Rougemont's  Instablog

Oil and gas stocks have declined with the markets in the last several weeks.  What makes the names below of interest is that these companies have reported recent insider buying.  The fact that insiders are buying these names could be a good sign that these stocks are now undervalued and possibly close to a bottom. 

 

BMB Munai (symbol: KAZ) is a small cap oil company which appears to be extremely undervalued.   I have been adding to my position in KAZ for several reasons.  KAZ looks great technically, the 50 day moving average recently crossed over the 200 day moving average which is a very bullish "golden cross formation" on the chart that can attract momentum traders and other investors.  The fundamentals look good too.  KAZ has a book value of about $4.08 per share and they recently announced a very significant increase in production at their Kariman well.  The Chairman owns about 12 million shares (he used to work at Chevron) and he hasn't sold any shares since 2007 back when KAZ traded for over $5 per share.

 
Some of the risks for KAZ include the fact that it operates out of Kazakhstan.  While that region is not viewed to be as stable as the US, this is a positive in many ways since Kazakhstan is so rich in oil.  Chevron has invested heavily in Kazakhstan and so have various Chinese interests.  Read more about the oil reserves in Kazakhstan here:   http://www.eia.doe.gov/emeu/cabs/Kazakhstan/Background.htmlWhat pressured the stock to around 60 cents earlier this year is that notes came due but they appear to have resolved that issue in principle.  If that falls through, it could hurt the stock- read more on this issue here:  http://files.shareholder.com/downloads/KAZ/808185659x0x402661/9e6ec204-d2e3-4c8f-a9de-584eaa5948a7/BMB_Munai_Inc._Reaches_Agreement_on_Covertable_Notes.pdf
 
I expect the noteholders and KAZ to find a reasonable solution soon.  It appears that noteholders would receive nothing if they forced KAZ into bankruptcy.  The licenses held by KAZ would likely revert back to the Kazakhstan government plus the current management is needed to operate the company and maintain the existing relationship with the Kazakhstan government, without this noteholders have nothing.  I believe they will agree to a longer term extension or perhaps KAZ will be able to find financing elsewhere and pay off these noteholders.  They could agree to convert some notes into shares as well.  Long term, I view any of these options as a positive for the company and shareholders.

 

Here is the investor presentation from KAZ, and I have highlighted some key points below: 

 

P1 reserves for KAZ is about 23 million barrels of oil (about 82 million in P2 reserves). KAZ expects to start including gas reserves in P1 reserves in the next reserve report which should be out in Q1 of 2011.

 

KAZ management appears to have good relations with the Kazakhstan government.

 

If you compare the P1 reserves for KAZ to other small oil companies such as MHR, KOG it shows that KAZ appears to be extremely undervalued.  As we have seen recently, these small oil companies can move fast and hard once positive momentum turns for them.  SSN, KOG, MHR have seen huge runs from well under $1 to well over $5 in some cases.  If KAZ resolves the noteholders deal in a fair deal for both sides, I expect to see the stock jump substantially.  If oil and inflation rise in the next couple years, it would be very reasonable for KAZ shares to return to over $5 per share, as they were before the financial crisis.

The 52 week high for KAZ is currently about $1.22 per share, so it will not be surprising to see KAZ break out and make new 52 week highs in the near future.

 

 

 

While no single person or President was to blame for the real estate bubble and the ensuing financial crisis, the U.S. Government is to blame (in my opinion) for the real estate bubble.  In an effort to make home ownership affordable to everyone, the US Government has in many ways, enabled and created policies that directly created and supported a bubble.  Of course, many individuals and companies share responsibility in this, but the government provided the framework that made it so banks and home buyers would be left out of if they did not participate.  Here some of the primary reasons:

 

1.  We have government sponsored and guaranteed loans from Fannie and Freddie which allowed home buyers nationwide to buy property with little or no money down.  Many buyers were able to put 3% down which is not even enough equity to pay a standard 6% sales commission in the event the property was sold. 

 

2.  The government encouraged and inflated demand for homes by giving homeowners a mortgage interest deduction.  Other countries that do not offer this tax break do not have the housing problems we are faced with now.

 

3.  The government also enabled and inflated home prices with artificially low interest rates starting in 2001.  These artificially low rates combined with government guaranteed home loans were the fuel for the housing bubble.  Responsible people who saved, and retirees, saw their income from CD's and savings accounts evaporate with these low rates.

 

4.  Finally, the government gives an additional massive incentive to promote home buying and financial speculation in property by allowing homeowners to make up to $500,000 in gains on the sale of their home TAX FREE!  Single owners can keep up to $250,000 in profits on the sale of their home and married couples can keep $500,000.

 

With all these programs, incentives and other offers to make home ownership "affordable", the government, over time, did just the opposite, and ended up making home ownership unattainable for many people towards the end of the bubble.  There is simply too much government encouragement to buy housing with all these programs.  Other countries that did not have all of these programs (like Canada) have not suffered as much and have a very strong banking system because of it.  Canada also has a high rate of home ownership even though the government policy in Canada has not tried to entice the population into homeownership.

 

If there is any lesson to be learned in this, it is that the government needs to stop making loan guarantees to people who have little or no equity in the transaction, and to people who cannot truly afford to buy the house.  If you can only put down 3% you really can't afford the loan.  The minimum down payment should be AT LEAST enough to cover a standard real estate commission of 6% in case the house needs to be sold by the homeowner or the bank in the event of foreclosure.   It is no surprise that so many are walking away from their mortgages because they never really "owned" the house or even a material percentage of it. 

 

I am amazed that with the massive financial reform bill brought forth from the Obama Administration, Americans are now protected from something as mundane as certain bank fees, but ABSOLUTELY NOTHING was done to reform Fannie and Freddie.  High credit card rates and checking account fees did not cause the financial system to nearly collapse, nor did it cause massive unemployment across the US.  The government induced housing bubble and low money down loans made possible by Fannie and Freddie are what caused the bubble and ensuing pain to millions of Americans.  The fact that a true plan to reform Fannie and Freddie has not been implemented tells me that our politicians are more interested in wallpapering over America's issues with short term gimmicks that might be nothing more than a ploy to keep themselves in office.  Meanwhile, America's long term future remains at risk.  We have seen that we will not build a strong foundation for the future if our economy is based on no money down and 3% down loans.