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  • Why Whitney Tilson Is Wrong About BP [View article]
    Thank you DBSX. I couldn't have said it better myself. One reason for the original article is that I have always perceived Whitney Tilson as a value investor and not a trader.
    Aug 11 04:41 AM | 2 Likes Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    Exactly: "There are no bad risks only bad rates." T2 was early enough to pay a rich valuation -- 14x trailing FCF. As I said in a much earlier comment, if Whitney had bought into this stock at a different market cap, say something more like $60B, my judgment of the prudence of his actions and the risk being taking with his investors' money would be more favorable.
    Aug 10 03:40 PM | 3 Likes Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    So you *are* selling? I congratulate you on a great trade, but to me that length of holding makes it quite clear that, that is what this was. (You are not profiting at this point because we know the real long-term liabilities yet. You are profiting because the headlines have changed dramatically.)

    Your published analysis, while quite thoughtful, does not actually speak to whether the things you say you knew about this stock (actual environmental damage, when the well would be capped) were knowable by anyone. Nor does it address the valuation issues I raised.

    Thank you again so much for commenting and sharing your insights with all of us.
    Aug 10 03:32 PM | 3 Likes Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]

    I am very excited to have you join the discussion here, and I never expected you would when I originally wrote this. It is a privilege to learn that a well-known investor whose thoughts I follow occasionally follows mine.

    Your post gives insights into your real reasons for purchasing BP stock as well the way you actually conceptualize risk for you and your investors in practice at T2 Partners, and I truly appreciate your writing it.

    While I am thrilled to hear about the money you have made on this position, the outcome of your investment itself does not establish whether you bought a winning lottery ticket with your investor's capital or made a sound value investment.

    It is again the oldest cliche in value investing but as Buffett always paraphrases Graham "Uou are neither right nor wrong because the crowd agrees with you. You are right ultimately because your facts and judgment are right."

    That is, because an objective record would show the odds were heavily skewed in your favor when you made an initial capital allocation decision.

    Plenty of people made billions in the 80s making risky bets on takeovers; in the 90s buying dot com companies with no earnings; and in this millenium buying esoteric real estate credit instruments.

    You and I both know that these people's success does not establish that they were shrewd value investors. It is just as plausible that they were lucky.

    Similarly, Buffett no doubt enjoys deal flow that makes the world largest investment banks jealous but he passes on vast quantities of attractive opportunities -- famously -- by considering varieties of risk and outcome scenarios most of us aren't even aware of, vigilantly sticking what he can gain a real advantage on through superior information and avoiding what is unknowable, and insisting on a margin of safety in every element of the deal from the people he works with to the language of the contracts he signs.

    If not free cash flow by what metric, other than the net income figure you cited in Barron's, was BP objectively cheap when you bough tit?
    Was it selling below tangible book value?

    In terms of price of purchase, price/free cash flow is the best way to value the price you pay for an operating (non-financial) business of this nature in my opinion, especially if it is not an asset play, and I think most people would agree that many of Buffett's (and Graham's) writings speak to this idea in numerous ways. Many famous value investors, as you know better than I, state that explicitly.

    The most conservative way to calculate free cash flow is to deduct capex from cash flow from operations.

    Yes, as some have tried to say in this case, you can try to use DD&A as a proxy for "maintainence capex" but that assumes that a commodity company doesn't have to keep developing reserves to stay competitive, which seems dubious to me.

    Again, non-DD&A Capex, which John Mihaeljevic mentioned, is not "growth cap ex" in that sense given the fixed costs generally involved in this or any other similar commodity extraction and sales business.

    The original point in the article -- that you and your investors paid 14x free cash flow for this company (that is accepted only a 7.1% yield for BP given its risks) -- seems as true now as when I originally wrote the article.

    One can only get around this fairly basic point by introducing a variety of optimistic assumptions, which previous commenters have.

    The first three points you say form the core of your publicly disseminated analyses are:

    "1) The well would be capped sooner than expected;
    2) The environmental damage would be less than expected;
    3) The clean-up costs, fines and damages would be less than expected"

    Whitney, I know you are an extremely smart investor and individual, but, honestly, how could any mere mortal really knows these things?
    That is the key with a "circle of competence" -- it is not an excuse for not doing your homework on a new subject but it is a painful reminder to only play in those spaces where you actually have a knowable advantage.

    You make comparisons in your public writings to the Ixtoc and Valdez oilspills knowing full well that these disasters did not affect areas nearly as populated or economically dense as the Gulf of Mexico. Nor was there anywhere near the level of new regulatory regime taking hold in America around that time.

