Davy Bui

Davy Bui
Contributor since: 2006
After digesting the company's response, I've posted a new article detailing my concerns with the possible, perhaps probable conflict of interest these loan deals make possible:
I don't think this scandal brings down the company or devalues its assets but it strongly suggests that Aubrey must go.
Your own response can't even seem to agree with itself, much less connect to the situation at hand. You state, McClendon "collateralized his loans with his ownership interest" [in FWPP stake] but then go on to say "I would be shocked if the loans are non-recourse." Of course, they are not non-recourse, you said so yourself they are collateralized by his FWPP interest ... if he fails to pay it back, the lenders have recourse to his 2.5% ownership stake in the wells associated with the defaulted loans. There is almost zero chance McClendon would be personally liable ... he wouldn't create various entities like Jamestown Resources, etc to expose himself personally and the lenders would have to go after those entities, which most likely have little assets other than the wells they're borrowing against.
Neither you nor I know the terms or structures of the loan but EIG personnel have stated that the loans are 100% cash sweeps until its capital is repaid + 13% return and the firm then has 42% profit rights in perpetuity after. That is a pretty sweet deal and suggests that a) EIG is paying for all the costs associated with FWPP wells in these loans & b) the loans probably do not require McClendon to make any actual service payments out of pocket, including interest, similar to a no-interest loan where the interest is simply tacked onto the back-end of the loan.
If the wells can't support the loan, then lenders' recourse is to take these same uneconomic wells ... McClendon loses worthless wells that he didn't have to pay for in the 1st place. This is as risk-free as it gets.
A lot of this is conjecture but that's what happens when there's not full disclosure. If everything's on the up & up, then all he has to do is disclose everything fully. $1.1B, 10% of CHK's market cap, is a huge sum and a gamechanger as it pertains to the FWPP since it suggests that McClendon has only focused on enriching himself even as shareholders have suffered. Nobody minds the CEO getting paid if everybody makes money but the only one making out like a bandit is McClendon.
The rest of your response is just as nonsensical ... where do I state that the FWPP is response for CHK's share price? I do assert that management is responsible for a large share of the blame and my chart includes several companies that rely heavily on natural gas as well, all of whom have outperformed CHK by a wide margin so it is not just the price of natural gas at work here.
Frankly, your response sounds like you're related to the guy or something -- there's absolutely nothing of substance in it.
Aubrey seems to have no understanding that Chesapeake as a corporation is separate and bigger than him, even if he was co-founder. This behavior isn't surprising.
You're right in that 2.5% stake program isn't analogous to profits but as far as I understand it, McClendon can choose which wells to participate in and though I don't know full details, I'm sure his cost to participate is probably far lower than say any of the JV partners costs. So it'd be like Bill Gates saying, no thanks to Bing but I'll sure take 2.5% of the new Windows 8 OS, probably at or close to the company's cost of development. McClendon, being the clever fox he is, even found a way not to pay those costs by having affiliates beholden to him finance the stakes. Maybe this was one time too many to that well, we'll see.
If the stock plummets to $5, it won't be because McClendon took out some loans. But thanks for playing.
Actually, I do get it as I have discussed the concerns you raise in numerous articles in the past, only with much more detail and far less condescension:
Also disclosed, I do not hold CHK shares but rather CHK preferred D shares, which yield ~5% with a convertible option in case CHK ever does clean up its act. While management is definitely a problem, its assets are still attractive and provide some margin of safety.
If you haven't sold before today, this loan story isn't the best reason to sell now.
Hey folks, thanks for the comments.
First off, all references to a dividend cut means future dividend cut on the currently expected €1.30 payout (€1.50 w/ in-kind) guided by the company. By definition, past dividend cuts, including the one in late 2011, are already priced. Cramer's call, specifically, where he called the yield unsafe was on the Mar 12, 2012 edition of Mad Money. Markets are forward-looking and it is my contention that they have already priced in another dividend cut at this point.
@Hammer, the company has guided to bring its net financial debt to OIBDA ratio under 2.35x, which means bring its debt down as there's no expectation of OIBDA rising significantly or at all even. Also, your assertion re: reducing debt reinforces my point -- if the company announced a significant cut to its dividend to reduce debt, I think markets would welcome the news & the stock would bounce. If they stay the course, investors get paid to wait. So we have two "outs" there, in poker parlance. We get hurt if the company's business/cash flow deteriorate & debt service becomes a struggle or if Europe and/or Brazil melts down.
The broader European crisis is a wild card and outcomes are uncertain but as a value investor, I focus on cheap companies and not big-picture questions I can't answer. How many investors missed out on the 2009 rally while waiting for the US to descend into another depression?
Hey guys, thanks for the comments.
