Monday, April 20, 2015

As predicted, Obama loses another one. Russian economy recovering nicely



Today, the answer is becoming clear—and it’s not the one the West was hoping for. Not only is Putin still standing, but the Russian economy, against most expectations, is recovering. Its stock market is one of the best performing globally this year; the ruble, after losing nearly half its value against the dollar over the course of a year, is rebounding; interest rates have come down from their post-sanctions peak; the government is taking in more revenue than its own forecast expected; and foreign exchange reserves have risen nearly $10 billion from their post-crisis low.


What’s bailing out Moscow? For the second time in two decades, Russia is showing that while a sharp drop in its currency’s value does bring financial pain—it raises prices for imports and makes any foreign debt Russia or its companies have taken on that much more expensive in ruble terms—it also eventually produces textbook economic benefits. Since a devaluation raises import prices, it also paves the way for what economists call “import substitution,” a clunky way to say that consumers switch to buying less pricey products produced at home instead of imported goods.

Well I told you so. This has been a classic case of contrarian investing. Buying when there was massive pessimism about Russia has yielded a tidy return so far. It will get better as oil prices continue higher and the EU diverges from the US regarding extending sanctions. I still consider Russia a buy.

Madalena Energy Operational Report


The country continues to move its projects forward in Argentina. The recently completed Loma Montosa horizontal well.

The PMS-1135(h) well on Madalena's Puesto Morales block, was successfully drilled and cased with a tapered mono-bore assembly to a total depth of 2,600 metres with a horizontal length of approximately 1,095 metres. The horizontal section had twelve open hole frac packers and ports while the main 5.5" casing string was cemented using a staged cement collar. Madalena then completed Argentina's first 12 stage ball drop frac operation. All 12 stages were completed using a hybrid slickwater/gel frac that pumped a total of 10,900 bbls of water and 360 tonnes of sand (approximately 30 tonnes per stage). Testing operations commenced on March 30, 2015 and the well has been flowing up 5.5" casing without a production string run. 

Over the last 24 hours, the well flowed a total of 860 boe/d including 480 barrels of oil per day (bopd) plus 2,300 mcf/d of gas at a flowing pressure of 530 psi and a 47% water cut. Cumulative production over the last 5 days was 2,140 barrels of oil (428 bopd) plus gas volumes. To date the well has recovered 4,931 barrels of water which is approximately 45% of the total water based frac fluid pumped. Although Madalena is very encouraged by this production test, it cautions that these results are not necessarily indicative of the long-term performance or of the ultimate recovery of the well. Madalena is currently proceeding to tie this well into its existing infrastructure and has a large inventory of horizontal development locations on the Puesto Morales block.

Good news and as oil prices pick up I suspect someone is going to step in buy Madalena. Especially if they keep having success. Up 74% so far with more to come in my view.

Sunday, April 19, 2015

Smart money moving into distressed oil assets



But with West Texas crude prices now down by 50%, to $50 a barrel, and many U.S. oil and gas companies scrambling for cash, Beal has been quietly building an oil and gas lending team at his Texas bank, and though he has yet to close on his first deal, he expects to pull the trigger soon. “We are trying to get real active in the oil patch,” he says. “We’re looking at some decent-size deals, hiring people–we are going to go after it.” According to Beal, volatility will become the driving force in markets once the Fed actually begins raising rates. But this will have little effect on the inevitability of oil’s long-term price appreciation.


Beal is not the only big investor on the hunt for bargains in the oil patch. Hedge funds like Clint Carlson’s Carlson Capital and billionaire Marc Lasry’s Avenue Capital have been raising new vehicles to target the debt and equity of energy companies. Likewise the biggest private equity firms have recently raised some $20 billion for energy sector investments and are rushing to do deals. The Blackstone Group, for example, just finished raising a $4.5 billion energy fund in February and is reportedly raising another $1 billion to buy bonds and distressed loans of oil and gas companies. Blackstone’s credit division recently committed $500 million to fund drilling programs for Linn Energy and got an 85% working interest in some of Linn Energy’s oil and gas wells in return. The Carlyle Group has about $9 billion marked for energy deals, and its co-chief, billionaire David Rubenstein, recently said, “There is no other sector in the world that we are as bullish on as we are on energy.”