    Do you really still plan to own this stock over the next 2 years? I will be very surprised if you do. If you are holding it for a few months before the real-world liabilities are known, that says something about the extent to which this was actually a "value play" for you, right?

    Your publicly stated claims estimates on CNBC and elsewhere do actually sound quite reasonable as ball park estimates to me but ballpark is exactly the word. As you yourself said in various interviews, you expected there was a 10% chance you were wrong and there could be orders of magnitude larger claims that would severely impact the company / kill the stock.

    I personally could never justify taking that kind of risk my or my family's or my friend's money. The most important lawsuits have still not been filed. With an open-ended, multi-faceted, long-tail liability of this nature we do not know what it ultimately would be -- and we still don't. As investors, we may get lucky, the odds may stick to the averages and stay within the bell curve, but in buying this stock one is not making an investment based on a truly definable research or relationship advantage.

    So, it seems early to talk about whether you are right or wrong in your BUSINESS predictions for BP when it has only been a few months. That is not really enough time to tell what this liability will shape up to be. Selling it at a profit now makes one an effective trader but again Graham: "In the short run the market is a voting machine; in the long run it is a weighing machine." In financial markets, profit can also be the result of fortunate consensus.

    Your 4th point is great:

    "4) BP's cash flows, borrowing capacity and assets would be FAR in excess of what was needed to cover anything but the very worst case scenario."

    I fully agree that the company would not go under as a going concern from this event. However, for the reasons previously described (hiked hedging costs, hiked interest rates, distressed asset sales, hidden leverage, government escrow demands, among others), the cost of quickly raising that cash could certainly be higher than immediately meets the eye.

    The more important risk your investment takes regarding "bankruptcy" is that in a truly cash-strapped scenario (e.g. a dark horse lawsuit ruling that made the company immediately liable for a large, escrowed amount) legal restructuring would impair or wipe out the equity holder even as the company continued to do well.

    You will note that in Buffett's "riskiest" distress investments (Goldman, USG, GE) he made very sure to only buy debt (which has legal protections and a guranteed return) and sign contracts with hundreds of provisions and covenants protecting him from esoteric corporation restructuring or potentially dilutive events.

    As common stock investors in public markets, we obviously do not have that kind of leverage or opportunity for the most part, but it should make us all the more wary of the risks we take on ourselves in these sorts of situations.

    Buffett is obviously trying to deploy far more capital than T2 or practically any HF on earth, and yet we would all be stupefied if he ever felt it inevitable to buy the common equity in a situation with this many unresearchable, unknowable unknowns.

    Congratulations on your wild success with this investment! Thank you very, very much for taking the time to post and share your views. I have enjoyed the spirited discussion from these comments so far and learned a great deal.

    Aug 9 08:23 PM | 3 Likes Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    The SPE PDF you link to does not define the term "net resources" either. I'm sure it could include "unrecoverable" barrels but we don't know either way. Yet again, your and my lack of certainty and information about what is really going on in this situation prevail -- for a stock that you already decided to own.
    Aug 4 09:59 PM | Likes Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    The $4.45 per barrel comes from the "net resources" figures disclosed in the press release.
    Aug 4 09:55 PM | Likes Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    Thanks Andruo, I think asking "what if?" (call it stress testing or scenario forecasting if you'd like) a priori is actually a pretty important mental framework for investing. Short of assuming the end of the world, you should always ask how, in really bad situations, different companies do badly and less badly and some seem to do great almost no matter what. Understanding such asymmetry to me is actually the key mental exercise for thinking about what concepts like "risk-reward" or "economic moat" really mean. Much of the commentary I get on this article, while not at all uninformed or factually inaccurate, doesn't view investing from this framework or really conceptualize of risk in this way.

    People come to me all the time with various ideas and, when you point out a risk, they say "but it will make money!" There are so many companies that are depressed now that "might" make money if "things go well again." The name of the game is getting paid the most for the risks you take on. When I wrote this article, BP was one of countless examples of things I've seen hyped on CNBC that don't really seem to fit that profile. Buffett devotee Tilson's Barron's article was a highly ironic sort of coup de gras.

    Many big name fund managers also act as if when they buy these risky stocks, heads they make a ton of money, and tails other stocks in the portfolio / performance over time / their reputation and existing clients will tend to bail them out. As certain infamous stories show, do that enough times or misestimate a systemic risk (2008), and eventually truth catches up with us all. But its so much easier to talk tough about risky investments when its not your own money or you are pumping your grime out to retail investors.
    Aug 4 09:51 PM | 2 Likes Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    Sorry for posting my reply to the second comment above the second comment.

