Thursday, August 22, 2013

Natural Gas: end of build season prediction

As can be seen in the previous post, the model predicted storage numbers based on a storage build season of 35 weeks.  I have been looking at my model constantly as I am higher then anyone else then I am aware of.  I've been checking and checking and thinking there was an error but could not find one. 

Today I realized that predicting a storage build for 35 weeks is incorrect.  While it could technically happen, because of the late start of build season, the build season is more likely to be 32 weeks.  I have updated my model and the numbers come in a little lower. 

My numbers are still higher then anywhere else that I have seen and are still dramatically bearish in my opinion. 

The new projections are for 4.05 Tcf, 4.20 Tcf, and 4.12 Tcf.  Not dramatically different, but about 0.1 Tcf or 100 Bcf difference.

Normally supply and demand works over time.  Natural Gas is the exception for three main reasons (a few minor reasons too).  The first reason is that oil is expensive.  E&P companies are minting a fortune drilling for oil.  Even when oil wells come in 1/3 oil and 2/3 gas, these companies are making a lot of money (IRRs are easily 25-30%).  Some of these wells have IRRs in the 50-60% range (depending on how much oil is being produced, differentials from WTI/Brent, and pipeline vs rail transport).  Supply is not going down, and has increased over the past twelve months.

I am not saying that supply will increase forever, supply will not decline dramatically until oil prices decline.  The bulls have been arguing for the past year that supply will come down.  Eventually they will be right, the question to me is it now, 1 year away or 2 years away.  (I am in the camp of 1-2 years away but that is more about when demand starts to catch up, and not supply going down). 

The second reason that supply and demand is not working is because of how leases are structured.  From 2006-2012, a lot of shale plays were leased and usually have a 5 year contract. 

Because of the characteristics of leases, there has been plenty of drilling done to hold acreage, so heavy natural gas wells were drilled to hold production.  Some of the earliest leases are held by production and will not be drilled further until Natural Gas rises.  There are still leases signed that will need to be drilled, regardless of price.  

The third reason I cite is the higher price of Natural Gas in further out months.  (Contango) is stopping major users from increasing their demand for natural gas.  Lets argue today (at spot of 3.45) that a utility is (financially) better off generating electricity from natural gas vs coal.  That is fine and great, but natural gas 3 months out is $3.81 or over 10% higher and is over $4.00 12 months out.  If there is a high switching cost for this fictional utility, the utility that would use Natural Gas today does not make the swithc, since they cannot lock in the low price for very long. 

Thursday, August 15, 2013

Natural Gas Outlook 8/15/2013

Sorry for the long delay in posts.  I want to get back to posting on a weekly basis but not sure when/where I will find the time.

Here is a quick view of Natural Gas.  I have been very bearish and for the most part been right.  I was wrong in my last post calling for a 2 handle before a 4 handle.

I think we still can get to a 2 handle, however it is more likely that we trade in the low 3s.  When comparing NG in November at 3.56 and December at 3.74 (as I write this), that is a major decline.  I believe that in 1-2 months time the natural gas market will start seeing reports of storage getting full or worried about getting full etc.  I base my opinion on the excel chart / picture below.

The purple marks the low of the season and then any additional draws after a build.  The orange is opposite and marks the high of the season, along with any additional builds after a draw.

In the right bottom corner are the estimates for where I think storage will end 4.14Tcf to 4.29Tcf.  Those numbers are close to the estimates working gas storage number that was released on 7/24/2013, although there is a 9 month lag.

In 2012 when storage reached 3.929Tcf we saw an intraday low of 1.902.  Working storage was closer to 4-4.2Tcf.  In 2011, we saw a low of 3.086 intraday which seems reasonable and within reach in November or December. 

If anyone would like a copy of the excel file, please let me know.  The information in the file was downloaded origianlly from EIA.  I kept the original data in a tab and then created a new tab that I could make estimates and calculations.

Based upon my outlook, I decided to trade a risk reversal.  I sold NG December 2013 $4.00 calls for 0.128 and used a little more than half the proceeds to buy NG December 2013 $3.25 puts for 0.066.

At some point, I will look to sell the $3.00 puts (to create a vertical put sperad), especially if we move down dramatically and I can sell the $3.00 puts for the price I paid for 0.066.

For traders that only trade stocks, I am short October UNG calls and looking to buy puts when December options are available.     

Sunday, February 10, 2013

Dell valuation by Southeast Asset Management

Interesting analysis and a possible alternative to going private.  Full SEC filing here, I saw the posting initially on Barron's that also linked to an article with Reuters

I am long DELL, however my long shares are being called away with February option expiration (short Feb 12 calls against long position). 

I believe that the current buyout offer of $13.65 per share undervalues DELL.  I value DELL closer to $16.50 with a floor price of $12.40.  The problem of initiating a new position today is that the risk/reward is unfavorable. 

The price of the deal could not be raised enough to satisfy Southeastern (or a couple of other funds that are against it) and if the deal is axed I think DELL trades back below 12. 