Big money is doing what it always does. It moves in when sentiment is negative and everyone else gets out. Oil is vital for life itself, at least if you want to live in a modern industrialized society. It is a declining resource and requires constant high levels of investment to not only grow production but just to maintain it. With prices down investment is down and therefore supply will be constrained in the future. We just need to sit back and wait to get paid as the price of oil will be going up in the future. 

Friday, April 17, 2015

Altius Minerals initiates dividend and resumes share buyback


Altius Minerals Corporation is pleased to announce the implementation of a dividend policy and a starting annualized distribution of $0.08 per share payable as $0.02 per share on a quarterly basis on its common shares to all shareholders of record at the close of business on April 7, 2015 expected to be paid on or about April 20, 2015.

Concurrently, Altius announces that it has made a payment of $35 million on its term debt facility. This payment reduces term debt to $79 million (from $140 million less than a year ago) and, as per the terms of its credit agreement, results in a reduced effective interest rate from 7.8% to 6.5% annually. This payment therefore results in an estimated annual improvement to pre tax operating cash flows of $3.8 million.

Altius also announces that it has re-instated its Normal Course Issuer Bid (“NCIB”) and it may purchase at market price up to 1,617,841 common shares (“Shares”), being approximately 5% of its outstanding Shares of 32,356,826 as of March 17, 2015, by way of a normal course issuer bid (“NCIB”) through the facilities of the Toronto Stock Exchange (“TSX”). The bid is subject to regulatory approval. The NCIB will commence March 30, 2015 and will end no later than March 29, 2016. Any Shares purchased during the NCIB will be cancelled and returned to treasury.

This is what the company said it would do and after selling their stake in Virginia Mines the company was able to pay down debt sufficiently where the management felt comfortable initiating a dividend. I expect further dividend increases as time goes by. Buy and put away for ten years. My initial reasoning from late last year on Altius. 

Sunday, April 12, 2015

Betting on the jockey. Speculating with Wilbur Ross on Bank of Cyprus

Cyprus is back in the news but I am sure many missed the significance of what was announced this week. The government is Cyprus lifted all the remaining capital controls that were imposed after the collapse of the banking sector and economy two years ago.


The last restrictions on international transfers will be lifted on April 6, Cyprus government spokesman Nikos Christodoulides said in an e-mailed statement to Bloomberg. Domestic capital controls ended in May 2014.

“The lifting of the restrictions confirms the full restoration of confidence in the banking system, the significantly improved business climate and essentially marks the return of the economy to normal conditions,” he said.

Cyprus is emerging from the crisis that forced it to seek a bailout and impose a levy on depositors two years ago while Greece, which in 2010 became the first country to be rescued by its euro-area partners, continues its tug-of-war with creditors.

I have been watching Cyprus for over a year as the stock market there was down 99%. Any market that is down 99% at least has to be looked at for the potential of a rebound. My typical thesis that countries very rarely just disappear came into play with Cyprus. I knew it was an opportunity but I had to find a vehicle to trade it and a catalyst that indicated that events were going from terrible to slightly less terrible. Change at the margin has now happened with the lifting of capital controls. This event was preceded earlier this year when Bank of Cyprus shares resumed trading in Cyprus and on the Athens stock exchange. 

The shares in the bank began trading after the bank was recapitalized by several large investors including US turnaround billionaire Wilbur Ross.  If you are not familiar with Ross's resume you can read Mr. Ross's Wikipedia page and see that he has been a guy that comes in and restructure bankrupt or distressed companies and industries. Following a serially successful investor into a situation like this is what is meant by "betting on the jockey, not the horse". Ross and the other investors bought stock in the Bank of Cyprus for .24 Euros per share late last year. The stock has recently dropped to around .20 Euros so buying now actually gets one in on Ross's coattails at a 20% discount to what he paid. 