    As for NAV, the fallacy in NAV valuation should be self-evident from the rest of this discussion: It assumes you really have insights into what these fields are worth beyond stated balance-sheet values and that requires better information on transactions like Apache than either of us appear to have. If they are getting fire sale like prices, so much for your NAV.

    Note, I've had some very intelligent/informed people recently email me actual property/transactions comparisons in the area and other data I have not before seen (the sort Charlie and I weren't able to find in this debate so kept going back and forth on the same points). I haven't looked at these yet but I am told they mitigate some of my concerns that Apache property was a deep firesale but still imply a bit of a haircut. I may update this forum or write a new article if something is substantially interesting that isn't already published elsewhere.
    Aug 4 09:37 PM | 1 Like Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    Charlie, I don't know if the CS report is obsolete just because its 2 months old. I still think its interesting but its your prerogative if you differ. The broader point is you cant really precisely quantify the open-ended liabilities even on order of magnitude, certain couldn't when Tilson jumped in. Our discussion to date makes that apparent.

    However you spin it, the Anadarko press release doesn't include the optionality of the probable reserves.

    I too am a bigger fan of absolute valuation over relative valuation methods. However, when looking at a relatively opaque market like this where cash flow is very dependent on future execution and actual costs of extraction etc etc, you need the relative comparables as well. Especially as an outsider. If you want to make your glamorous present value/DCF forecast for an oil property (or a real estate property using a cap rate) be my guest. It would be generally indicative of the need for false precisions the rest of your comments on my article to date have indicated.

    "BP hit a disaster, and it is down 40% from 2 years ago. Ensco had no such disaster -- and it too is down 40%. " (Say no more!)

    I'm not pushing ENSCO by the way. I don't own it long or short. I'm just asking a simple question of why its a worse risk-reward. Other than noting that they pay lower taxes (which most people would think of as a positive) and that they are a different part of the oil supply chain you don't really provide an answer.

    My goal is not to be your financial advisor nor was the purpose of this article to provide advice even on BP per se. Indeed, as much I find these discussions stimulating, I keep coming back to the original point. Whitney made a risky call with BP at the price he paid not a value investment. All the false precision you keep trying to interject into this discussion on things ranging from the Apache deal to the ultimate scope of the liabilities to the potential interest rate risk down the line confirms my view of this. If the companies earnings are back to normal and no new liabilities arise in the next couple of years, you will be right, but, in my view based on the information that was out there when I wrote this article, if you paid Whitney's price, you will also be quite lucky.
    Aug 4 09:31 PM | Likes Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    For anyone interested in good sell side research and still following our discussion here, Credit Suisse put out some wonderfully detailed estimates of potential BP spill liability by category around the time I wrote this and has continued to revise. Mostly, it strikes me as having all the perils of "false precision" but its still great food for thought.
    Aug 2 07:42 PM | Likes Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    Right, the Apache Anadarko press release doesn't include a "resources" (probable reserves) number. So, if it wasn't in the deal, then this means that you can't just compare the $/B.O.E of Anadarko to BP for Apache and say it was cheaper because of the obvious optionality in the additional millions and millions of barrels BP just divested to Apache in that transaction. They aren't worth as much as a proven reserve but they certainly aren't worth 0. So $4.45/BOE to 19.44/BOE seems like quite a wide range to me -- enough to highlight that based on that information we cannot be sure if they got a great deal or not.

    If you think about, all the sell side reports you have quoted do is break out what was already in the press release and add some arithmetic. It doesn't solve the underlying problem of finding goods comparables for the valuation. As to sell-side's integrity, I'm not saying they are all a bunch of hucksters, of course not. I worked with ML's A&D team in 2007. I'm just saying that their endorsement alone hardly means much to me. Yes, facts are great from any source if they are true, as are analyses you can verify yourself. Initially you were quoting the UBS and Citi report in such a way as to imply their buy recommendations were reliable evidence in this argument. We have established that they are mostly just repeating statemetns either BP has itself made to the press or adding arithmetic onto what was already in the Apache press release.

    Exploration expenses and exploration capex may be discretionary in the sense of keeping the cash flows from existing proven reserves but they are not discretionary in these of staying competitive and/or preserving earnings levels.

    Your point about BP not being levered to the hilt is obviously correct but it misses the reason we care about a potential interest expense hike. It's what Charlie Munger terms the lollapolooza effect and its a real even (always apparently) small risk in a situation like this. They have hedges that are becoming costlier, they had trouble raising new bond money, they have to roll over existing debt anyway, credit markets were far more aggressive about spitting out their stuff than the stock holders (the ratings downgrade obviously no small factor in this), and there is a big open ended liability.

    To the underlying point about picking the best opportunities you can find, in the case of energy, why not ENSCO? How would that possibly be a worse risk/reward than the discussion we are having here?

    You have clearly invested a lot in being right about this emotionally. And you may well be. But you've taken some real risks and at the higher price WT paid he certainly did. That's all I keep saying and every one of these mini-threads has tended to confirm not disprove my initial view. I think frequently the hardest thing in investing is not knowing what you don't know but knowing what you cannot know or don't know you don't know.
    Aug 2 07:37 PM | Likes Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    Just because the petrochemical compound itself is no longer visible doesn't mean the impacts of it being in the water for days prior have all magically disappeared. Science -- and more specifically potential liabilities from a multi-faceted environmental disruption -- is yet another place where humility is nice in a discussion like this. Your Graham quote is right on. Equally appropriate, perhaps, is his frequent writing on the difference between speculation and investment. (He dedicated a whole chapter in II and the second edition of SA...they are definitely a few pages worth reading several times for a discussion of this nature.)
    Aug 2 07:20 AM | 2 Likes Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    Exactly. The point is we still don't know. Trying to extrapolate ultimate long-term liability outcomes for something this big based on week to week spill headlines is a fool's errand. Or, at least, a very talented day trader's.
    Aug 1 07:44 PM | 1 Like Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    Fraze, to your incredulous view of my dividends comment, all I can say is I have found it surprising how often publicly traded companies are in fact financed-dividend ponzi schemes.

    (Allied Capital in David Einhorn's Fooling Some of the People is of course one famous example. Lots of REITs and MLPs that are pushed by brokers on retail investors play similar games.)

    I am not saying that BP is purely "financing" its dividends (which would make it an abject ponzi scheme; obviously it is not). I simply noted that it is somewhat aggressive to pay dividends that exceed the free cash you actually earned in any given year.
    Aug 1 07:38 PM | Likes Like |Link to Comment
  • Why Whitney Tilson Is Wrong About BP [View article]
    Charlie -- I meant what I said, at $14.28 per barrel of oil equivalent of net resources, Anadarko got much more than BP. The "Per barrel" price of 19.44 you and other cite ignores the oil equivalents (the gas) which were included in the deal. If you use the the barrels of oil equivalent of net resources total number they give (148M + 1368M + 55M = 1571M), $7B/1571M = a mere $4.45 per barrel of oil equivalent of net resources.

    Of course, this isn't the ideal way, you should break out proven reserves, probable oil reserves, and gas - and price each separately - rather than just using the "equivalents of net resources" number given. But that's what is in the press release and again, even as a rough proxy, you can see the big discrepancy here. The Citi numbers you cite basically just restate $/barrels of proven oil reserves figures. All the variances you cite sound reasonable. Again, however, you fail to actually provide a specific comp to any part of what was sold in Apache that would give confidence as to whether or not BP is getting a sweet deal or a firesale price. (In your analogy, you and Citi aren't giving me the price of any neighboring real estate in Kentucky.)

    I'm glad you have so much faith in Citigroup sell-side research after Spitzer / global settlement / the lawsuits of the 00's. I'm sure my stock broker wishes I had the same.

    I also think interest expense is pretty important for stockpicking in the real world but if those "in the know" in oil and gas like to ignore it, I am content with my ignorance.

    Your interpretation of the BW article is just that. You may be correct, but the article also makes it pretty clear that they are swapping out of predictable cash flow assets into "wildcatting" higher risk / higher reward oil exploration strategies. Self-evidently that increases the potential volatility of earnings and risk going forward; it does not reduce it. So you have earnings that are becoming less predictable right as new we are creeping into the risk period where dark horse liabilities may creep up (the next 16 or so quarters).

    As I said, if I had to play in this space, I'd rather make my life as an investor easier not harder and look at something like ENSCO (or perhaps Noble). But you certainly have the courage of your convictions, and, as I've said, I wish you the best. If you and other BP bulls know how to win consistently at a casino, it is nothing to belittle. You simply possess a skillset that I and more conservative readers do not.
    Jul 30 07:50 PM | 1 Like Like |Link to Comment