Monday, January 28, 2013

Are we at a market top?

It feels like a top to me.

My short book is getting killed so far in January.  This has worried me before, however in the past it ended being the top every time.  I suspect that what is really happening is that the last of shorts are throwing in the towel.  The last marginal buyer is the short throwing in the towel. 

Hussman noted in his weekly comment that capitulation is everywhere.  Is Abelson advocating a market timing strategy now?

I read an article on Facebook where an analyst was advocating an EV/EBITDA multiple of 17.  This sounds more like coming up with a price target and figuring out how to get there after.  The article was on Barron's Tech Trader Daily (here).

Another concern is the market going gaga over REIT and MLP conversions.  CBS outdoors announced a conversion and rallied 8%.  When the market starts chasing rumors of the next conversion and stops paying to fundamentals, we are close to a top.

Disclosure: Short FB, no position in CBS. 


Thursday, January 10, 2013

Net Long OSK

I just finished reading the 10-K for OSK, which was released in November 2012.  OSK first came on my radar when Icahn made a tender offer (that he later withdrew) for $32.50.  
The company has 4 main sectors, Access Equipment, Defense, Fire & Emergency, and Commercial.  Only the Defense sector showed any decline this past year.  Future guidance was for the same, growth in 3 sectors with declines in the defense sector (for an overall decline in revenues). 
In 2012, total capitalization to debt decreased from 40% to 35%.  Management feels that 35% is the right debt profile for the company.  With the debt profile reaching its goal, the company can now use that cash to grow their business as well as give more back to shareholders.  The company did modest buybacks in 2012 but could see larger buybacks this year.  Another catalyst could be a reinitation of some sort of dividend (OSK last paid a dividend in 2009).  
I am more interested in net debt and noticed that cash equivalents also increased.  Net debt is also down to approximately 0.5B.  Another positive (for stock holders) is that long term benefits are now being reduced for both executives and retirees (see page 3 of the 10-K).   

Another benefit, interest costs are dramatically lower because total debt has declined.  OSK was also able to refinance its short term debt facilities at lower rates.  Down the road, their senior notes are  redeemable in 2014 (at a premium).  Interest rate on this debt is 8%+. 
While there are positives, there are plenty of negatives.  Gross margins declined YoY and coupled with higher SG&A, operating margin continued to deteriorate.  Offsetting some of the deterioration is lower overall interest costs, but that alone is not enough.  Some of the bump in SG&A can be attributed to lowering retirement costs (freezing some executive plans as well as some employee plans), which I think in the short term is okay.

Even though there are a lot of positives, the street has realized it (before I could finish my review) and the stock has run up from 26-28 to current 32.80.  I think there is value up to 36 and possibly to 48-60 (if management is able to achieve all of its objectives).

At current levels, there is only 10% upside ($36-$32.80 or $3.20/$32.80).  Instead of being outright long OSK, there is a better trade.  I sold cash covered puts at $30 for February for $0.42.

The annualized return (if I could do this every month) is closer to 14% ($0.42 / 36 days x 365 days / $30) while also giving me $2.80 (or $3.32 with the premium) of downside protection at expiration.  I believe this trade to be superior vs being outright long OSK. 

If OSK goes to $36 tomorrow, of course I will not be happy.  Most of the time, however, I am able to do this type of trade for a few months while the stock hangs around at the same level (or goes down).  In my next post, I am going to show an example of real trades I did with another stock in 2012. 

Natural Gas outlook

Over the weekend I thought more about my Natural Gas trade.  I felt that there would be another cold spurt or two that would push Natural Gas up.  At the time of my trade (here), my plan was to hold the trade to expiration.

With Natural Gas in the outer months trading near 3.40 I said to myself, do I think Natural Gas trades with a 4 handle or a 2 handle first?  The conclusion I came to is that Natural Gas will trade at a 2 handle and exited my trade Monday morning (you will see in the comments section).  It also helped that I was way ahead on the trade.  

1.  Every report I read on drill results, companies are producing wells (such as Utica Shale) that are 2/3s gas and 1/3 oil.  These companies are happy to drill these wells just for the oil and any natural gas is a bonus.  Some companies are being very aggressive such as GPOR with their release here.  (Even though this report is dated, I just read it over the weekend).

2.  We see more efficiency (lower costs) with drilling being done.  NBR is feeling the effects of this with utilization rates down as well as earnings estimates.  You can also see this in NFX presentation on December 5th (page 8).  A greater then 50% gain in efficiency and cost/lateral foot YTD 2012.  Even though these wells are less 'gassy', efficiency will drive lower costs and higher values to encourage further drilling.

3.  There are also plenty of leases where you need to drill in order for the lease to be held by production.  It is either use it or lose it and wells are being drilled, even if only marginally economic, to hold the production for better times.

So the new trade is take the rally today and sell at the 120EMA of 3.41.  I sold the March 3.40 NG calls for 0.075.  I expect to hold the trade til expiration but will update on the comments section if needed.

