Tuesday, June 29, 2010

If Long On Colombian Oil, Forget HUSA and Consider GTE

It's days like today that I congratulate myself on my attempts to look for value and put emotions aside. Short positions are, obviously, doing quite well and my dividend payers are falling less precipitously than the average security. Still I review my thesis to confirm that logic still prevails.

While my HUSA short is doing very nicely, it is worthwhile to compare Houston American Energy to other Colombian exploration companies. If I wanted to own a piece of Colombia's growing oil business, I'd consider an investment in Gran Tierra Energy [ GTE ], not HUSA. GTE is an actual operating company that is proving itself nicely in South America while HUSA is a hope and a prayer speculation. HUSA could turn out to be a huge winner, but I strongly doubt it. A person could earn a good return with GTE and, maybe, get a huge winner. A comparison of the two companies is worthwhile.

Today, the market values GTE at $1.3B and HUSA at $315M. Per share, you can buy GTE at 1.5X book value, but must pay up to 10X for HUSA. On a sales basis you only have to pay 4X for GTE, but must fork over 29X sales for HUSA. Clearly, on a financial valuation basis, GTE is the better buy. How about on a production basis?

GTE is running at 15,000 BOPD net. HUSA's net is only 1000 BOPD and that production is for sale as it is controlled by Hupecol, the operating partner. Gran Tierra owns 100 percent of it's wells and leases. GTE produces 15X more oil, but is only valued at 4X more than HUSA. Not only are HUSA shareholders paying more per share for each sale, they are paying a huge amount more for cashflow as EV/EBITDA is only 4X while HUSA is valued at 94X cashflow giving GTE a cashflow yield of 25% and HUSA only about 1%. So, HUSA loses on the basis of financial valuation and production metrics. How about future big oil finds?

HUSA has an interest in about 1.1 M acres in Colombia, but only at approximately a 12% ownership interest. GTE owns 100% of over 6M acres of exploration in not only Colombia, but also Peru and Argentina. With GTE you get the potential excitement of Peru as well as Coumbia. I won't delve into who has better drilling prospects due to proximity to large, producing wells since they both say they do and I don't have the expertise. Both aren't burdened by debt, but face large exploration budgets. Both sets of investors hope that big oil finds are ahead.

If I want to own a lottery ticket on South American oil, GTE has much safer odds and more upside per share. Conversely, HUSA is priced too richly and I'll continue to say short.

Monday, June 14, 2010

Ray Charles Couldn't Miss This Opportunity

Since Neutral Tandem is down about a dollar since I launched my latest telecom investment, I decided to review the wisdom, or lack thereof, of that decision. I remain convinced and Ray has to be with me. He would have been able to see the value if he was still with us and I'm sure he can see this no brainer from above.

Here are the fundamentals on TNDM:

Forward P/E 10X
Earnings Yield 10%
P/B 1.6X
ROE 19%
Cash per share $6
$184 million cash and NO DEBT

Negatives? Revenue growth has slowed as prices are coming down, but market share is growing as minutes handled is growing by 25%. This trend will likely continue, but the company has a neutral business model, it doesn't compete with its customers like other competitors do, and an amazing stable of customers. It's service offerings are growing and customers are buying more. An ethernet exchange is the next growth area, much larger than the current switching opportunity, and it has a leg up on its competition again due to its neutral positioning and established customer base. TNDM is priced like it is going out of business, but it isn't and that's where the opportunity arises.

Neutral Tandem presents at William Blair's Growth Conference on Wednesday. Maybe Ray and the Blues Brothers will help TNDM impress the Chicago investment house's attendees and the market will start to appreciate this very cheap stock.

Working The Numbers Backward Can Be Enlightening

Houston American Energy [ HUSA ] has been causing me some pain lately. I'm still ahead of the game, but don't enjoy the cushion I once did. The last several days have caused me to question my thinking and consider covering my short position. OK, I've considered my options and I'll stay short. The pain may get worse, before it gets better again, as HUSA's new found market cap makes it a likely candidate for inclusion in a Russell Index at the June 30 rebalancing. Inclusion will cause some one time buying by index funds and remove a little float. But it doesn't change any of the fundamentals of the company itself and those fundamentals are very over valued.

HUSA is a three employee operation that has some small working interests in a couple of Louisiana and Texas wells that hardly produce any oil/gas. Additionally they own other minority working interets in some Colombian properties. That's right, Colombia land of the drug cartel and women that wear funny hats. Those wells are producing some oil, but not huge amounts. Basically the Colombia properties are speculative in nature, not proven reserves. They do happen to be near proven properties and that leads to the hype. And that is what I believe is in full gusher at HUSA, hype, not substance.

Here are the numbers that speculators are willing to pay:
Price/Book 12X
Price/Earnings 108X
Price/Sales 35X
Market Capitalization $434 million

Can it get better than that? Do buyers really think shares can double? Let's work some numbers backwards from the current market cap of $434 million. If HUSA was a real operating company with current production and very good future prospects, an investor might be willing to accept an earnings yield of 5%, or a 20 P/E. That would mean the $434 million market cap should be justified with $22 million of after tax earnings. HUSA has been making about $500,000 per year until last year when they lost $670,000. They did do considerably better in the 1st quarter as they made $800,000 or annualized, $3.2 million. Clearly current revenue and net income doesn't justifiy the current market cap. What does then?

