I’ve been an interested reader of this forum for a long time now. The insights/comments offered by some of the posters here has been very informative. I thought it would be pretty neat if we could all chime in with our stock pick (just one, can be from any market) for the year. Would be fun to reflect on our comments in 9 months’ time…
Silly contest. The only way to win is pick something with very high risk. You could even argue the winner made the worst risk adjusted decision. If you ever play group games with a Monte Carlo simulator, the person that “should” have won, and the person that wins is rarely the same person.
Those are all very risky investments, b/c very high probability of chapter 11 at all of them. One of them already is in default.
For BBEP, LGCY, LINE, there are far better ways to do valuation work but I suggest you consider the following back-of-the-envelope technique;
The SEC requires all E&P’s to get 3rd party valuations of their reserves. They report a PV-10 or ‘Standardized Measure of Discounted Net Cash Flows’ from their proven reserves (look for it at the end of their 10-K). Keep in mind those valuations assume crude oil of $47 to $51/bbl and natural gas of $2.60/mmbtu (the trailing 12 month average price in 2015), which are considerably higher than the current market price.
Take that valuation of the company’s assets (which is inflated b/c it assumes higher prices) and compare it to the total debt which is front of the equity. You’ll see that in all of them there is major impairment for the debt holders with all 3 of those E&P’s, even assuming materially higher crude oil prices than what the current futures curve implies.
The debt trades very poorly for all of those companies. Owning the equity in those companies is like being long a call option on the S&P 500 with a strike of 3,000 that expires in a year. There is fundamentally no value to the equity beyond option value, b/c the capital infront of you has significant impairment. All of those companies have balance sheets built for $80 to $100 oil, and with all the cash interest they have to pay they can’t survive with all of that debt. They have to restructure.
Yes there is tons of upside, but fundamentally its very difficult to be bullish on the equity of those companies considering how impaired the debt is.
Define bullish. An option would be having a positive return expectation over a certain period of time. If a security is priced at one dollar and you expect a binary price of zero or twenty in one year, you would be bullish on that security. Obvioulsy risk of ruin management is paramount. And if a security is twenty and you assign a 80% chance of 22 in a year and 20% chance of zero, you should be bearish.The language prevalent on CNBC regarding bulls and bears is not actionable and nonsensical. Comical when they pullout a scorecard for a guest. Means nothing. A stock prediction is useless without an expected return distribution. Congratulating someone for a “good call” when my fictitious stock reaches 22 just illustrates a complete ignorance on how money is made.
I agree with you, but my point wasn’t to get theoretical on this. I spend a lot of time at my job on distressed oil debt and I think the equity is worth nothing in a lot of these companies. Its just option value. Money can be made being long all of those companies on short-term moves but ultimately I think the companies in my post go close to zero.
If you want to hit some HR’s in oil and gas equities, look for small oil and gas technology companies.
I like midstream, but you need to be selective. Guys that can fill the pipe. Take or pay isn’t that hot when the counterparty is bankrupt. There are some markets in North America that have very constrained shipping or processing and there are some midstream firms that have a strangle on those markets, allowing them again to fill their facilities/pipes.