High Paul -
E&P Basket - Positive Black Swan(s) or just a few small cap E&P's creating value
I have noticed in my E&P basket of 18 stocks I have 3 positions that are my positive Black Swans. Well if not Black Swans, they have more than doubled and have accounted for my basket to show a positive net return (up 5.75% to date). I also have a similar number of loosers but not quite as bad. 16% of my E&P basket represent 100% (or more) gainers compared to 1.7% in badi_ portfolio (ie INSM).
I have to think it is the nature of these small cap companies. As positive news about new productive wells are announced significant value is made and eventually it is reflected in the stock price. I have noticed that even with bad news like non productive well results, the stock(s) trade lower but so far eventually recover (perhaps because many of my companies already have proven reserves that provides a floor level of value). This is not the case for badi_'s stocks as many of his down side companies lost more than 30%. Many of his positions do not have a floor level of value like the small cap E&P companies have with their proven reserves.
I also track the daily price of crude oil vs the daily value of my E&P basket. There is a small positive correlation but definitely not 1:1. The biggest change in my E&P basket occurs as crude oil falls below $100 per barrel especially when looked at $5 increment moves, I started tracking the daily prices of crude oil on 3/11/2011 through present. The high price of crude occurred 4/29/2011 at $113.70 with the low on 6/24/2011 at $90.59 (one day after the crude oil supplies were released into the market by president Obama).
I added 14% more to my E&P basket in April 2011 when crude oil averaged 110 per barrel. Big mistake as many of these adds are still under water.
In May 2011 I added another 7% to the basket where crude averaged around $100 per barrel. These worked out OK and are slightly positive.
In June 2011 where crude averaged around $95 per barrel I added another 4% to the basket.. All of these buys are up, some more than 30%.
In hindsight, the best time to add to the E&P basket is when crude drops below $95 per barrel. I should have peeled off a few shares on crude oil spikes above $110 per barrel. Also, on positive company specific news events, a few shares should be sold (especially when crude is over $105 per barrel) w/ the expectations to buy back these shares on a drop of crude back into the 90's price range.
Finally, I noticed as the mega deals were announced over this time period (ESV, PTR, MRO, CHK,XOM, BHP, SUG) the average move in my E&P basket was net positive with most of the gain sticking over time. The average $/acre has increased with these large deals which has created more value in my small cap E&P companies w/ similar acres. (eg. LEI has a cost of $287/acre w/ BHP paying as much as $13,500/acre for Petrohawk Energy acreage - Both own Eagle Ford Shale acreage contiguous to each other).
In summary, one does see more "positive" type Black Swan events in the small cap E&P companies due primarily to "positive" news events. Adding shares to the basket when crude oil falls below $95 per barrel has helped the overall return. Shares purchased when crude was over $105 per barrel was a mistake and those buys are still underwater. Your down side Black Swan events are small even with bad news as long as you do your due diligence and only buy those companies with undervalued proven reserves (typically measured by their BOE/D production) and/or undervalued leases (when compared to the most recent sales).
My E&P basket is up 5.75% to date and crude closed 7/15/2011 at $97.30 per barrel.
EKS |
