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Harry Long is the inventor of Hedged Contango Capture and Hedged Convexity Capture and is the Managing Partner of ZOMMA, the world's most innovative strategy index creator. Mr. Long is a globally recognized expert on the research and development of quantitative investment strategies. The ZOMMA... More
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  • Short Idea: WHX 1 comment
    Jun 3, 2011 7:26 PM | about stocks: WHX

    WHX is a classic negative carry short idea based on the notion that WHX is mispriced due to people reaching for yield, retirees who are unsophisticated and want dividends, quant funds searching for higher dividend yields, etc. I give a special thank you to Citron Research for first bringing this idea to the market's attention.

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    [bold, underlining, italics my own, from 10-K page 7]


     
    General
     
    Whiting USA Trust I is a statutory trust formed in October 2007 under the Delaware Statutory Trust Act, pursuant to a trust agreement (the “Trust agreement”) among Whiting Oil and Gas as trustor, The Bank of New York Trust Company, N.A., as Trustee (subsequently renamed The Bank of New York Mellon Trust Company, N.A., and hereinafter referred to as “Trustee”), and Wilmington Trust Company, as Delaware Trustee (the “Delaware Trustee”). The initial capitalization of the Trust estate was funded by Whiting in November 2007. The Trust maintains its offices at the office of the Trustee, at 919 Congress Avenue, Austin, Texas 78701. The telephone number of the Trustee is                         1-800-852-1422            .
     
    The Trust makes copies of its reports under the Exchange Act available at www.businesswire.com/cnn/whx.htm. The Trust’s filings under the Exchange Act are also available electronically from the website maintained by the Securities and Exchange Commission (“SEC”) at http://www.sec.gov. In addition, the Trust will provide electronic and paper copies of its recent filings free of charge upon request to the Trustee.
     
    As of December 31, 2007, the Trust had no assets other than a de minimus cash balance from the initial capitalization and had conducted no operations other than organizational activities. In April 2008, the Trust issued 13,863,889 units of beneficial interest in the Trust (“Trust units”) to Whiting in exchange for the conveyance of a term net profits interest (“NPI”) by Whiting Oil and Gas. The NPI represents the right for the Trust to receive 90% of the net proceeds from Whiting’s interests in certain existing oil, natural gas and natural gas liquid producing properties which we refer to as “the underlying properties”. The underlying properties are located in the Rocky Mountains, Mid-Continent, Permian Basin and Gulf Coast regions. The underlying properties include interests in 3,077 gross (373.1 net) producing oil and gas wells. Immediately after the conveyance, Whiting completed an initial public offering of Trust units selling 11,677,500 such units. Whiting retained ownership of 2,186,389 Trust units, or 15.8% of the total Trust units issued and outstanding.
     
    The NPI will terminate when 9.11 MMBOE have been produced and sold from the underlying properties (which amount is the equivalent of 8.20 MMBOE in respect of the Trust’s right to receive 90% of the net proceeds from such reserves pursuant to the NPI), and the Trust will soon thereafter wind up its affairs and terminate. As of December 31, 2010, on a cumulative accrual basis 3.90 MMBOE of the Trust’s total 8.20 MMBOE have been produced and sold and a cumulative 0.02 MMBOE have been divested. Further detail on the reserves is provided herein under the section titled “Properties-Description of the Underlying Properties — Reserves”, and such reserve information is based upon a reserve report prepared by independent reserve engineers Cawley, Gillespie & Associates, Inc. for the underlying properties at December 31, 2010, which we refer to as the “reserve report.” According to the reserve report, the portion of the 9.11 MMBOE (8.20 MMBOE at the 90% NPI) reserve quantities attributable to the NPI not yet produced or sold as divestitures at December 31, 2010 is projected to be produced from the underlying properties by November 30, 2015, and the reserve report is based on the assumptions included therein. See “Risk Factors” in Item 1A of this Annual Report on Form 10-K for additional discussion. Production from the underlying properties for the year ended December 31, 2010, was approximately 60% oil and approximately 40% natural gas.

    [bold, underlining, italics my own, from 10-K page 7]

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    [bold, underlining, italics my own from 10-k, page 21]

    Financial returns to purchasers of Trust units will vary in part based on how quickly 9.11 MMBOE are produced and sold from the underlying properties, and it is not known when that will occur.
     
    The NPI will terminate at the time when 9.11 MMBOE have been produced and sold from the underlying properties (which amount is the equivalent of 8.20 MMBOE in respect of the Trust’s right to receive 90% of the net proceeds from such reserves pursuant to the NPI). The reserve report prepared by the Trust’s independent petroleum engineer dated as of December 31, 2010 (the “reserve report”) projects that 9.11 MMBOE will have been produced and sold from the underlying properties by November 30, 2015. However, the exact rate of production cannot be predicted with certainty and such amount may be produced before or after the date projected by the reserve report. If production attributable to the underlying properties is slower than estimated, then financial returns to Trust unitholders will be lower assuming constant prices because cash distributions attributable to such production will occur at a later date.

    [bold, underlining, italics my own from 10-k, page 21]

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    Disclosure: I am short WHX.
    Stocks: WHX
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  • AU1981
    , contributor
    Comments (53) | Send Message
     
    Hi Harry,

     

    I'm very interested in this trade. It seems like GNI did a similar thing as it plunged from above $100 to $60 as it approaches expiration. My question is this: what is driving this opportunity, and is it doable? I had looked into shorting pairs of leveraged ETFs to profit from the contango, and simulations did work over several months.

     

    The problem thought, is if it is possible to hold WHX short (or Leveraged ETFs short) for a long enough time, enough for people to realize that the trust's distributions are worth much less than $17.00 and that it'll be worthless upon expiration. How can one do this without invoking a margin call? How can one determine the approximate value of the trust's distributions between now and expiration?

     

    Thanks for the article.
    24 Jun 2012, 08:02 AM Reply Like
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