Lately, independent E&Ps have been beaten down due to lower commodity prices. Drilling stocks (e.g. NADL) have been beaten down due to US sanctions on Russia and lower oil prices. Some shipping stocks (e.g. DRYS, PANL) are beaten down. In these situations, I will not be greedy when others are fearful.
I find that ranking stocks is a useful analytical tool. Ranking stocks against each other helps me be more realistic about how good or how bad a stock is.
I have some extreme and unconventional viewpoints. Many “value investors” would have a list that would be the opposite of mine. Many of the stocks I have shorted have been mentioned on ValueInvestorsClub.com as longs or potential longs. Many of these people are quite intelligent and eloquent. In my opinion, the longs do not understand how they are being bamboozled and misled by stock promoters. I’ve written about this many times on this blog (e.g. “How would a sociopath fleece investors in oil and gas?” and “Beating Wall Street in oil and gas“).
While the independent E&P sector has seen a meltdown in share prices, I don’t see undervaluation. The problem is that many of the companies continue to be run by stock promoters and charlatans (more so in the small caps than the large caps). Until the management teams get better, I don’t think that the independent E&P space will be a good place to look for longs. My prediction is that there will be more pain to come when NGL prices collapse.
- Ethane prices will collapse. The pricing for natural gas liquids (NGLs) will also probably collapse though I am less sure of that.
- There is a very high amount of fraud when it comes to exploration and production (E&P) companies. This creates opportunities on the short side and makes the long side difficult.
- Going forward, midstream will be an attractive place to be for shareholders.
For whatever reason, it seems that many institutional investors analyze this sector poorly. This creates wonderful opportunities for short sellers. To recap, this sector has attractive shorts because:
- It seems that many institutional investors don’t understand how oil and gas companies inflate their reserves.
- Inflated reserves are very common among oil and gas companies.
- Institutional ownership is high enough that there are reasonable borrows on these stocks.
- Many management teams use the company as their piggy bank to pay for corporate jets, expensive meals, etc.
- Valuations are high.
- A few of these companies are pump and dumps.
The warrants may still be slightly undervalued. However, my instinct is to sell stocks/securities on rallies and to reinvest the proceeds into stocks that have dipped (e.g. ASPS).
I sold slightly below $4 (which is terrible trading on my part because I sold near the day low). I still have a few call options which I plan on riding out to maturity. This trade worked out well.
I may be completely wrong about Kinder’s reasons for merger KMI with KMP/KMR/EPB. Here’s my guess.
Things have gotten to the point where the GP/LP structure is becoming unwieldy. Any investments that the LPs make must be accretive to the LP unitholders. Because of this, the hurdle for new investments is extremely high (?somewhere around 18% EBITDA yield?). Because KMP and EPB are so large, there is a limited universe of investments that make sense for the unitholders after paying the onerous Incentive Distribution Rights (IDRs) to the GP. (In the past, this problem has been avoided by the GP waiving its incentive fees.) By getting rid of the GP/LP structure, the resulting company has more flexibility to pursue opportunities with lower returns that are still attractive.
Here’s the press release: “Kinder Morgan, Inc. to Purchase KMP, KMR and EPB; 2015 KMI Dividend to Increase to $2 per Share”
I may do a follow-up post with thoughts on the merger.
*Disclosure: Long KMI warrants and call options.