- I still have over a 90% portfolio position in Fannie Mae and Freddie Mac, and yes, I just sold some even though I expect 100% return this month.
- I sat down and read a few Harris Kupperman blogs this past month and I simply had to get oil tanker and natural gas producer exposure.
- The premise there is that oil is in a glut and demand went off a cliff, so either they pump too much and fill up oil tankers or cut supply.
- If they cut supply, then that should help put a floor in for natural gas. Natural gas has been in oversupply for a long time, but times are changing.
I basically stayed up one night reviewing options prices on natural gas producers and oil tankers and moved something like $30k into that on top of around $10k I already put in. My market puts have only lost me money, and I've only ever lost money in options. That said, I'm sticking to my strategies and throwing in new money. Harris Kupperman is my fearless leader and I think he's got the right ideas here, and I think the risk/reward is so asymmetric I couldn't resist buying exposure even though I'm confident I'll collect an easy 300% return or so on my existing investments in the next 12 months.
I tend to try to find highly leveraged situations and try to make life-changing bets. Last year or two, I lost like $125k in FTR call options that would have made me a multi-millionaire if I was right about anything there, but I was not. I'm not going to be right every time. With Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) I will be, but if you haven't noticed, the valuations there have come down to basically my cost basis, or less than that, recently. I happen to think that May is going to be the best month of my life. Fannie Mae and Freddie Mac are going to be reproposing the capital rule, which was necessary in order for FHFA to avoid lawsuits based on the advice of general counsel. I figure that between October 2020 and January 2021, the lawsuits against the government's illegal theft there get settled via conversion terms.
Oil is in contango. Oil tanker companies are writing contracts to fill up their boats with oil and sit around in the ocean, and the amount of money they are making according to their stock valuation is unsustainable. According to their stock valuations, this is a temporary blip that will disappear and worldwide oil tanker utilization will come down, and the sector that tends to be mostly famine with the occasional feast will not feast enough this time to make much of a difference. To that point, oil prices seem a little stronger lately than they have been, and supply builds are decreasing. Whether this is demand coming back or supply being taken off-line, I simply don't think demand comes on-line fast enough and more shut-ins are necessary. Even still, you have a situation where storage worldwide is filled to the gills, and tankers should mint money for a while as they work though this glut.
I also don't expect the global economy to rebound quickly from this. The hedge here is natural gas companies. The hedge might even be more profitable than the tanker play itself. Both natural gas producers and oil tankers have been in famine-style pricing genres for years now, and the company valuations have gone by the wayside, like discarded trash. Natural gas prices are so low that even an increase/decrease of $1 is a life or death difference for some of these companies. The premise here is that natural gas is a by-product of oil drilling, so if they start cutting oil production, then that naturally decreases natural gas production as well, which should help boost prices and possibly send these companies into the stratosphere.
Both oil tankers and natural gas companies, in my opinion, seem to have more near-term potential than Fannie and Freddie preferred, depending on how long it takes the market to figure stuff out. I figure this month is a big one there. Then, I figure they do financial advisors in June and the rest of this year, and early next year they restructure the equity and get the companies on track to raise capital. As such, tankers, which could go up 200% when Fannie and Freddie preferred are only up 100%, might be marginally better at some point in the game, and although I expect it might take longer, the natural gas producers might be up 300-500% by the time Fannie and Freddie make 200%. I have no idea, but that's kind of why I decided to take this trade.
What I do know is that I am confident in Fannie and Freddie being restructured. That's why that is over 90% of my portfolio. The purpose of this article is to help me organize my thoughts and solicit feedback. I want to see if I can figure out if I should buy more tankers and natural gas producer exposure, and if so, what kind.
