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Darren McCammon
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Darren owns ProActive Financial LLC. He manages private family and individual accounts as well as the yield focused, 50+ Portfolio. He has a Bachelors in Economics, an MBA and a Certificate in Financial Planning. Darren is most proud of having successfully managed income producing portfolio's... More
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  • Fishing In The Oil Patch

    No one, except maybe a few members of the Saudi rulling elite, has a good idea when or if oil prices will go up. As one can tell from my last blog post, I think the House of Saud is currently much more motivated by retention of power than money. So they could reasonably allow prices to remain low for 2 or 3 years. However, even given this possibility, I think there are still some cases in the oil sector where sell offs are overdone. Investors have been throwing the baby's out with the bathwater, which in turn has been further exacerbated by tax loss selling. I thought I'd record a few of the bargains I picked up here. This is not meant to be a comprehensive nor even meaningful analysis but rather just documentation and a list of stocks others may want to look in to.

    CPLP leases ships. Nothing much company wise has changed from my last blog post and article on them so I'll just let you read about CPLP in that article (seekingalpha.com/article/2571765-capital...). The short version is according to Teekay tankers day rates are still doing fine and I still expect CPLP to raise their dividend in Q1 2015. The only thing that has changed significantly is at $7 per share CPLP is an even cheaper buy now than when I wrote the article above.

    OTC:BRYFF is a company I have never mentioned before. Part of the reason for that is they are small and thinly traded so mentioning it here was counterproductive to me being able to pick up the amount of shares I wanted. I now have, so there is not as much limitation. Just be aware they are very thinly traded and limit orders are advised. BRYFF (BRY.TO in Canada) is a distributor of drilling supplies and makes drilling mud. They have been expanding from Canada into the US over the last year. Certainly, upstream companies will cut heavily back on drilling. Bri-Chem will likely see much less demand for it's products. However, in this case thanks to their expansiion that may mean they see equal demand vs. last year instead of large increases. They are probably in for a very rough patch, but at $1 per share, I found the P/B, expected P/E, and expected EV/EBITDA cheap.

    LINE, everyone knows LINE. You can find dozens of articles on it on seeking alpha. There's not much for me to add. The acreage trades LINE has made in the last 6 months were very insightful (or lucky). It's almost as if they knew the Saudi's were going to cut oil prices. Between these low decline, gas heavy, acreage trades, their hedging and the timing and profile of their debts, I think at $14 LINE represents a good investment. They may cut the dividend, but if they do, I think it will be more because they choose to than they have to. A way to de-risk and store up potential in order to buy more acreage later at bargain basement prices. While I would probably get a better price immediately after a dividend cut, I'm not sure that's ever going to happen so I'm taking what I can get now. If a dividend cut is followed by a price dive similar to SDRL's, you can expect me to be on the opposite side of that trade.

    MILL-pD is the 10.5% cumulative preferred issue of Miller Energy, an Alaskan upstream E&P. Like BRYFF I've never mentioned it before because it is thinly traded and I wanted to add to my position. MILL announces tonight and has a conference call tomorrow. I'm looking forward to their clarification of capex plans, cash flows, hedging, etc. With the preferred you don't have to bet they will thrive, surviving is enough. Actually, with the preferred trading at such a discount to par, you don't even need that. As long as there is enough value there to cover the debt and preferred you are golden. So I made my own estimate of PV10, saw that it covered EV very well and that's good enough. Add in the 90% hedging, opportunity to focus on gas, cut exploratory capex, etc. and I think the dividend is probably good to. But even if it's not, the dividends are cumulative and at $12 per share we are buying at less than half of par so, good enough.

    CPLP, LINE, BRYFF and MILL-pD, those are the greedy bets I made in the oil sector while many are running scared. Wish me luck!

    Disclosure: The author is long MILL, CPLP, LINE, BRYFF.

    Additional disclosure: The poster is actually invested in MILL-pD not MILL however seeking alpha does not recognize the preferred symbol. This blog is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, or portfolio diversification, I can not recommend any specific equity. Readers are expected to complete their own due diligence before purchasing any equities mentioned.

    Dec 09 5:36 PM | Link | 11 Comments
  • Why Is The House Of Saud Allowing Oil Prices To Fall?

    We investors naturally tend to think in terms of money. That is well and good, but occasionally it can cloud our understanding of the motivations of others. The country of Saudi Arabia has plenty of financial reserves. Even at current oil prices it can continue it's spending for years before it has to go even $1 in debt. The House of Saud, and here I'm specifically talking about the people at the head of the family not the country of Saudi Arabia, also have all the money they need. While it's difficult to separate the families assets from the countries, the House of Saud is estimated to be worth approximately $1.4 Trillion. It's hard to put this in perspective but I will try. First lets get rid of the shorthand, $1.4 trillion is 1,400,000,000,000 dollars. $1 billion dollars is to $1.4 Trillion as 1 minute is to a day, something you barely notice. Imagine not noticing a billion dollars.... If you assume a 7% return, the House of Saud can spend $270 million per day without ever dipping into principle. Money at this point is a way to keep score and more importantly a tool for the House of Saud. Power is more likely their main motivator.