Now this is a speculation and just because his other turnarounds worked out does not guarantee that this one will work out. However guys like this do not run diversified portfolios trying to beat the averages. They keep their powder dry until a fat pitch comes across the plate and then they swing with everything for grand slam home run. Here is Ross on his views on Cyprus:

So the situation is that the country got into big financial trouble. The banking system almost collapsed so the government had a bail in where some depositors assets were confiscated to save the bank. No one cares about Cyprus right now just as serially successful turnaround investors show up. The bank will not disappear and Cyprus will not disappear. Capital controls have been lifted and the economy should actually grow about .5% this year. The bank is now slowly but surely healing and at some point everyone will discover  how undervalued Cyprus is and the stock should revalue higher. That is my thesis. This is definitely a speculation and it will take a few years for this to play out. However this could be a multibagger. Do your own due diligence. 

Sold my China shares

I got long China at the end of 2014 and I had the China ETF (FXI) as my stock of the year. However in the last week the shares have went parabolic and are way overbought. I went ahead and sold into the strength as these kind of moves usually result in a significant pullback. The news out of China is quite frightening in that the government is encouraging stock speculation by newbies. I would rather cash in now and see what happens. I have read articles where it is highlighted that the recent "investors" are  inexperienced and uneducated (greater fool theory). This is usually a recipe for a disaster. It could keep running higher but staying in now is picking up change in front of a steam roller.

Yikes! Way overbought and going parabolic! Get me out!

Sunday, April 5, 2015

FXI breaks out to upside

FXI is the the China Large Cap ETF which I have as my stock of the year pick. It appears that the shares have finally broken out to the upside.

The Chinese government has instituted several policies to encourage stock ownership by investors. In addition they have been easing monetary policy in order to stimulate the economy. I expect as in other countries that have eased monetary policy that a good portion of the money will find its way into the stockmarket. 

Here is a good technical analysis of the break out by Morris Hubbert.

Saturday, April 4, 2015

Three more stocks to take advantage of inevitable rise in oil prices

I am adding the the following companies to both my speculative and investment portfolios as I believe that a bottom has been put in regarding oil prices. I do not think we go straight back to $100 a barrel but I see a gradual increase in prices as US production begins to roll over and relentless demand begins to reduce inventories.

On the investment side I am adding Bancolombia (CIB). Bancolombia is the largest bank in Colombia and is trading at five year lows. This is mostly due to lower oil prices and a rise of the US dollar versus the Colombia Peso. Oil accounts for 40% of Colombia's exports but only 8% of GDP. Even with the lower oil price the Colombian economy is forecasted to grow over 3% this year. As I expect oil prices to begin heading higher later this year we should see this headwind turn into a tailwind. The US dollar also looks like it may have found a intermediate term top as it now appears that the Fed may not be in as much of a hurry to raise interest rates as the market once thought. Regardless, the shares of Bancolombia are trading at a p/e of 12 and currently have a 3.4% dividend yield which the company has been increasing the dividend every year since 2001 including 2008/09 during the financial crisis. Colombia has adopted many free market reforms and should not be tarred with the same brush as some of its other South American brethren. On a three to five year time frame I believe an investment in Bancolombia will lead to market beating returns.

