Boy, I looked bad. On January 10th, I noted the sharp bull run at Adams Resources (AE), which had risen over 30% in the first six trading sessions of 2012. "What is clear for investors, though, is that the trade in AE has likely been missed," I concluded.
Hardly, as one of the article's commenters angrily pointed out. AE would nearly double over the next three months, touching an all-time high of $75.13 on March 28th. The normally sleepy stock -- Adams is a small-cap marketer of oil and natural gas -- then saw severe volatility, pulling back, rebounding, consolidating, dropping, and, then, over the last week, collapsing:
Even for a stock that has had some violent price movements in the past, and a small float of just over two million shares, Adams' movement has been nausea-inducing. It's also been hard to explain. The recent decline may be tied to the May tumble in oil prices, which are at a six-month low; but oil prices were relatively stable while AE took off from November lows, nearly quadrupling in less than five months. AE was aided, somewhat, by increased oil prices, which produced $2.5 million of inventory liquidation gains in the first quarter, according to the 10-Q. But Adams' inventory exposure is hedged; derivative losses were over $3 million for the same quarter, meaning the second quarter decline in inventory valuation should also result in a gain from the sale of forward contracts.
The pure price of oil is not necessarily a big driver for Adams (the company itself has noted that "over time, the gains and losses tend to offset.") What has driven the company's recent earnings as, I noted in January, are higher-than-normal margins because of the elevated spread between Brent crude oil and its West Texas counterpart. This spread has driven earnings in the company's Marketing segment, which generated most of the 2011 profits. Adams itself has emphasized the short-term nature of the spread in its regulatory filings, noting in the Q1 10-Q that "narrowing unit margins [are] anticipated in the South Texas region as the year progresses due to a number of third party pipeline infrastructure projects currently under way that will increase competition in the area." One of those projects, the Seaway pipeline began operating this weekend, perhaps leading to some of the recent fear surrounding the stock. But despite Seaway's reversal, and predictions that the pipeline will collapse the Brent-WTI spread, it rose sharply this week, as AE, which will profit from the increased spread, fell just as sharply:
Brent-WTI spread (in US dollars) in blue; AE stock price in orange; chart courtesy ycharts.com
Now, with the stock at Friday's close of $33.75, AE looks like an interesting play again. (I wrote it had "outrun its value" back at $38, for those keeping score.) There is a terrifying "falling knife" aspect for potential investors (and no options listed to cushion entry-point risk), but the stock should be of definite interest to long-term investors if it dips back below $30 and when volatility finally decreases to somewhat normal levels. AE offers $8.53 per share in cash; trailing earnings are $5.68 per share, leaving its P/E at 6, and 4.45 when backing out the company's cash. Its tangible book value is nearly $28 per share, providing some margin of safety when the stock stabilizes. Even assuming that the Brent/WTI spread will narrow, and earnings will return to lower levels, Adams' long-term execution and solid investor returns make the small-cap a solid potential pick for a value portfolio.
Without understanding any reason for the stock's roller coaster 2012, it's a little daunting to consider an investment in AE. It appears the stock simply got caught in a trading frenzy -- in the last four days of March, at the stock's peak, daily volume averaged over 100,000 shares, compared to a 3-month average of 8,300 shares as of early January. When the frenzy finally dies out, and if Adams continues to drop, the stock is definitely worth a look.