Seeking Alpha

Michael Cutler

View as an RSS Feed
View Michael Cutler's Comments BY TICKER:
Latest  |  Highest rated
  • Whiting USA Trust I - 35%-Plus Arbitrage Profit Opportunity [View article]
    I thought the same thing, and you may be correct. It really depends on what the demand is for the borrow. If it is high, meaning many people think they can profit from this trade and try to short at any cost, then the borrow rate will go up.

    Shares are already hard or impossible to find to borrow. So, anyone trying to profit from this 'arbitrage' will quickly drive up the borrow rate in order to enter any significant position.

    What I'm trying to say is the opportunity exists, but the liquidity, and dollar amount that can trade it, don't exist in sizable quantities.
    Aug 18 02:13 PM | Likes Like |Link to Comment
  • Whiting USA Trust I - 35%-Plus Arbitrage Profit Opportunity [View article]
    Good point.

    The borrow costs can also change on you while holding short and you are immediately subject to those borrow costs even if you don't change your position or get bought-in due to a recall of shares. Borrow costs have gone from <30% to >90% in a matter of days in the past. If they went to 90% again and remained there, more than the 37% of the gain would be eaten up in 7 months, for a net loss. That would be consistent with recent history in WHX. Unfortunately it becomes a timing issue, no guarantee of getting short now and holding to the end for a profit.
    Aug 18 12:04 PM | Likes Like |Link to Comment
  • Whiting USA Trust II Quarterly Distribution Up On Decreased Expenses, Good Oil Prices [View article]
    No, I haven't change my view on WHZ. I think Gary's analysis of why this past distribution was higher is correct - higher oil/gas prices in the prior period and one-time lower costs. I also think his analysis that the next distribution will reduce significantly to more normal levels and to the past trend is correct, due to returning to normal costs, lower commodity prices in this period and continuing downward trend in production.

    I look forward to seeing Gary's forward-price estimate, because he seems to understand the trust quite well, and especially the physical aspects better than I do. I would love to see another analysis of the remaining production based on Whiting's statements, or based on an oil engineer's view of production.

    The idea that Whiting may continue to produce faster than predicted (or, more correctly, keep production rate declines lower than forecasts) is an interesting one, because there is real value added to the trust in that scenario due to the flexible nature of the trust (minimum quantity or minimum end date if more is produced faster, whichever is better for trust holders). I am skeptical that will happen significantly going forward, but as I mentioned in my article, Whiting has done that so far getting ahead of original production schedules by about 10%, which does benefit trust holders.

    To note - oil and gas prices have declined, following the forecasts I used, in an uncanny way. I don't think that's likely to continue (they are volatile), but I still believe the long-term trend is a bit lower than current levels, as industry forecasts continue to agree.
    Aug 17 02:30 AM | Likes Like |Link to Comment
  • Bellatrix Exploration Is A Strong Buy At Current Price [View article]
    Jack - I agree with your position. Management's strength is adding to reserves and production profitably. They need cash to grow the business, so it makes sense to do an offering vs. more debt. They messed up the offering, or got less interest than expected, and have been punished short-term, as they should for misreading the market and making a last minute change. But if they use the cash as they have in the past to continue to execute their growth profitably, then they will recover and prosper long-term.
    Aug 13 10:50 AM | 3 Likes Like |Link to Comment
  • Whiting USA Trust II Quarterly Distribution Up On Decreased Expenses, Good Oil Prices [View article]
    Nice article. I think your reasoning for this distribution and prediction for the next one are both correct.
    Aug 11 10:42 AM | Likes Like |Link to Comment
  • Eagle Warns Shareholders Of Possible Lower Share Price From Dilution And Substantial Doubt In Its Ability To Continue As A Going Concern [View article]
    We finally got our pre-planned bankruptcy, with prices near $1. It took far longer than I would have ever imagined. I haven't looked into the value of the rights, but on the surface it looks like current investors are getting very little of the future pie.
    Aug 10 12:13 AM | Likes Like |Link to Comment
  • Investors Cautioned To Read Biofuel's SEC Filings To Value Its JBGL Transaction; $6.27 Post Transaction, $9.05 Now [View article]
    SSM - Fair points, all, and worth keeping a balanced view.

    Agreed - it's not possible to be precise on future predictions, only on past results and known current facts. On the valuation, as pointed out in the article, I took Duff & Phelps' JBGL analysis (from the proxy statement) at face value plus the cash and NOLs in current BIOF that can be leveraged in the new company, divided by the number of post transaction shares, and came up with $6.27/share. It was not intended to be precise, but rather the simplest valuation possible given available information and without changing the assumptions in that information. Duff & Phelps provides a range of values and $6.27 was simply in the middle of those ranges. I fully agree that a 5-10% (maybe even up to 15%) range on either side is within reasonable bounds, and anything under 5% is probably too precise.

    Duff & Phelps was paid hundreds of thousands of dollars to do the work with direct access to JBGL management and financials. While we all have our own views, expertise and opinions, I made the assumption that generally we won't do better than that analysis, assuming it was done impartially. That view is difficult to refute without making different assumptions than Duff & Phelps used, or assuming they were not impartial. The purpose of the article was to present that case in a simple way.

    I think I did that right for the base valuation case using available information. Where I messed up was in the rights offering and the strong short case - it's not strong at these levels.

    Separately, I also believed and still believe that others have confused some of the mechanics of the transaction and what I view as negative changes to the company post transaction. I didn't write about it because it is easily argued (as you do well), complex and confuses the issue whereas I wanted to provide a simple inarguable case in the article (which I simplified too much on the rights). New Capital's referenced article ( contains some of those post transaction negative views I share so I won't repeat them here.