Fannie and Freddie: Triple-Bottom FNMAS
So, this has been my bread and butter for about five years now, and it is 90%+ of my portfolio. With the government having paused the net worth sweep with the intent of further amending it in order to attract outside capital via capital raises, the Federal Housing Finance Agency has worked with Milbank LLP and Houlihan Lokey to make sure that the incoming capital rule is capital raise-friendly. Frankly, the previous one proposed by Melvin Watt was not. Preferreds currently trade between 20% and 30% of par, and their stock charts just triple-bottomed:
Legal claims, according to many, are worth 130-140% of par. Tim Pagliara has recommended taking a haircut to par in order to get a deal done. I own preferred stock here, but common stock seems poised to generate similar returns at these valuations.
Now I'm stepping into the less familiar. I hear Scorpio Tankers (STNG) could be worth over $100. Considering right now it is around $25, that makes it competitive with Fannie and Freddie, especially given that rates already support these valuations, according to Kuppy:
If you like Scorpio Tankers, I guess you can get them cheaper by owning Scorpio Bulkers (SALT). Harris Kupperman owns a basket of oil tankers, and so do I. Others include Euronav (EURN) and DHT Holdings (DHT):
Kuppy also speculates that Teekay Tankers (TNK) could go to $200:
It's certainly possible. Note that would be a 10x from the time of writing this article. One person put out research outlining how many days at prevailing rates it will take the company to earn its market capitalization:
Frontline (FRO) went 50x in the early 2000s, just showing how much potential tanker trades have:
So that's the tanker trade. In the off chance that they cut oil production hugely and the tanker trade fades, natural gas prices should stabilize and start soaring.
Natural Gas Producers
Natural gas June 2021 contracts are breaking out and crossing their 200-week moving average for the first time in nearly a decade:
Harris Kupperman recommends SandRidge Energy (SD) and Antero Resources (AR) because they have the best balance sheets to weather the long-term storm, but I am a man who plays with fire, and as I was writing this article, bought some more call options on Range Resources Corp. (RRC) because of the graphic above. I'm banking on natural gas prices rising to levels that the market is saying to be impossible because of the oil contango situation cutting supply. I could be wrong, and that's why I have position-sized this accordingly. Similar to the tankers, I have exposure via a basket of call options that expire in like 5-7 months. I figure that's all the exposure I want to buy, because in that time frame Fannie and Freddie will move up, and at that point maybe I'll take a real position in the stocks instead. I have no idea, I'm just trying to prevent from missing out on something that seems like it is already happening but isn't priced in to continue. I guess we will see.
I'm more excited about the natural gas producers than I am about the oil tankers. Even though I think the oil tankers have the most logical reason to go up the fastest the soonest, I have a special place in my heart for natural gas producers because I think that they are more likely to be valued appropriately by the market. They are less of "fluke" businesses that are feast or famine. If higher natural gas prices start getting priced into the futures market, I expect the stocks to reflect this, and so many of them are down so much over the last decade, it is insane upside. At least that's how I see it.
Summary and Conclusion
I'm 90%+ Fannie and Freddie preferred, with a side of oil tankers and natural gas producers. I think all of these are great investments, but on a personal level, I see Fannie and Freddie preferred as a certainty. It's simply a private equity deal that gets done in the next year.
That said, I finally found something interesting that I felt compelled to buy given that my opportunity cost feels like over 100% per annum. Oil tankers and natural gas producers could outperform my Fannie and Freddie preferred stock, so I took a stake. I haven't really done the math on any one of the companies to figure out which ones in particular to target to take a big stake in based on natural gas price sensitivity, which is pathetic, but I have reviewed simple napkin math put out by people who have provided it. It is compelling, and I just wanted to get the exposure and then wanted to tell you about it.
Please leave your thoughts below. Let me know what you think!
This article was written by
Analyst’s Disclosure: I am/we are long DHT, EURN, TNK, STNG, AR, SD, RRC, COG, FMCCL, FMCCM, FMCCN, FMCCT, FMCCI, FMCCG, FMCCT, FMCCS, FNMFO, FNMFN, FMCKP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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