rule explains how to determine value in the sector.
investment tips
Buffet Bugs
What do you call people who follow Warren Buffet sycophantically? They call people who think it’s a good idea to invest a portion of one’s portfolio in gold, “gold bugs”. So perhaps we should call them “Buffet Bugs”. Isn’t that grown-up of me?
What does Petrobakken’s sale of 7% of their Bakken business unit imply about the value of the remaining Bakken lands?
See also:
What does the sale of Daylight Energy tell us about the value of Petrobakken?
What does the sale of Brigham Exploration tells us about the value of Petrobakken?
Reflexions on Petrobakken (Updated)
Petrobakken has sold 7% of their Bakken business unit to Crescent Point for $427 million. Their press release says:
The Bakken Business Unit will continue to represent a significant portion of our corporate asset base as this sale represents only 7% of the Business Unit’s land holdings and approximately 12% of its production. Assuming successful completion of this Transaction, our average working interest in our remaining Bakken Business Unit lands will increase from 82% to 86% and we will continue to have over 700 net drilling locations in the Business Unit, representing approximately 10 years of drilling inventory.
In the past two years, Crescent Point has received market love. Its managers are hailed as brilliant and it is consistently able to raise money in the form of new issues. Petrobakken and Petrobank, however, have struggled to get the same kind of love. As a result, Petrobakken/Petrobank has been the better deal for value investors–whereas there seems to be a premium on the shares of CPG compared to industry peers, Petrobakken is still selling at a deep discount to value.
The implied value of Petrobakken’s Bakken Unit
If 7% of the Bakken Business Unit sells for $427 million, the implied value of the remaining unit is: $5.673 billion (427 = .07b; b=6,100 whole bakken unit; remaining Bakken = 6,100-427= 5,673). Petrobakken’s total market capital is currently $2.5 billion. This means that the current market price of Petrobakken sells at a 50% discount to the Bakken business unit alone. Don’t take my word for it. Take the value that the industry’s smartest managers, Crescent Point, have just given to the 7% that they bought. Crescent Point has just done a great favor to Petrobakken by showing that its stock is worth closer to $30 per share (not counting remaining debt and the value of its other holdings, including its Cardium, which I would argue is much more than zero dollars per share).
Disclosure: I am long PBN, PBG and CPG.
Whose shares are lent out to short sellers?
Does anyone know the answer to this question? A short seller must borrow shares at a fee, and so I wonder whose shares they borrow. The other day I was reading at Stockhouse that bullboarder had put a sale order on his shares of Petrobakken @$30 per share in order to prevent his brokerage from lending out his shares. Does this mean that my shares are among those which may be lent out?
My friend “Just Me” sent me an article this morning about the subject of short-selling, A not-so-short story, at the Economist which deals with Patrick Bryne’s fight against the short-sellers who harmed his online-retail company. But there were a few lines that caused me to wake up to the practice of shortselling:
The failure to deliver shares (and thus to settle trades) that goes hand-in-hand with naked shorting is more than just a plumbing problem: a buyer who does not receive his share cannot technically vote it.
What if my brokerage lends out to short seller, who sells them and then my shares are actually delivered. We have the following scenario.
Stockholder A has 100 shares long.
Stockholder B sells short A’s shares.
Stockholder C buys 100 shares on open market and receives delivery on settlement date.
Now the problem is that if a brokerage can rent out A’s shares at a fee to B, and C receives them, then 100 fictional shares now exist in the market and these are non-voting shares (because only real shares can vote). So only A or C can vote but not both. But if C receives fictional shares, then only A can vote.
I reported that I never received ballots for my shares of SKW at Beating the Index. I wonder if it was because my shares were the fictional ones and that the real ones were borrowed. Does anyone know the answer to this question?
Given the meltdown of MF Global, I think we should all be concerned. Perhaps we should go back to the system of my grandfather’s day when you received the stock certificates upon settlement and you kept them in safety deposit box. Finally, if my brokerage is lending out my shares, I should be told and I should receive part of the fee that the brokerage receives from the short seller. Has anyone else experienced not receiving ballots for important votes, such as the election of officers?
Be careful, please, of investing in the United States
I wrote to fellow blogger Kevin Graham the following warning after his repeated insistence that Wells Fargo is very safe and cheap:
Kevin: Are you aware of the consequence of the FATCA legislation and how it will affect investments in the United States? As a Canadian you can easily protect yourself from these consequences by pulling your investments out of the United States. I am involved in a group blog, the Isaac Brock Society, which is dealing with the questions of US persons abroad and the attempt of the United States to crack down on alleged tax evaders living abroad, including Canada.
I say this because you promote Wells Fargo, and not a few other US equities as “safe”. I am not sure that anything in the United States can be deemed “safe” and I recommend all investors to get out before the meltdown of the economy there. The other issue of course, is that the United States debt has no surpassed 100% of GDP. This seems to me to be a reason to be extremely cautious.
Kevin and I had a good time going back and forth over Petrobakken last year, when PBN hit its nadir. I was the bull; he was bear, even when PBN was at $6.50; Petrobakken achieved its year end exit production guidance and thus is on its way to a full recovery (which I think will be above $24). It didn’t hurt that Sinopec bought Daylight Energy, a company which had a similar debt issues to Petrobakken, but Daylight was arguably less attractive because it was more weighted towards natural gas than Petrobakken, but it did give us an opportunity to see what an outside buyer would pay for a mature intermediate oil and gas company, and it was double the then-current market price of Daylight. I took tender for my shares of Daylight and I am happy to say that I have, as of today, received into my brokerage accounts.
Unfortunately, Kevin’s recommends US bank after US bank. But he is apparently unaware of FATCA and the likely damage that it will do as a result of the exodus of foreign investment in the United States. Furthermore, I consider American banks black boxes. Who can possibly know what they are worth when they have so many derivative contracts that nobody understands? I consider the banks bad risk since the time that I learned that many of them (e.g., Scotiabank) have large short positions in gold through their sale of unallocated gold certificates.
One might ask why I bother checking Kevin’s blog. Well, I like reading some blogs that look at the world in a totally different way than I do. I also like to challenge them. Then, if they can muster cogent responses, it makes me think about my position. I can’t say that Kevin has ever succeed in convincing me of anything though. Each time that he talks about a company being safe (like Sears), I get the urge to add to my Spam collection.
My Spam collection
The Righteous Investor 