I am net long NFX and net short GPOR.  The quick story is that I believe NFX is valued for its oil assets and any increase (even though I am arguing against it in this post) in Natural Gas pricing will help lift the stock.  I am short GPOR on valuation as I believe that hype from their 'big' well in Utica (discussed on seekingalpha) is already priced in. 

I am also net long NBR (and been wrong), which I will detail in another post shortly.  

"At no time in history have we had more people harm others, without paying the price" Nassim Taleb

I found Taleb's speech very informative.  His books are always on my to do list but I never seem to get to them.  The most important takeaway for me is at the 33 minute mark (which is also the title of this post).  "At no time in history have we had more people harm others, without paying the price."  Taleb then goes on to give examples of bureaucrats in Washington, economists on television.

My takeaway is that on this blog I am always going to make comments of how I exited a trade so that the information is no longer stale.  You can see this in my last post where I traded Nat Gas and exited the trade at a profit.  

Here is the speech in its entirety

Wednesday, January 2, 2013

2013 Blog Goals

My goals for 2013 are two posts per week (on average).  I would like to post one short term trade idea per week while also posting one investing idea.  Ideally, I could make four posts each week with an idea for both on the long side and short side but don't want to get carried away (my last post was in May 2012 before tonight).   

My first post for 2013 is a short term trading idea is Natural Gas.  While nat gas has been very volatile, the general movement is up a few days, down a few days and relatively staying in range.  I believe that the market is range bound with low prices stagnating supply as well as slowly increasing demand.

As I look at the chart today, I am not sure if today's movement (down to 3.05) is a bad quote or not.  Regardless, it does remind you that there is always risk and that you need to keep plenty of margin.  I suspect that even if the move was real, the market has already corrected the false move. 

One of the best sources for fundamnetal news I have found is the temperature outlook by the National Weather Service.  I generally look each day and see if the forecast has been updated.  You can drill down into multiple time periods with links for 6-10 days, 8-14 days, 1 month, and 3 months.  Also this link is helpful for drought information and grain trading during critical planting and growing months.

Due to the move on monday (and my perception of volatility) I recommend selling Nat Gas 3.15 for February Nat Gas (expires end of January).  Why did I chose 3.15?  I believe that there is strong support there as well as relatively strong congestion between 3.25 and 3.30.

On any sustained rally towards the moving averages near 3.55, I would use that opportunity to then turn the position into a strangle by selling 3.90 calls. 

Source: TDAmeritrade ThinkorSwim Platform

Disclosure: Short volatility in Nat Gas

Investment mistakes of 2012

"Those who do not remember their past are condemned to repeat their mistakes" George Santayana

One of the things I have noticed this past year is that companies deteriorate faster.  I am not sure if this happens because we are more connected then ever or for another reason.  Email, smart phones, internet (twitter, facebook etc), or 24 hour news but companies deteriorate faster.  Perhaps it is because employees can see or hear the issues more readily morale declines faster, further compounding initial issues.  

Even making very pessimistic scenarios for Best Buy (BBY) and Research in Motion (RIMM), both caused plenty of carnage in my portfolio.  I have exited both positions.

The new rule for declining companies is: Be very wary of any company projections as they are generally too optimistic and keep getting revised down.  Even using pessimistic scenarios under the company projections, I still was burned by multiple projections lower.

Buybacks, which I viewed favorably during these types of declines need not be aggressive.  If aggressive, that (probably) means that management continues to be too optimistic.  I saw both BBY and RIMM buy back a bunch of stock at higher levels, only to slow or stop buybacks to conserve cash. 

Diversification vs Concentration

In my mind I have debated for most of 2012 on whether I should run a concentrated portfolio.  During the year, I have read arguments from both camps.  Off the top of my head, I think of Buffett/Berkshire and Berkowitz/Fairholme as prime examples of strong returns in concentrated portfolios. 

The argument of why you would want to put 2% of your portfolio in your 50th best idea seems very logical.  I agreed with this argument and started moving to a more concentrated portfolio.  However, during the year a few stock selections underperformed (relative to others I also found undervalued) giving me pause.  As my mind wrestled about it more, I realized that being concentrated is trying to predict the timing and catalysts in the future. 

In the past, I have noticed that I am wrong (as most people and commentators on TV) more then I am right in projecting the future.  Yet, I would continue to make projections and say to myself I know the company better I've been following it for 2 years vs 1, or something to that effect.  That being said, my forecasts did not get any better.

One well known study by Dr. Paul Slovic in which horse handicappers did no better (but became much more confident in their predictions) with more data is written about at Motley Fool (I've read at other places but can't remember the original source).   

The best real life example this year was Citigroup (C) vs Bank of America (BAC).  At the start of 2012, I felt that C was better for two reasons.  One, C was more undervalued then BAC and second, that C would come back to fair value faster.  I only bought C and was rewarded with only (I say only but really can't complain) a 40% return.  Had I also owned BAC, I would have received a 100% return.

So where I am going with this post is that if I find 50 stocks that are undervalued, I should own them all as the catalyst/timing for the future is unknown.

Source: Yahoo Finance