The next stock I am adding to the investment portfolio is TransAtlantic Petroleum (TAT). This is one I have a had a love hate relationship with going back four or five years. The company is run by its majority shareholder Malone Mitchell who founded Riata Energy which he later sold and which became Sandridge Energy. He then started TransAtlantic which has the majority of it assets in Turkey. However it never seemed he could get traction as the company built a drilling and service business and had distractions in Tunisia and Morocco. All of these distractions led to failed promises and loss of credibility with the markets. Fortunately the company kept doing seismic and drilling in Turkey and they are now seeing the fruition of their strategy as the company has now begun delivering on production and reserve growth promises. The drilling business was sold and the the other distractions were divested. The piece of news that has got me excited was the acquisition of three legacy oil fields in Albania. Many people do not realize that Albania has several billions of barrels of oil reserves. An example of what is possible in Albania is the Bankers Petroleum story. The company entered Albania in 2004 and had initial production of 400 bopd which has subsequently grown to 20,000 bopd in ten years. This was done by investing money and western recovery techniques to legacy fields that had last been worked on with Soviet era technology. If Mitchell can replicate or at least come close to Bankers success we will see a big upward revaluation in TransAtlantic's share price. The shares are currently undervalued just on the current assets. This has led the management to announce a share buyback as a way to pick up undervalued shares. As oil prices recover and if the management can keep its positive momentum going I expect a much higher share price.

My last pick is another company I have been following for years and is a pure speculation.  WesternZagros (WRZ.V) operates in Kurdistan and has a production sharing contract to exploit two concessions in southeastern Kurdistan. The company was a development company for many years but is now transitioning to a production company. The company began selling 5000 bopd into the local market on February 11, 2015. The management intends to increase this to 10,000 bopd later this year. WesternZagros only sees about 7% of the production from this after the split with its partner and the Kurdistan regional Authority. Nevertheless, these wells are very prolific and the company has contingent reserves over 1 billion barrels. The stock has been hammered on the lower oil price and the possibility of ISIS invading and taking over Kurdistan which would put WesternZagros out of business. I view this as a lower risk than most. I have been following the events in northern Iraq and the Kurds have been more than holding their own against ISIS after initially being put back on their heels. If interested you can follow the daily situation reports at the website of the Institute for the Study of War.  Over time I believe ISIS will be pushed back further from Kurdistan and the market will revalue WesternZagro's production upward as it deems it in a safe position.

Wednesday, April 1, 2015

Texas shale production begins to decrease

The laws of supply and demand do work:


State regulator Railroad Commission of Texas just released data for production rates in January. Showing that output of both oil and gas took one of the most sizeable monthly declines in recent memory.

Oil output during January fell 11%, or 8.5 million barrels, as compared to the previous month.


The scale of the monthly decline is notable -- being much deeper than during any of the previous months since oil began its decline last summer. Up until now, oil output had been largely holding steady.

Low prices are the cure for low prices. This is one of the reasons I got long Russia again. I have also been getting more and more long various oil stocks and some other stocks that will benefit from a higher oil price. I will be featuring these new picks over the next few days. 

Sunday, March 29, 2015

Going long Russian stocks

Back on 1/3/15 I pointed out how cheap Russian stocks had become. I said at the time that I was nibbling on them. In the last week or so I have made a more substantial commitment to Russia. The reason for this is because the Russian market is one of the cheapest markets in the entire world. The other reason is that I believe that an inflection point has been reached on several fronts regarding Russia.

The first point is that I believe that although Russia is feeling the pain of lower oil prices I do think we are getting near a bottom in oil prices. This has been made clear as we have seen announcements of hundreds of billions in curtailed investment in the oil sector. The carnage is just beginning for the US based shale producers as several have declared bankruptcy already with more on the way. As growth in demand for oil is relentless it makes sense that curtailing investment in future production will at some point lead to a drop in production and higher prices.

The second, and most important part, is that Russia is winning the geopolitical contest. Most people are not focusing on the events in Ukraine but the events unfolding there are instrumental in understanding Russia. Many western analysts are observing Russia and assuming that the Russians are acting irrationally with respect to Crimea and Eastern Ukraine. In fact they are are being historically and politically consistent in their actions.