RE: F ... this article is a stock screen and thus meant to provide only a survey of the stocks which fit the criteria in order to find candidates for more in-depth research. That's why it's in the "Quick Picks & Lists" category. As for Ford's debt, I only mentioned it in the context of its ROE of 282%, which is staggering if you could earn 282% return on your money but the reason it is so high is because debt can skew ROE figures.
RE: SVNT ... the screen criteria was "at least 80%", which means 80% or more. Hope that clears up any confusion there.
Hey Nathan, that's a good question ... I do have some cash covered puts open on XRX & TEF. generally, I only like to sell naked puts on stocks at levels where I wouldn't mind owning them. If markets are too dear, then it's the same problem as not having enough cheap stocks to buy (or write naked puts on).
Hey folks, thanks for the comments. This article was a summary of a stock screen, as indicated by the title. It is not an-indepth analysis of FTR hence only a brief overview of each stock. Readers are advised, as I do, to use any stock screen as only a starting point for further research.
Thanks for the comments ... I didn't mention the dividend because I'm basically long via naked puts so I won't get paid the divvy while this position is open.
$8 entry point isn't bad, IMO & actually, the 2% dividend would cover your loss since stock closed at $7.81.
I don't mind if TOT drops a bit from here. As a value investor, I like to buy down into my positions so it'll allow me to build my position at a lower cost basis.
I didn't really discuss their specific operations & strategies much. In general, I don't expect them to be as efficient as XOM ... just hoping they don't keep buying solar companies.
Hey folks, thanks for the comments.
@DelibTrader: like your naked put idea ... 14-20% annualized returns might not be a bad trade-off for less risk exposure. I use naked puts often (see http://bit.ly/xhtlFh for my naked put on Minefineders (MFN). I wrote naked puts on Nat Oilwell Varco (NOV) back in late 2008 at some ridiculously low price and really wish I had gone long instead.
@Chemist: I'm just trying to evaluate mgmt with any/all data I have. Financial + downtime issues damage mgmt credibility & my experience is usually these signs are not a blip but indicative of the quality of mgmt. It's dangerous for investors to hope mgmt is better than what they're showing.
The market in the short term is random & prices can go anywhere. But if RIG doesn't get to $35, I'm OK with missing the boat -- that's how I sleep at night. I've missed plenty of boats (in fact, I missed the $50 RIG boat in Oct and saved myself 25 pp of loss vs. the market).
I don't mind folks disagreeing w/ me but don't sling unwarranted accusations of short pumping. I have been a certified SeekingAlpha contributor since 2007. I also post my ENTIRE portfolio on a monthly basis so my 5-year track record is there for everyone to see:
Good luck all.
Hey guys thanks for the comments --
I do like some of the other former Canadian trusts better than PWE but none seem to be selling a marked discount to asset value. There were a few that only trade in Canada that looked really attractive a few years ago and have done better than PWE. If you have any US-listed candidates, I'd be happy to take a peek.
PWE's debt is a little higher than I'd like to see but not outrageous. With a company so dependent on energy market prices, I just like a little more cushion. I don't worry about XOM or DVN getting killed if we revisit late 2009/early 2009 turbulence but PWE is walking a tighter line.
I followed up with more in-depth analysis on Staples (SPLS) here:
Thanks for the comments! I've managed to make some $$ in MFN but must admit it did sting to get called out at $13 when the thing ran up to ~$19. Now it's around $11 so pretty whipsaw ride. When it comes to gold stocks, options are your friend. If nothing else, they enforce selling discipline.
I assure you my Chesapeake Energy preferred D shares are alive and well -- it is only Seeking Alpha's ticker page for the shares that is defunct.
My impression is that DeVry is not as exposed to the shady practices that surrounds some of the other operators so even as the industry deals with changing regulations, DV may be less affected than others who were more reliant on "flexible" practices to generate high returns. But the whole industry is in some flux so it's difficult to say that STRA will be able to maintain its historical growth rates and increase its dividend.
Thanks for the comments folks. I try not to get too emotional about stocks but sounds like people have some strong opinions about the stock.
I do agree that the stock could be dead weight for a while, especially if the economy turns down. But GE might be a safe place to hide for all the reasons listed in the article & investors will be paid ~4% (& rising) to wait. I'm planning on it being a long-term play.
I don't have a precise number but it's at ~30% now and it's been trending down so I'd guess the mid-30% range for the year. I've been holding a lot of cash for years not because I'm worried the market is gonna drop but rather stocks have looked too expensive, though for practical purposes, they can look like the same thing since I would need the market to drop for stocks to get less expensive. I'd like to be more fully invested and soon as prices cooperate, I'll work on it.
Once again too late to get in ... I missed ANV too. Perhaps Klarman's gold picks should be a buy first ask questions later status.
Thanks, I'm a big fan of his 1st book, Mosaic. The 2nd, more widespread one is pretty good too.
