Adventures In Following Harris Kupperman

Summary

• 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.

Investment Thesis

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.

Oil Tankers

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!

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.

Comments

[Q.Cap]

@Glen Bradford you are a wild man! Look forward to reading more of your articles.

[User 47732154]

Sees Bradford article: gets excited…
Sees that it is not about F&F: frowny face. :(

Glen, my friend, my brother, my comrade in this investment, do not mess with my heart like that. Do not let your need to “fill in the gaps” of time to distract you from the real trade here. Keep dancing on the beach and day drinking until we are there; then we will all be joining you.

The potential greater upside in the tankers you see…I don’t think your article proves just how much more risk and uncertainty is in those versus what we have all been weighing with the twins. The risk for the real trade is time and execution while the tankers still have a dozen things can easily still go wrong.

Milkweed: hold that laughter, yo. Those of us who have been in since the $4s will still have the last laugh here. Need to shake out the scaredy-cats. I think there is some good AT&T stock or whatever relative value out there for you.

[ding dong]

Why did the STNG go to $100 last time? Was it market overreaction or was there a material change in the long term prospects of the business.

If it was a market overreaction because the market projected the near term earnings far into the future, it might not happen again. The market knows from last time the spike fades. There is a possibility that a momentum trade develops (and to me, it seems that it is the intent of a lot of people that are suddenly sharing their research) but it will be purely based on greater fool theory and will fizzle out.

You should ask how many tankers(% of fleet) are actually on storage duty. Also, what is the average realized charter rate (blend of time-charter/spot rate) across the entire fleet of the company for each day? People quote the rate realized for one tanker and assume all the tankers in the fleet will/have realize(d) that rate. Also, market cap is meaningless if you have the tankers loaded with debt. You should be looking at enterprise value. And NAV is meaningless. If they were going to sell all ships and go out of business then looking at NAV would make sense.

I am not a tanker expert by any means. So take my post with a grain of salt. And I am not bearish on tankers. I just don't think the bullish case is very convincing yet. I get a feeling that a pump and dump is going on.

[Rainman 06]

Glen so, if you had 10k what one would you go for out of the bunch.

[Anuj Kumar]

This is the greatest article on SA I've ever seen

[Trade Junky]

People who concentrate positions remind me of the live hog trader on the CME who accumulated a fortune and was considered a genius at trading hogs. He knew hog fundamentals cold. Well one year he just knew hog supplies were going to be severely constrained so he built up a full limit long position in hog futures because how could he lose? Well, the USDA came out with one of their periodic pig crop reports and it was super bearish with apparently a huge crop of pigs on there way to market. Well the market tanked limit down for several days and the genius hog trader lost 36 million dollars, his exchange seat, his home in Winnetka and eventually his wife and family. Long story short, the USDA revised their pig crop report as an incorrect number had been entered into the USDA computer; too late for our friend, and the market reversed course and was limit up for several days. The trader's analysis was correct, but a bureaucratic error cost him everything. Consider this story the next time you are so damn sure of yourself that you put almost everything in a few positions. Stupid is as stupid does.

[Exile of the Mainstream]

@tigerssaymeow where is that story from? lol

[FulcrumBTC]

@Exile of the Mainstream Sounds very much like the movie Trading Places. Replace hogs with Frozen Concentrated Orange Juice, add in Eddie Murphy and Dan Aykroyd, and it's pretty similar. www.youtube.com/...

[Trade Junky]

Chicago trader lore. I was a floor trader. Likely a compilation of many traders tapping out as we would say. I always liked the Airport trade where you were one step ahead of your clearing house and loaded up ahead of a major market report and left town. If the trade was a winner you flew back to Chicago. If the trade was a loser, Mexico is always nice this time of year!

[zelhar]

When you own a shipping stock of some Greek/Norwegian controlled entity which is registered in some island tax shelter, you don't really own a part of the fleet. These owners are crooks and the Public entity is there for them to transfer risk to you and your wealth to themselves.

[Q.Cap]

Well, you invest in Navios family yes. TNK, EURN, DSSI not so much.

[tdswim]

How is their corporate governance different? Seems EURN is solid, but I want to hear how you came to the conclusion.

[Q.Cap]

I'm no expert in governance, but this is why I exited NNA and stuck with EURN and DSSI - NNA has a long history of arm-in-arm transactions between entities controlled by AF. NNA isn't and won't be run independently, you just can't be confident AF will not shuffle cash and assets between assets to prop up struggling entities. You could argue this is a positive, a luxury some operators don't have. Too much risk and uncertainty for me.
Last year they just killed the good momentum they were experiencing around September issuing shares and diluting shareholders which across AF controlled companies is not uncommon.
Then there is the leverage/inability to reduce debt. It's a leveraged sector, but NNA is one of the most leveraged of them all.
Then you look at the consistent underperformance in the share price. I think investors know that if the stock gets some price appreciation AF will do another raise and knock it back down. So what's the point when there are less levered businesses with CEOs at the helm that don't carry the baggage.

[Carlos Vignote Sánchez]

On April 20th, I submitted a brief of Amicus Curiae in the Court of Federal Claims with respect to two cases before judge Sweeney. The judge neither admitted it, nor rejected it, but she read it, which is the purpose of this type of briefs as they don't have any other legal validity. All the lawsuits are meritless.
vignote.blogspot.com/...

[Glen Bradford]

Carlos, read your amicus brief, you started to lose me when you started talking like a pirate making references to "booty" and then I really stopped paying close attention when you started slandering Tim Pagliara.

As someone who has met Tim on a few separate occasions in different cities, and talks with him from time to time, I must say that your impact here is simply more landfill material.

That said, I am impressed to know that you actually did something, power to you for trying. Good luck with your quest.

Glen

[Carlos Vignote Sánchez]

The pirates are the conspirators, I'm amicus curiae. Pagliara is the worst. He wants to rip-off the shareholders and be portrayed as an advocate of the shareholders. No values, no ethics, no nothing.

[9045082992]

@Carlos Vignote Sánchez what does this have to do with the price of eggs in China?

[System Trader]

Agree on the tankers and the natural gas. What on earth moved you to get involved with FTR on the long side? That has been an obvious disaster for years.

[Glen Bradford]

Fair question, I have a friend who is in the business and who did work on the finance side; things didn't make the turn that the company seemed to be projecting and that seemed to be possible based on conversations with my friend. I was wrong, unfortunately. If I would have been right my $125K investment could have been like $30-50M or so. Well worth the risk. Instead, as projected, the calls expired worthless and frankly I don't mind that because as projected, the equity became worthless too.

Doesn't mean I'm wrong for doing these kinds of things. Sometimes you can find huge potential and if you can make potentially life changing bets. heads I am worth $2M. Tails I am worth $30M seems fine to me.

Note that the starting basis was like $500k-$750k at the time around then I think.

[Hubert Hultgren]

Glen, I am long AR as well. Can you remind me why you do not have FNMAS?

[Glen Bradford]

the other preferred are bigger discounts to par.

[R.Darby]

Great article!

[Glen Bradford]

party on

[Pops007]

Now this is a concentrated position.

[Glen Bradford]

did you stare at orange juice boxes in elementary school?

[cfrimodt]

Glen I aggree with you on the nar gas thesis, but you should go for AR instead of RRC, they are so much cheaper and thus has much greater upside. I would recommend reading some of KCI researchs articles on AR. (Long AR)

[Glen Bradford]

yeah i bought some AR calls yesterday like $2k.. and then $1k of rrc.. there's a few others, who knows. i certainly don't i haven't done the research, not that i'm not capable, i just haven't really put in effort, which is kind of pathetic, because it isn't that hard, i just would rather swim in the ocean.. thanks for your feedback.

[Milkweed]

AR is fully hedged until 2022 I believe and won't benefit from the reset in nat gas pricing until then if they make it. Their break even price is also substantially higher than RRC. They have a large un-hedged liquids exposure that is tied to oil pricing. The bounce in oil prices is probably what's propping them up lately. There is a reason why AR is a lot cheaper than RRC.

[jeffkad]

Seems like several knowledgeable authors here on SA are enormously bullish on AR: Long Player, Courage & Conviction, KCI Research.