In the last quarter of 2009 HUSA raised about $15 million at about $4.50 per share and used that money to buy some Colombia concessions. Magically the stock price rose and the company is now worth multiples of that equity raise. Additionally, most of their producing Colombian properties are for sale. Hupecol, the managing partner, is attempting to sell wells and leases that produced most of HUSA's $4 million of revenue in the 1st quarter. How much can $4 million of revenue be worth? The unproducing areas require lots of expense and risk, so how much can the rest be worth? The company points to a similiar, they say, sale by Hupecol, 6/08, that fetched $920 million with HUSA's share amounting to $11.5 MM. Those proceeds didn't last long as HUSA needed to raise cash in 2009 and will spend an additional $10 million in 2010, fortunately they have about $14 million on hand and no debt. Even if Hupecol can arrange a sale that, pick a number, gets HUSA twice the proceeds, they have more cash and no operating wells. What would you pay for cash today? It's still going to be a company that is valued on hype because they won't have any production after a sale.

Can 1000 barrels per day production and a bunch of leases be worth $400 million? I think there is little danger that actual business results begin to justify the current share pricing. Therefore, the price will adjust downward again as soon as the euphoria ebbs.

Wednesday, June 9, 2010

Not As Short As This Fellow, But Owe A Few Shares

What do the following all have in common? The nation's largest boat builder awash in debt, a legacy airline hugely awash in debt and union issues, an tiny oil company with a huge market capitalization, a well regarded bank with a huge subprime portfolio, a fancy fitness club operating in a terrible industry, and a broad market index. They represent most of my short positions. They've provided a good hedge against my longer term holdings and have kept me from finding a high ledge.

Mid June is nearing and, as I mentioned in an earlier post, expect the media to feast on a California budget crisis as we near mid month. Comparisons to Greece will be rampant and requests for more Federal help will fill the front pages and cable shows. California will once again bring our over borrowing to the forefront. Sounds scary, so I would guess the markets won't like it even though they should already know its existence. I'd be surprised if my shorts didn't make me happy and my long positions cause me anguish. But I'll try to remember that I own stocks for a purpose and a long horizon. In the meantime I will borrow some more shares. Especially Brunswick as the California problems and Florida oilslick are not going to be conducive to sales of new boats.

Time to go tally today's damage and see if mama can buy new shoes.

It Never Hurts To Ask The Question

Bunge is up $4 this morning, for all the wrong reasons! It's not their repositioning from fertilizer to sugar and ethanol. It isn't the valuation metrics that are much improved since the share price has come down from the lower 70s. It is due to last evenings announcement of a $700 million stock buyback program. An authorization that may, or may not, be used to its fullest authorized extent. It's a wonder I make any money at all since my thinking is sure different than many on Wall Street.

I've also been questioning myself on my Smart Balance position. I'm currently into the second year of my estimated 5 year holding program on this venture. SMBL doesn't have a fortress balance sheet or a sterling earnings performance, but it is building a great brand and someone, over time, will take it out. Management has done this same gig many times, all successfully. They will again and lots of money will be made. But it was a lot easier staying true to my thesis when the stock was several dollars higher. The market has taken the company steadily lower over the past month and I am now only slightly over my basis. SMBL is a bet on management and mangement is still on the job. I'll continue to wait even though those smarter than me continue selling. I could be wrong, but as Charles Barkley says, "I doubt it."

Natural gas companies have been more in demand lately. Devon, a company like Bunge that has largely liquified its balance sheet and changed it's emphasis from offshore oil to gas, has been doing nicely. The safer side of a Devon investment is some of the pipeline Master Limited Partnerships, guys that get paid for carrying the product. Names like EPD and DEP are down, but still yield 7%. They are a reasonable place, in this low interest rate enviroment, to have some exposure, especially as the country moves to a more natural gas environment.

Time to quit typing, get another cup of coffee, it's too early for scotch, and see what the market is doing to me. Am I smart or stupid?

Friday, June 4, 2010

Bunge Has Gone From Worthy To Compelling

It's difficult to buy equities in a lousy market, but if you truly believe, and have discipline, that you will hold the securities for many years then it becomes easier. Remember I said easier, not easy, as you will kick yourself with each market swoon. But, you ought to make money. Since I think we'll stay in a difficult market for a long time, it's obviously better not to bet the farm at one time as the market will continue to give you opportunities at lower entry points, so scale into a company like Bunge.

Not too many years ago, during the great fertilizer mania, BG was selling for about $140. Today you get to buy it at about $49. That's still higher than was available at the bottom, but still an excellent entry price. Espescially since Bunge is significantly changed since that time. It has ramped up it's sugar and ethanol production in Brazil through an acquisition and, just days ago, closed the sale of its ferilizer mining operation, keeping retail.

BG will net $3.5B from the sale and use at least $1.5B to reduce debt. If they decide to use it all, they could almost be debt free. Before the sale, today's price was about 85% of book and I'm guessing that when we see the quarterly numbers, book value per share will be higher than last quarters's $55 per share. It never hurts to buy at less than book. On the earnings front, they project 2010 earnings of between $5.30-$5.70, say $5.50. At a share price of $49 you are acquiring an ag leader for less than 9 X earnings. And you get a large exposure to Brazil.

Bunge pays a dividend and has a good coverage ratio, is an excellent grain merchandiser, has some leading brands overseas, now has an ethanol component, possesses a good balance sheet, and is the best ag name to own. Much more attractive than ADM or Corn Products, a company that BG could take another run at with their new cash horde.

Buy a little here and more later and eventually you'll be happy. You can't get beat up too badly in the interim like you can, and will, on those 15-20X P/E companies.
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