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Tom Armistead's  Instablog

Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • Squeezing The Cards On Carbo Ceramics

    Carbo Ceramics (NYSE:CRR) has made a nice upward move, more or less in sync with the rally in oil. At least for now, the price of the stock seems firmly tied to the price of the underlying commodity. Certainly there is a logical relationship.

    By way of analysis, I did a scatter chart of CRR's share price against WTI, using data from mid 2008 to the present. Here's the chart:

    The software provides a formula for the regression. R2 at 0.57 demonstrates the connection, but is not particularly impressive. Applying the formula, Friday's price of $51.69 for WTI implies CRR at $37.57, close to the actual close of $36.19.

    Looking at futures, February 2016 Crude traded Friday at $60.86. According to the formula, CRR would be in the $47 area. That's a 29% gain from the current share price, and sufficient to justify the assumption of considerable risk.

    Upside vs. Downside Risk

    Looking at the downside, the biggest risk is getting a panic attack and selling at the bottom. Over the past ten years, WTI has closed under $35 a total of 7 days, under $40 a total of 25 days, and under 50 a total of 133 days. I would wait for about a year before concluding there has been a paradigm shift.

    On the upside, WTI has spent 458 days above $100 during the same time frame. So the odds, based on this line of reasoning, favor $100 oil over $50 oil. Patience is required.

    After going over this for a while, I feel as if the upside:downside risk ratio is about 3:1, with the most likely outcome that CRR will be at or above $47 at this time next year.

    Big Insider Trade

    William C. Morris is a director at Carbo, after an extremely successful career on Wall St, at J.W. Seligman. Charities of which he is a board member sold massive amounts of CRR in the $150 area during 2011.

    His wife recently spent over $1 million buying shares of CRR at prices averaging less than $35.

    Who's to Blame?

    BIS came out with a study, which was covered by both CNBC and the Financial Times, intended to analyze the cause of the oil rout. CNBC with their usual perspicacity claims the report blames the Saudis. The Financial Times, noting that BIS says oil is acting like a financial asset, connects the dots and adds some information about the size of the futures market compared to the market for physical oil.

    I continue to read articles on oil, and have yet to see anything on who the big winners and losers were in the futures trade. Nobody is talking.

    Paradigm Shift?

    I don't think so. I see speculation and manipulation in the futures market, and mis-allocation of capital. Specifically, there was a lot of money attracted into loans to shale oil producers, some of which are not going to be repaid.

    All of that is business as usual on Wall Street.

    Tags: CRR, Oil
    Feb 08 10:35 AM | Link | 1 Comment
  • California Resources Now In Play

    Back in early December, I did an instablog on California Resources (NYSE:CRC), mentioning a small position and taking a wait and see attitude. With the stock under $6, the potential of $20 if oil would go back up to where it was came into view.

    As oil continued to tank, CRC followed it down, and I started systematically adding to the position. At first, it was 100 shares every time it went down another 10 cents. Then it was a fixed position size, 70% of my normal, and buying another 100 shares every time I needed to bring the dollar amount up to the target size. Sort of an exercise, how many midgets can you cram into a Volkswagen.

    That really isn't much fun, and I finally gave it up somewhere under $4 and let the last little bit of the bottom go by without adding. But I worked the average cost down to $5.23, from a $5.90 starting point.

    So now we learn Soroban has taken up a 9.98% position. Predictably, and also driven by the increase in WTI, the shares made their way back up over $6. I sold a few hundred, at 10 cent intervals, and brought the position down to 100% of normal.

    Now What?

    Morningstar updated their analysis, and they now have a target of $17 on the shares, based on oil futures as they now stand and the assumption that eventually oil stabilizes somewhere between where it is now and where it was for several years before.

    CRC has hedged their production for 6 months at $50 a barrel. They have a variable capex plan, to respond to the situation as it develops over time. Their financials provide enough information that you can project based on the prices of oil and natural gas. I sort of browsed it a bit and then I figured let's wait another quarter when we can see what their realized prices have been compared to the benchmarks.

    There is quite a bit of debt here, a private placement, somehow I just couldn't seem to get the details. There is also a large credit line, by several of the big banks, with covenants. The thought does come up, the interest rate on the private placement was probably a little bit on the high side. But if a major oil company with a strong credit rating bought CRC and assumed the debt, it would be easy to trade publicly at a higher price than it originally commanded.

    Major oil companies have a problem, to grow reserves in the face of ongoing production. Extensions will be more difficult than they have been recently, for the fact that economic feasibility is more difficult with the commodity priced at current levels. So there will be some motivated buyers out there.

    Hedge funds are like a bunch of jackals, they're all over any opportunity for easy pickings. It wouldn't be surprising if Soroban had some company, soon enough. The most likely thing is that they will agitate for a sale of the business.

    Perils of Pauline?

    If the price of oil doesn't go back up, at some point cash flow will go negative and covenants will start to come into play, then there will be waivers to discuss and pay for, then things will get complicated. I don't think it will go that far.

    Stay Right Size

    After looking at this for a while, I plan to sell into any increase in price, so as to keep my position at normal size. There's nothing wrong with taking a few bucks off the table. I won't be selling covered calls, because there's always the possibility that it will gap up.

    Tags: CRC, Energy
    Feb 05 5:50 AM | Link | 5 Comments
  • Chubb: Quantifying Lowball Guidance

    Chubb (NYSE:CB) reported fine earnings for 2014, but guidance for 2015 was characterized as "light" by the press, and the shares have been giving up some of their recent gains.

    The company has a history of lowballing guidance, strong enough to be worth tracking and quantifying. Here's a table:

    Over the period tracked, the company has beaten guidance by an average 18.61%, and missed only once.

    Based on this analysis, I'm looking for EPS of $8.90 for 2015. The earnings will be deployed to benefit shareholders, some to the dividend, the bulk of it to buybacks. With that in mind, I'm not too concerned about the share price. The lower the price, the more profitable the buybacks will be.

    Tags: CB
    Feb 03 12:15 PM | Link | 2 Comments
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