    If we assume a 5% range on either side of Duff & Phelps mid-range valuation, then BIOF has been trading at the upper range of that level lately. Pre-transaction I am generally negative at $9.50 and higher, and positive at $8.60 and lower (this is a 5% range up/down from $9.05, which would be $6.27 post RO). Post transaction I am biased lower per some of New Capital's article reasoning. It would be best to discuss those reasons in that article's forum instead of here.

    One reason not mentioned in that article is that the cost to borrow has been around 20-30%, probably due to the relatively small float, small market cap and demand to borrow shares. This has a tendency to mute short positions, especially longer-term short positions, which reduces long-term downside sentiment's ability to act now.
    Aug 8 01:10 PM | Likes Like |Link to Comment
  • Investors Cautioned To Read Biofuel's SEC Filings To Value Its JBGL Transaction; $6.27 Post Transaction, $9.05 Now [View article]
    I'm not strongly bearish on the company. I also haven't bought into the idea that it's a $10-$20 stock a year from now (assuming $6 post rights offering). I think JBGL is a strong business with real prospects. James Brickman has done and can continue to do well at the helm.

    Capital raises can certainly continue with growth, but at the cost of interest on debt, dilution to current shareholders and/or increased leverage (or risk), now that JBGL won't be privately held and privately funded. I've seen and run a few different scenarios on how that could play out. In some of the scenarios I've seen from others they used past JBGL growth and financials to project future growth and financials, without, in my opinion, correctly considering the cost and risk of that capital and growth in the new structure, because it wasn't included in the old structure when capital additions were simply increased equity from the existing majority owners with no cost of additional capital subtracted out.

    Having seen a number of good, profitable companies go from private to public I admit I am also a bit pessimistic because things get more complex as a public company. It can be more difficult to continue similar results when adding a third party, outside shareholders, to the mix of management's priorities. Of course that can also drive growth and stronger margins if done right. One positive is that the current owners will still be 50% owners post transaction, so priorities should be aligned.
    Aug 8 01:01 AM | Likes Like |Link to Comment
  • Investors Cautioned To Read Biofuel's SEC Filings To Value Its JBGL Transaction; $6.27 Post Transaction, $9.05 Now [View article]
    Definitely a risky move if you don't understand that you could end up short 2.2X more shares when all is said and done.

    Unless you believe it's worth less than $6.25 post transaction, in which case you're happy to sell shares at current prices (and $5 rights) at a combined premium to buy back lower later. Given the past and projected artificially high growth rates for JBGL that are likely to slow as capital infusions also stop (or with interest costs added), that is an entirely plausible scenario.
    Aug 7 09:20 PM | Likes Like |Link to Comment
  • Investors Cautioned To Read Biofuel's SEC Filings To Value Its JBGL Transaction; $6.27 Post Transaction, $9.05 Now [View article]

    Thank you. I messed up on the rights offering. I know better than that, yet in reviewing the transaction I missed that simple point. I have submitted changes to the editors, admitted my error, and I hope the changes are updated quickly, because frankly it's embarrassing.

    Aug 5 01:00 PM | Likes Like |Link to Comment
  • BioFuel Energy - Day Traders Pushed The Price Above Reasonable Limits [View article]
    Another one that confirms the points (market confusion) you made in your article:

    While day trading does appear to be a factor in the price swings and recent run up (it falls going into the close - day traders don't want to hold overnight), I think long-term investors also believe the story and are buying prior to the transaction at any price. Per your article they appear to be thinking:

    1) I can't go wrong if I follow Einhorn, Greenlight, et al. What they don't realize is that they are FUNDING those guys' investments, not profiting off them.
    2) These hedge fund managers are increasing their position in BIOF, so it must be a sure bet. Without recognizing prior equity interests pre-transaction.
    3) Financials pre-transaction look great, so they will look great post-transaction (without factoring in the extra 10% interest on $150 million = $15 million off the bottom line post transaction, which reduces the income 40% or so).
    4) Investors don't realize how aggressive future growth is factored into the projections, or they believe it because of past growth, which was a result of outside capital injections, not organic or some other growth tied to internal returns.

    It's a brilliant move by Greenlight, Einhorn and the others. Take a failed company with some assets left ($10m cash and losses you can carry forward to offset future income), combine it with a decent company you don't want to finance anymore (JBGL) and want to cash out of, pump money into JBGL the year before you sell to make it's growth look strong and to support over-optimistic future growth projections, and make a high interest loan to a business you know intimately and with a low risk of default. Investors jump on the bandwagon and you can sell out at a higher premium than you would have gotten selling the two companies separately in the open market, and make a guaranteed 10% on a new high quality loan to boot.

    We still live in a world of kings and peasants...
    Jul 27 08:47 PM | 2 Likes Like |Link to Comment
  • Marchex: Another Bubble Basket Stock [View article]
    Nice article. I reviewed first time after reading and it appears spot on. Your range fo valuations don't bode well for current holders. Long-term it appears a strong short.

    Why do you think it's up 5% today? Normal volatility, or something else? Any other risks you see that could send it much higher short-term?
    Jul 14 11:29 AM | Likes Like |Link to Comment
  • Linn Energy: Value Gap Suggests Risk Of Underperformance [View article]
    Nice article. Kind of a bottom-feeder in a competitive market.
    Jul 11 10:00 AM | 5 Likes Like |Link to Comment
  • Vulture Investors Won't Be Propping Up Genco's Price For Much Longer [View article]
    Wow. Thanks. That was short and quick for the EC. Wonder what their position is now in the stock...
    Jul 2 07:56 PM | Likes Like |Link to Comment
  • Are Stock ETF Investors Placing Too Much Faith In The Fed? [View article]
    Thanks. Understood and agreed. I like the barbell approach.
    Jun 27 06:28 PM | Likes Like |Link to Comment