    People generally do what they think is in their own best interests. All that oil money and the power it supports will stop for the House of Saud if they are no longer the rulers of Saudia Arabia and the effective heads of the oil central bank referred to as OPEC. Both Iran and now ISIS are a threat to the House of Saud. These threats receive significant funding from oil revenue's and have nowhere near the financial reserves of Saudi Arabia. Fracking is also a threat to OPEC. One unlike any other because it is neither in OPEC nor even controlled by a large central power than can be negotiated and dealt with. This cancer of fracking (from the Saud's point of view) can spread to other regions of the world further marginalizing OPEC. Last reduction in the willingness of the US to provide military support in the Middle East is a direct threat to the House of Saud. The US has long provided military support to the region as well as both implied and direct military support specifically to Saudi Arabia (anyone remember where we first staged our military assets before invading IRAQ?). This direct military relationship with the US helps the House of Saud to stay in power. Keep in mind, the House of Saud is an absolute monarchy and the Kingdom of Saudi Arabia formed relatively recently (1932) by military conquest. This conquest, followed quickly by the fortunate discovery of oil on their newly conquered lands by Americans, led to their incredible wealth. They are not so many generations removed that they don't know this. They fully realize their continued existence is dependent on maintaining power.

    Maintaining production and allowing oil prices to fall helps the House of Saud on a number of fronts when viewed from the lens of power. It significantly reduces resources for political/military threats from Iran and ISIS. It cracks the whip on the other members of OPEC who have been cheating on production quota's, particularly those who can least afford the decline in income and have been cheating the most: Iran, Venezuela, etc. This re-establishes the cartel and Saudi leadership in it. It ultimately helps to ensure the OPEC cartel does not get broken up by outside uncontrollable influences, fracking. Reducing oil prices also garners the favor of the US government (and probably China) by supporting economic growth and reducing Venezuelan, Russian, Iranian and ISIS resources. It may be a coincidence that the US started bombing ISIS and at least halting our military pullback from the region just a few months before the House of Saud started cutting oil prices, but then again it may not. There is little doubt the House of Saud has a direct line to the US government and CIA (and vice versa).

    It is ironic that in the end I think the reduction in oil prices is most likely about the House of Saud maintaining their long term power and influence. It's just another way of using money to buy power.

    So when we investors consider how long oil prices are likely to stay at current levels, we should not just think about monetary influences. In this case, the maintenance of political power by the House of Saud is at least as big a driver.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Dec 05 3:22 PM | Link | 4 Comments
  • A Comparison Of FULL To PSEC

    I originally started following Full Circle Capital (NASDAQ:FULL) when it made a sweetheart deal with Advanced Cannabis Solutions (OTC:CANN) and wrote about it here:

    seekingalpha.com/instablog/379412-darren...

    That thesis did not work out. When CANN got de-listed by the SEC, I sold FULL for a small gain. I continued to follow the stock however and recently decided to repurchase shares. The way I see it, FULL has issues but is trading below book and is actively taking steps to solve those issues. Furthermore, it still has some longshot upsides in CANN and other investments.

    Maybe a comparison between FULL and one of the most owned BDC's, Prospect Capital PSEC, would be informative. These two BDC's both have a fundamental issue, according to this article, they have the two highest operating expenses as a % of income in the BDC universe:

    http://bit.ly/1yPJrXa

    PSECs operating expense as a % of income is 40.6%, FULL 40.3%. Both are very high, limit the dividend coverage and are a significant reason why the stocks have not done well. PSEC however is one of the largest BDC's while FULL is one of the smallest. To give you an idea of scale, PSEC seems to need 57 times the management fee of FULL in order to run and fairly compensate management. So perhaps FULL suffers somewhat from a lack of scale, but this is not a valid excuse for PSEC.

    More importantly, FULL seems to recognize it has a problem and is doing something about it. They have recently indicated they were capping fee's (1.5% in 2015, 1.75% in 2016) and would not be making dilutive share issuance's below NAV.

    http://yhoo.it/1yPIGgz

    "As previously announced, Full Circle Advisors has agreed to bear any annual operating expenses of Full Circle Capital above 1.50% of Net Asset Value in fiscal 2015 and above 1.75% of Net Asset Value in fiscal 2016 and beyond."

    "we view a primary share issuance as unattractive at current trading levels."

    Are you seeing anything from PSEC about reducing there 2% management fee and /or not issuing shares below NAV?

    FULL also clearly outlined the actions they have and are taking to cover the dividend:

    "we restructured the Blackstrap Broadcasting, LLC loan facility and the loan returned to performing status as of September 22, 2014. Given the timing of this event at the very end of the quarter, there was no material benefit to the first quarter's earnings. "

    "We are pleased with the robust origination activity that continued in the first quarter resulting in new investments of $37.9 million"

    "Our pipeline remains strong, with significant investment opportunities, including in our newer healthcare and real estate strategies."

    "...we proactively sold certain of our more liquid investment positions in favor of some higher return opportunities in our pipeline. We will consider recycling other portfolio positions..."

    "We expect that these expense initiatives combined with our current level of investment will allow Full Circle to cover the current stockholder distribution rate on a sustainable basis, an important goal of management and the Board of Directors."

    I expect FULL will, finally, cover their dividend this quarter. PSEC not so much.

    So you got to ask yourself, which would you rather own, large PSEC which seems designed primarily to enrich management and is unlikely to cover their dividend, or much smaller FULL which has taken shareholder friendly actions and probably will cover their dividend? Certainly there are other BDC choices out there one may prefer to either of these two; however, between these two, it is clear to me which is the better choice.

    Disclosure: The author is long FULL, CANN.

    Additional disclosure: This blog is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any equities mentioned or recommended.

    Tags: FULL, PSEC, CANN, dividends
    Nov 18 1:24 PM | Link | 3 Comments
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