Any investment in BRK.B should be considered a long term investment, 1-5 year minimum. Eventually, there will be a succession to Buffett and possibly dividends at that point. The company has been buying back shares, which is uncommon, so dividends may be in the cards in the post-Buffett era.
Yes, looks like he added 3.5% to MBI stake.
Hey folks, thanks for the comments. As with any investment, price is the most important factor -- I bought my preferred Ds around $54 so am doing OK on this investment (since I sold CHK at a loss to buy D shares). But with the assets it has, CHK should be trading a bit higher. But a 4% yield is hard to find these days and is relatively safe in the long run so I'm inclined to wait and see if management finally gets the message. Shareholders are willing to go along if everybody is making money but if McClendon's the only one making out, the pressure will continue to mount.
Not sure what happened but quick correction to the article: I am NOT long CHK, I am long CHK preferred D shares.
@BSexposer ... I've already been long 5 years, is that short term in your book? If management projects 250k bbl liquids in 2015, then I have confidence they will hit that mark. What I (and the broader market) don't have confidence in is what the balance sheet and shareholder equity/returns will look like in that time. What would happen if oil prices were to crash like gas prices? With the turmoil in Europe and savvy watchers waiting for a comedown in China, such a scenario is not impossible -- how would CHK fare then? I'm a believer in peak oil but that doesn't mean we get there in a straight line and CHK leave themselves little wiggle room.
It's been over 3 years since CHK introduced this buy-and-partially flip strategy, realizing all this "value" for shareholders ... all they've got to do to shut folks like me up is show us the money, like the title says. CHK reminds me of that old saying about US home buyers in a housing bubble: land rich, cash poor. Yet no matter how many JV's they close (like 7 now?), still cash poor.
@g8trgr8t -- I think CHK's management has made a buy-out option more difficult w/ their complicated corporate structure -- if CVX or somebody wanted more exposure to on-land US resource, wouldn't it be easier to look at Devon or EOG? Even selling assets piecemeal would be less ideal. A side effect of having JV's everywhere is if they want to sell that asset, the most likely buyer would be the JV partner -- bidding for 75% of an asset isn't as attractive as buying the whole thing so it might be harder to get the best price as the JV partner is the most logical buyer & everybody knows it.
In my view, CHK's financing strategy has cut off some avenues for value realization ... is management sacrificing long-term profits in the short-term? Perhaps so but I'm still willing to wait and see what happens. I agree rjj1960 -- these assets in somebody else's hands would be valued better by the market, which is something of an indictment of CHK mgmt.
Thanks for the comments. EPB and MAIN were 2 of the stocks I didn't really evaluate as FCF may not be the best basis on which to judge those stocks. CTEL does look interesting and Hong Kong feels safer than mainland stocks, though that may be an illusion.
Argentina news isn't pleasant but not a huge driver of TEL earnings or growth. If Brazil had issues, then TEL would be in serious trouble. Either way, expecting lots of volatility in TEL due to Europe mess but we should get out the other end alright.
Quick update for folks ... I closed out my TEF and AEO naked puts yesterday (10/31) and good timing too in the wake of the ongoing drama surrounding Greece. I think TEF may be especially volatile in the coming months as the stock responds to Europe headline news so it made sense to pocket the gain (orig cost $1.70, closed at $0.20) and if it heads back down to the $18 level, we'll run it again.
At-the-money options are actually the most expensive as they have significant time premium embedded in their price and the farther out you go, the more time premium. DITM have a high delta in that they are so far in the money that most of their value is intrinsic based on the price of the stock -- after all what are the odds that AAPL is going to fall to $200 by Jan 2013?
There are strategies to take advantage of option premiums like spreads and ratio hedging but these are more trading strategies, not fundamental bets on the stock.
Bid/ask spreads are wider than at-the-money calls but not horrible like some lower volume stocks. Besides you can always exercise the options early and sell the stock.
Hi folks, thanks for the comments.
I specifically avoided short-term options since the focus was going long Apple vs. trading AAPL stock moves. Original title of my article was "The Best Way To Go Long Apple" and editorial added the "Options" part. In my view, deep ITM LEAP options are the best way to go long AAPL if you're so inclined. Trading 10 point moves is a different animal.
And yes, rolling over the deep ITM LEAP is another option, thanks for mentioning that. You'll have to pay another premium but in my view, that's cheap compared to the leverage you maintain. Also, the company would have to re-evaluated to make sure your long thesis held up.
Thanks for the MDT insight. I did come across the spinal device issue in my cursory research but my impression is that industry analysts don't expect anything too adverse to come out of it, which you also call "unlikely." So my impression is the market is not pricing that issue too deeply in discounting shares but then again, who knows how Mr. Market goes about pricing things.
2nd half of this screen is now available: