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My previous article addressed Value Digger's article entitled CAMAC Energy's Gross Overvaluation Is A Gift From Santa Claus To All Short Sellers For 2014. After it was published, I realized there was a major flaw in my assumptions and understanding on how dividends affect short sellers, and asked the article be retracted. From the SEC:

Brokerage firms typically lend stock to customers who engage in short sales, using the firm's own inventory, the margin account of another of the firm's customers, or another lender. As with buying stock on margin, short sellers are subject to the margin rules and other fees and charges may apply (including interest on the stock loan). If the borrowed stock pays a dividend, the short seller is responsible for paying the dividend to the person or firm making the loan.

I have been watching Camac Energy (NYSEMKT:CAK) for a long time (often times very frustrated), but have been very encouraged lately by developments and have written several articles outlining the upside. I felt Value Digger's article was very well written, and addressed the counter argument to what I believe. I am always very open to these counter arguments, and find them helpful in getting the whole view of an investment strategy.

So now it's time to look at both and try and determine the upside and downside for each.

To do this, I'm going to make a few assumptions in the evaluation:

  • An investor/trader enters a position (long or short) with a price of $1.35
  • There will be a pull back after the dispersion
  • I'm ignoring the overhead of interest and commissions that brokers require

The short argument (closing the position after the stock dividend is disbursed)

In the short argument with closing the position after the stock dividend, I'm going to assume that a trader enters a short position of 1,000 shares at a price of $1.35 for a total short of $1,350. Assuming there is a pullback, I looked at a final position being closed between $.25 and $1.35 to get an idea of where a trader would profit and have a loss. The following chart outlines the potential upside from that position (not including interest and commissions):

(click to enlarge)

In this situation, a trader would have to have a pullback below $.55 in order to see a profit.

The short argument (closing the position before the stock dividend is disbursed)

With the short argument closing the position before the stock dividend, a trader is assuming the price of the stock will fall prior to the payment of the dividend. Right now CAK is trending up, staying above the 50 day moving average, and bouncing above and below the 20 day moving average.

(click to enlarge)

My problem with this that I believe once the dividend date is announced, traders and investors will rush to get in to take advantage of the share dividend and shorts will be looking to cover to avoid paying for the extra shares. I predict it will look something like this:

(click to enlarge)

The long argument

In the long argument I'm assuming that an investor enters a position of 1,000 shares at a price of $1.35 for a total investment of $1,350. Assuming there is a pullback, I looked at a final position being closed between $.25 and $1.25. The following chart outlines the potential upside from that position (not including interest and commissions):

(click to enlarge)

Analysis

Investors and traders should always remember that figures can be manipulated. The final pullback could be lower, or the company could continue to present good news driving the stock higher, and minimizing the final pullback.

In my opinion, the company is continuing to show progress in implementing its plan to monetize OML 120 and 121. The recently announced the extension for the floating, production, storage and offloading system ("FPSO") ARMADA PERDANA for an initial term of five years and automatic extension for an additional term of two years shows the long-term plan for production.

If the pullback settles at a price of $.71 (Public Investment Corporation (SOC) Limited ("PIC") of South Africa is paying US$270 million equity investment for a private placement of 376,884,422 shares of common stock at a price of $.71 per share) the short option offers a 28% downside while the long option offers a 28% upside.

Conclusion

Assuming there is a pullback, shorts would profit at any price below $.55. According to Value Digger, the value is between $.60-.66, a point where shorts will not profit after the stock dividend:

At the time of writing, CAMAC trades at $1.48, and the valuation of $0.66/share represents a downside of 56% for the investors who short the stock.

At the time of writing, CAMAC trades at $1.48, and the Net Asset Value of $0.6/share represents a downside of 60% for the investors who short the stock.

With the stock dividend, longs profit at any price above $.56. With that, it comes down to how much faith you have in the company to execute their plans. The company has made several announcements recently outlining the plan to increase oil production, and then had subsequent statements when it reaches a milestone. I personally believe the company is on the right track, and the pullback will not be as drastic. I also do not plan on selling after the stock dividend is distributed as I believe the company will successfully carry out its plans for drilling and production.

As with any investment, it is up to investors and traders to do their own due diligence and research.

Source: Camac Energy: Why The Short Side Won't Win