[Milkweed]

I'm making a killing on RRC and COG as associated gas was KILLING nat gas producers and oils pain is nat gas gain. I loaded up on these two early in the market sell off realizing Mr. Market was missing the nat gas story. Nat gas producers had already cut their rig counts in half before CoV and the oil route; they are down more since and oil rig counts are plummeting with associated gas volumes soon to follow. Nat gas is used mostly for heating and cooling in summer so demand is more stable than Mr. Market was pricing in early on in the downturn. Mr. Market is getting it now.

You got this one right except I would play it straight up instead of messing around with options unless you really know what you are doing. RRC is still a triple or more. SLB in oil services is on fire sale and SAND is a leveraged gold play on inflation that's going to come from the federal government filling in for the consumer and another potential multi bagger.

On the other hand F&F's only hope was Trump gets re-elected and freeing them was good politics in his second term when it wasn't in his first. Not only is his re-election in serious jeopardy but F&F's business is going to get hit by this recession. I don't pretend to be an expert on their financials but with a flood of delinquencies to evevtually turn into foreclosures as a LOT of people ain't going right back to their old job even when the all clear signs are up F&F could be drawing on their backstop again and increasing the liquidation preference while decreasing the argument "they paid the government back".

You've got real multi baggers out there right now and once Mr. Market figures out that the people who stripped grocery store shelves bare ain't coming out of hibernation until there is a vaccine or cure and that ain't happening until next year if we are lucky there will be multi-baggers all over the place. If you are smart you will dump your mistake in F&F and redeploy into real businesses selling at fire sale prices that the recession is making available. Mr. Market is giving you a chance at a do over.

[Glen Bradford]

okay what do you recommend? Can you list out like all your ideas and how much portfolio weight you have? (by the way, your analysis on fnf is wrong, but that's okay)

[Milkweed]

RRC, SLB and SAND are my 3 favorites right now, COG is a near foolproof bet on nat gas but less upside.

You can stick a fork in F&F they are done. Glad I took my near double on FMCCH and ran over the summer when Callabria delivered a laundry list instead of a plan to release em. Remember when I was being ridiculed the next day when the En Banc ruling was announced and the message board and market misread the significance? I'm laughing now.

[ghlbtsk]

@Milkweed

All the ridicule came from clowns (of which message boards like this one are unfortunately infested) that are best ignored.

I do disagree that the GSE investment thesis is done. The NWS is effectively over due to the September letter agreement, and according to Tim Howard's calculations the GSEs already have enough capital to weather the storm. Of course, that probably won't stop Calabria from imposing much larger capital requirements,probably on the order of 150 billion, but a draw from Treasury seems very unlikely at this point.
howardonmortgagefinance.com/...

There are plenty of ways to make money in the market, and I still believe the GSE junior pref shares are among the best ones. Broad disagreement with this thesis by the market actually benefits me because it allows me to buy more cheaply.

[Exile of the Mainstream]

This is a hilarious post. I like Kuppy but he seems to be wrong on tankers right now. Though right on Nat Gas.

[calvinfroedge]

Wrong on tankers earning a ton of money? Don't think so. Thesis is correct. Market is irrational.

[Glen Bradford]

hey calvin, huge fan

[JWVGOETHE]

Hello @calvinfroedge. As my first comment here, I'll second the compliment offered by Glen Bradford. The brain trust around this thesis is impressive. Cheers.

[7380309]

Well Glen, interesting. I jumped into MO for the 9.5% dividend and inevitable capital appreciation.

[Glen Bradford]

nice! good for you

[rleon7]

When do you guys think the oil tankers will spike back up?

[jdubbsdiv]

1st QRT Earnings are coming out now and 2nd QRT will be better than 1st. So, this month. DHT earnings was yesterday and they increased their dividend for the money the company is making.

[jdubbsdiv]

$DHT 5/5/20
$STNG 5/6/20
$INSW 5/7/20
$EURN 5/7/20
$DSSI 5/8/20
$FRO 5/21/20?
$NAT 5/22/20
$TNK 5/22/20
$TNP 6/4/20 or 5/22/20?

[Gri Ma]

Well done and really just in time. Kuppy + VIE is pushing tankers for how long? One year?

[Glen Bradford]

eh well, it's not about the past if you want to make good investment decisions, it's about what to do now and who is correct, starting now.

kuppy seems like a genius to me on quite a few approaches

[baruchg]

Kuppy is great!!

[Glen Bradford]

go kuppy go