With respect to Crimea. Sevastopol has been a Russian naval port for three hundred years. The Russians fought many wars against the Ottoman Turks and Germans over this important port. Sevastopol was enshrined as one of 12 "hero cities" during WW2. It is the only warm water southern port that Russia has and affords access though the Bosphorus to the Mediterranean Sea. The Russians have a historical and geopolitical claim on this place. They were never going to relinquish control of Crimea as it would be militarily unacceptable to allow this port to become a NATO port and allow western dominance of the Black Sea, which is on Russia's southern border, to fall outside of Russia's control. It would be akin to allowing the Gulf of Mexico fall out of control of the United States. Putin sums this up in a quote from a 2014 speech:

“NATO remains a military alliance, and we are against having a military alliance making itself at home right in our own backyard; in our historic territory. I simply cannot imagine that we would travel to Sevastopol to visit NATO sailors. Of course, most of them are wonderful guys, but it would be better to have them come and visit us, be our guests, rather than the other way round.”

                                                  WW2 Sevastopol War Memorial

Regarding the conflict in Ukraine. The US and western media bombards us with propaganda that pushes the narrative that Russian involvement in Eastern Ukraine is Russian aggression against democratic reforms in Ukraine. In fact the change in government in Kiev and the Maidan coup were western orchestrated and financed by the US.  The former president of Ukraine, Viktor Yanokovich, was no doubt a complete crook but he was duly elected and was the legal President of Ukraine. 

The new pro-western regime in Kiev has quite literally put the fear of god into Russian leadership. Again this is complicated by the fact that for all of Russia's history it has been the victim of continued invasions on its western borders. Just in the last one hundred years the country was invaded by Germany twice, once in WW1 and again WW2. The Russians call WW2 the Great Patriotic War and it is viewed as a war of civilization survival for many Russian people. 

Take a look at this map and it should be obvious why Russia does not want Eastern Ukraine to fall under control of the US and the EU.

 As one can see eastern Ukraine juts right into the center of Russia. With the history that Russia has it is unacceptable for the Russians to allow the EU/NATO to get right up on their border. This is especially true as the new government in Kiev, at the behest of the US and the EU, keeps blathering on about joining the EU and NATO. It seems to be forgotten by most western observers that the Russian psyche is scarred by the loss of 25 million people in WW2. This was the last time that Russia allowed Germany to be right on her border (after the fall of Poland to Germany in 1939). Again Russian President Putin has been clear on this matter. 

It does not really matter if you agree with me on this matter or if you dislike Putin and Russia. One thing and only one thing matter in this conflict. Is anyone in the EU or the US willing to to go to war and die to stop the Russians from having Eastern Ukraine as its buffer from the west? The answer is no for the majority in the west. However, I suspect that the Russians will fight and die for their historical claims. Therefore, my view is that although it will not come to that we will see the EU begin backing away from the US on this matter over time. The Europeans especially Germany under the leadership of the a weak and feckless Angela Merkel will back down and seek reconciliation with Russia. The turning point in my mind was the battle of Debaltseve in eastern Ukraine in January 2015. This was a decisive battle and a place where the Ukrainian Army was devastated as it was trapped in an encirclement and literally destroyed by the armies of the Donetsk and Lugansk Peoples Republics. It is illustrative of my thesis that once the outcome of the battle became known German Chancellor Merkel and French President Hollande got on a plane and met with the Russians to hammer out the Minsk 2 agreement that has led to a barely tenable ceasefire. 

In my view this is a turning point as it has demonstrated, at least for the Europeans, that the US puppet regime in Kiev is ineffective and that continuing on with supporting this will be to their long term disadvantage vis-a-vis Russia. I suspect what will emerge of over time is a loose federation with the eastern parts of Ukraine having autonomy from Kiev. There could be further flareups and small skirmishes but I do not think the Europeans will have the stomach to continue on with Washington's plans. Over time sanctions should be allowed to expire and oil prices will eventually climb again. That will hopefully lead to a revaluation upwards of Russian stocks as the Russian economy turns around.

Another motivational factor for this outcome is that the Ukrainian economy is in shambles with the Ukrainian currency facing hyperinflation. I would not be surprised if the regime in Kiev does not come under pressure from its own former supporters if they do not get the economy under control and turned around soon. The Kiev regime actually thought they would get support from the EU and the US but they found out, like many others in the world, that the US talks big but rarely follows though with its promises.