If you can't sleep this will help!
After running 4.5 miles and then working out for two hours lifting over 50 tons, I STILL find myself stressed by the events of the last 2 days. In an attempt to clear my mind I have dumped my thoughts onto paper. I have posted it here in the extremely unlikely event anyone would find it interesting. If anyone makes it to the end, I would appreciate your comments. Is my logic faulty? my facts wrong? Do you agree with my conclusions? Why or why not?
Thanks in advance!
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Last November I decided to retire from a lucrative consulting career and use the time to invest. It was sort of like another job. I quickly zeroed in on the oil sector as being the best place to buy low/sell high.
Since that time I have spent thousands of hours monitoring chat rooms and reading articles, press releases and SEC filings. I have read nearly every post made on the Strictly Drilling thread (and several others) this year.
It was clear to me in January that OPEC was going to cut, despite the fact that EVERY analyst said no way. I bought the drillers and made a killing over the next few months.
Two months ago I noticed that the large EnP's were not loosening the pursestrings for drilling projects, nor did it appear they were going to. Why should they? They had been hurt BADLY by the prices from the prior year. Also, the reduction in supply could easily and quickly be reversed. They were wisely repairing their balance sheets.
Oil and gas prices were going up. Who was going to benefit from this? It was clear to me that the EnP's were the ONLY ones who were going to directly benefit, as they were raking it in but not spreading it around. I saw another problem: product prices weren't going up nearly as fast. This told me to avoid EnP's with refining operations as that would be a drag on earnings.
I learned on SI that NG wells deplete much faster than oil wells. This told me that the lack of drilling was going to affect NG much more than oil. NG would be further affected by the difficulty and expense of transporting it from other countries.
Reading articles about NG revealed to me a newly emerging market for the product: electrical generation. EPA clean air mandates, combined with electricity deregulation and power companies not building plants for several years made it clear to me that NG demand was going to increase RAPIDLY for the next few years. I have since read of about 50 new NG based power plants announced just this summer.
Most of the big EnP stock prices had not really gone down as much as I felt they should have, given their pathetic balance sheets, so I started to look at mid and small cap companies. I noticed that many were not actively drilling during the downturn and thus not taking advantage of the low dayrates. I wanted companies that were drilling, especially if the wells would start coming online in late fall when I expected NG to start rising rapidly.
I always expected a shakeout before earnings. We are in that now. Didn't expect it to be this severe. Just figured everyone else thought like I did, and would be buying on any weakness. Inflation fears were a plus. Since energy prices were causing the inflation, energy companies seemed a logical safe haven to me.
After researching dozens of companies, I eventually ended up with 3. What follows is my thoughts on those three.
1. TMR - Meridian Resources
The best I have found, bar none. Stumbled on this one after reading about their blowout. Very high oil AND NG production, reasonable debt, fantastic reserves, good management, actively drilling, and the stock cut in half due to the temporary bad news. I was amazed no one had discovered it.
I started accumulating, making large buys when it dipped under $4. I currently have institutional level holdings. When the stock started dropping this week I posted a little bit of my research. Some folks gave me some feedback and I modified the numbers. In the worst case I figure TMR will surprise 150% to the upside of the most optimistic analyst estimate.
I watched the stock price very closely when it unexpectedly started going down. Why was it going down? Who in their right mind would be selling in the 5's? I was astounded. I noticed a few things:
1. Volume was very high pushing it down to 5
2. There was no volume below 5. less than 3% of the volume has gone off below 5 the last two days.
3. Thomsons was showing sell messages and an unusual level of institution trading for the stock
I concluded that a hedge fund was trying to drive the stock below margin limits to force a collapse due to margin calls. Then they would step in and rebuy the shares at 4 1/2 to 4 3/4.
It almost worked with me. I got a huge margin call. I was surprised to find out that my broker was very helpful. After spending an hour on the phone with the margin department an arrangement was made whereby they will carry me for twice the normal interest rate until the margin call clears up or certain (extremely unlikely) events occur.
I am pissed off at this fund for messing with such a sound company. I have always kept my Roth well diversified, but I am so sure of TMR's future that I am seriously thinking about selling everything off and putting a 6 figure share bid at $5 1/16 (all or none). I figure I can realistically re-diversify in 2-3 months with a 50% gain
Where will I sell? All I will say is that I won't begin selling below $7. That is the floor for their most recent loan. Much of my holdings are long term.
2. MEXP - Miller Exploration
The terms lemming and sheep come to mind when I think about this company. Fairly illiquid, it is fairly easily manipulated by individuals. The company is sound, and has a bright future. I have personally talked with the CEO and CFO on several occasions. They come across as being affable and quite intelligent.
The problem with MEXP is that most of the shareholders don't know why they are holding it. Because the price is so low, every Tom, Dick, and Harry buys a few hundred shares whenever it is hyped. That's the ONLY reason they buy it. They can afford it and figure they are going to make a quick buck.
It works the other way as well. When someone makes nasty overtones, these folks panic. Why shouldn't they - they don't know why they bought in the first place. They sell, like today, and drive the stock through the floor. Then they get angry and blame others for their foolishness.
So why did I buy MEXP? Low debt levels initially attracted me. Reasonably high NG production got me more interested. The Mississippi Salt Domes and the potential of the Blackfeet play got me to buy fairly heavily on weakness. If I had cash available I would have been a heavy buyer below $2 today
3. RRC - Range Resources
RRC has high NG production and reasonable oil production. They have a fairly high debt load but are taking care of it through an innovative and synergistic Joint Venture (JV). This stock is also somewhat illiquid and was driven to bargain basement levels today. I am sickened that I didn't have cash to buy at 4 1/4, especially since the announcement of the JV is just a week away!
Where would I sell? No fixed price for starting. Depends on what they announce for earnings. This is my smallest holding.
If anyone read this far I would be interested in your feedback, either on the thread or by private mail. I actually DO feel better now! |
